Lithium Americas (Argentina): Significant Upside Potential Backed By Quality Assets

seekingalpha09-13

Lithium Americas (Argentina) Corp. is significantly undervalued with a strong buy rating and a 36-month investment horizon due to its high-quality assets and potential lithium price recovery.LAAC's ...

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Ltd.","start_time":0,"source_url":"https://seekingalpha.com/article/4720755-lithium-americas-argentina-significant-upside-potential-backed-by-quality-assets","article_id":"2467770789","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1331663482/image_1331663482.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2467770789","pubTimestamp":1726160312,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Lithium Americas (Argentina) Corp. is significantly undervalued with a strong buy rating and a 36-month investment horizon due to its high-quality assets and potential lithium price recovery.LAAC's Ca","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"GNENF":"Ganfeng Lithium Group Co. Ltd.","BK4168":"多种金属与采矿","LAAC":"LITHIUM AMERICAS ARGENTINA CORP","GNENY":"Ganfeng Lithium Group Co. Ltd.","BK4109":"特种化学制品"},"translate_title":"美洲锂业（阿根廷）：优质资产支持下的巨大上涨潜力","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"GNENF":1,"GNENY":1,"LAAC":1},"content_text":"Lithium Americas (Argentina) Corp. is significantly undervalued with a strong buy rating and a 36-month investment horizon due to its high-quality assets and potential lithium price recovery.LAAC's Caucharí-Olaroz project has a 40-year mine life, with a base-case NPV of $876 million, indicating substantial upside potential from current valuations.Production from Caucharí-Olaroz is ramping up, with expected robust cash flows even at conservative lithium price estimates, supporting strong future financial performance.Key risks include project execution and financing, mitigated by a partnership with Ganfeng Lithium, ensuring financial backing and enhanced execution capabilities.   Olemedia Lithium Americas (Argentina) Investment Overview With the plunge in lithium prices, most stocks in the sector have witnessed panic selling. Undoubtedly, lower lithium prices imply cash burn and project execution delays. These factors had to be discounted in lithium stocks. However, the markets tend to overreact, and I see the same happening for lithium stocks. For value investors, there are some good opportunities at undervalued levels. One company that deserves attention is Lithium Americas (Argentina) Corp. (NYSE:LAAC). I am initiating coverage on LAAC stock with a “Strong Buy” rating and an investment horizon of 36 months. It’s worth noting that LAAC stock has plunged by 60% for year-to-date. A current market valuation of $345 million seems attractive, and the downside seems to be capped. On the other hand, the upside potential is significant. This thesis will elaborate on the factors that support my bullish view. Lithium is Poised for Recovery There is no doubt that Lithium Americas (Argentina)/Lithium Argentina has high-quality assets. However, the basis for a rally for LAAC stock from oversold levels is a reversal in lithium prices. Let’s therefore start the discussion with the factors that point to a potential bottoming-out for lithium. I believe that an important catalyst for lithium is production cuts or scaling-back of investments by some major lithium producers. There is already news on that front. CATL, one of the largest battery producers in the world, has plans to “make adjustments on lithium carbonate production in Yichun.” The company’s mine is one of the major reasons for an oversupply of lithium in China. This news triggered positive price-action among all lithium mining stocks. Linda Zhang, the battery materials lead for Asia Pacific at CRU Group, believes that project deferments are likely to peak next year. This “could tighten the market balance in the medium term.” It’s therefore likely that the downside in lithium is capped. Over the coming quarters, the supply to demand gap is likely to narrow on a relative basis. I therefore expect a gradual uptrend in lithium prices, and this will support a rally for LAAC stock from oversold levels. As a matter of fact, LAAC stock recently touched 52-week lows of $2.07. The stock is already higher by 20%, and I expect the positive momentum to sustain. LAAC's Asset Valuation Points to Significant Upside Potential It’s worth noting that the company is still at an early-stage of commercialization. At this point, individual asset valuation might be a good indicator of the upside potential. Lithium Argentina holds 44.8% stake in the Caucharí-Olaroz project with 46.7% stake held by Ganfeng and 8.5% by JEMSE, a mining investment company. The asset has a mine life of 40 years and an annual production capacity of 40,000 tonnes every year of battery-quality lithium carbonate. While the asset has already been commercialized, let’s first focus on the after-tax net present value.   Annual Report 2023 Assuming a discount rate of 8% and a base-case NPV, the value of the asset is $1.9 billion. With Lithium Argentina holding a 44.8% stake, the company’s share of after-tax NPV comes to $876 million. In my view, this is a conservative estimate as the lithium carbonate price consideration is $12,000 per tonne. In the next five to six years, the world might be back to a tight supply demand scenario or a supply deficit. Benchmark Mineral expects lithium deficit to return at the end of the decade. If the high-case NPV is considered, the company’s share of asset value is $1.1 billion. Clearly, Lithium Argentina looks undervalued at a current market valuation of $345 million. Additionally, Caucharí-Olaroz is not the only asset. The company’s Pastos Grandes asset was acquired from Millennial Lithium in early 2022. The project is at a feasibility stage, but there is a good valuation indicator. In March 2024, Lithium Argentina signed an agreement with a subsidiary of Ganfeng Lithium to sell a 15% interest in Pastos Grandes. This deal was closed in August 2024 whereby Ganfeng Lithium acquired $70 million in newly issued shares of Proyecto Pastos Grandes (wholly owned Argentinian subsidiary holding the Pastos Grandes project). Considering the transaction, the Pastos Grandes asset is roughly valued at $470 million. I must emphasize here that the deal is at a time when lithium prices have plunged. It would be fair to assume that the asset valuation will be significantly higher in the upcoming years. Even if we consider the current valuation as a base-case, the company’s share of the asset is valued at $400 million. Additionally, Lithium Argentina acquired Sal de la Puna in April 2023 in an all-share deal with Arena Minerals. The total consideration for the acquisition was $227 million. For ballpark estimates, I have considered the same as the current asset valuation. Therefore, Caucharí-Olaroz, Pastos Grandes, and Sal de la Puna have a combined valuation estimate of $1.5 billion (base-case). This underscores my view that LAAC stock is significantly undervalued. Production and Cash Flow Upside from Caucharí-Olaroz It’s still a few years before Pastos Grandes and Sal de la Puna start contributing to production and revenue growth. However, for the next few years, Caucharí-Olaroz is likely to create value. This view assumes that lithium gradually trends higher in the next 36 months. To put things into perspective, Lithium Argentina reported Q2 2024 production from Caucharí-Olaroz Stage 1 at 5,400 tonnes. On a quarter-on-quarter basis, production increased by 24%. The company is targeting production of 20,000 to 25,000 tonnes of lithium carbonate in 2024. In the first stage, production can, however, be ramped-up to 40,000 tonnes per annum. Once Stage 2 production commences, it will add 20,000 tonnes per annum of lithium carbonate production. Therefore, the Caucharí-Olaroz asset has a peak production capacity of 60,000tpa. Considering Lithium Argentina’s stake of 44.8%, the production attributable to the company is likely at 26,880tpa. It’s worth noting that Lithium Argentina guided for steady-state operations close to nameplate capacity of 40,000tpa by the end of 2024. This would imply strong production growth on a year-on-year basis in 2025. I believe that Stage 2 progress would depend on the trend in lithium prices over the next 12 months. Besides production growth visibility, the reason to be bullish on Caucharí-Olaroz is excellent project economics. As indicated above, the project has an IRR of 45% in a base-case scenario. For Q2 2024, Lithium Argentina reported positive operating cash flows when adjusted for working capital changes. Digging deeper, the table below gives the total operating cost per tonne of lithium carbonate.   Annual Report 2023 At $3,579, the operating cost is attractive even if the base-case scenario of lithium price at $12,000 per tonne is considered. It’s worth noting that lithium carbonate (per tonne) averaged $68,100 in 2022 and $46,000 in 2023. I don’t expect these euphoric prices even in the next 36 months. However, even if lithium carbonate trades around $20,000 to $30,000 per tonne, there is visibility for robust cash flows. To put things into perspective, Lithium Argentina has guided for negative cash flows in the first two years of operations. In the third year, cash flow is likely at $52 million annually. Thereafter, the annual cash flow is guided at $212 million. This is under the assumption that lithium carbonate is trading at $12,000 per tonne. As a bull-case scenario, if lithium carbonate were to be trading at $24,000 per tonne by 2026 or 2027, the annual cash flow would be $424 million. This would imply attributable cash flows to Lithium Argentina at $190 million. This is the potential of one asset that has a mine life of 40 years, and further underscores my view that Lithium Argentina is undervalued at a current market valuation of $345 million. Concluding Views Based on the asset potential and cash flow visibility, I believe that LAAC stock is significantly undervalued. The deep correction therefore presents a good buying opportunity. I would, however, look at an investment horizon of at least 36 months for substantial gains. It would be unrealistic to expect a “V-Shaped” recovery in lithium prices. However, I expect a gradual uptrend as miners scale-back on their production and investment plans. Amidst these positives, the major risk factors are execution and financing the development of major projects. A key mitigant to the risk is association with Ganfeng Lithium (OTCPK:GNENF) (OTCPK:GNENY). The latter is one of the largest lithium miners in the world and will boost Lithium Argentina’s execution capabilities. At the same time, there is financial backing and I expect Lithium Argentina to raise funds via additional sale of stakes. Of course, with projects in the feasibility stage, there is a case for potential dilution of equity. I don’t see that as a concern if lithium is in a renewed uptrend. The company has also indicated that it is working with Ganfeng to “pursue additional longer-term financing options to leverage improved lending conditions in Argentina.” This includes the possibility of a local bond offering. Currently, the objective of Lithium Argentina and Ganfeng is to extend the debt maturity profile. In the long term, there is ample cash flow visibility to deleverage.  For now, Lithium Argentina reported a cash buffer of $96 million as of Q2, 2024. If undrawn credit facilities are included, the total liquidity buffer increases to $171 million. With the completion of the Pastos Grandes transaction, there is an additional cash infusion of $70 million. The current liquidity buffer is, therefore, healthy to support growth plans for the coming quarters. Overall, Lithium Argentina stock is worth considering for the medium to long term. I expect significant value creation once lithium trends higher.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.27.0","shortVersion":"4.27.0","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2467770789"}