Source: Peter Epstein for Streetwise Reports 01/22/2020
With initial production at its Argentina project expected in 2022, Peter Epstein of Epstein Research believes the company could be an “excellent” bet when lithium prices rebound.
Earlier this month, the mining court of Salta, Argentina, granted Millennial Lithium Corp.’s (ML:TSX.V; MLNLF:OTCMKTS) Argentine subsidiary four mining licenses on its 100%-owned Pastos Grandes project in Salta province. Readers may recall that Millennial recently delivered a bank feasibility study (BFS) and expects to reach initial production in 2022 (subject to funding and permits), ramping up to nameplate capacity of 24,000 tonnes lithium carbonate equivalent (LCE)/year by mid-decade.
Farhad Abasov, president & CEO, commented: “Millennial is pleased to have received four mining licenses which comprise ~97% of the property area at Pastos Grandes. Millennial expects the final license to be granted in the near future. The company continues to actively advance its three-tonne-per-month lithium carbonate plant and pilot evaporation ponds. Millennial is moving forward with financing, off-take and other key strategic initiatives with large industry players.”
This news comes on the heels of the October announcement that the national mining secretary of Argentina granted a federal fiscal stability certificate (FFSC) for Pastos Grandes. The certificate outlines the tax regime, plus additional benefits bestowed on the project, and officially confirms a reduction in the corporate income tax rate from 30% to 25%.
CEO Abasov commented, “The granting of the FFSC assures the tax and additional benefit terms under which we can operate a lithium carbonate production operation. Receipt of the FFSC confirms our confidence that mining projects in Salta have the support of all levels of government.”
This means that, like Australia-listed Galaxy Lithium’s (GXY:ASX) Sal de Vida and Lithium Americas Corp. (LAC:TSX; LAC:NYSE)/Jiangxi Ganfeng Lithium Co. Ltd.’s (002460:CH) 50/50 joint venture (JV) (Cauchari-Olaroz) brine projects in Argentina, Millennial’s Pastos Grandes has both a BFS and fiscal stability package. At a time when many lithium brine projects in Chile and Argentina are moving very slowly—or are stalled—it’s clear that Millennial’s management team is working closely with all stakeholders to successfully advance Pastos Grandes.
Unlike most peers, Millennial has been blessed with ample cash liquidity. Even today it’s sitting on ~$23 million, enough to last well into 2021 if necessary.
Exciting times ahead
Next is the lining up of strategic/financial partners, signing offtake agreements, raising construction capital, construction of ponds and plant, and first production—expected in 2022. That’s about 12–18 months behind Lithium Americas’ JV project. Importantly, Millennial will greatly benefit from valuable lessons learned from Lithium Americas’ and Galaxy’s development progress, as well as expansions underway at Livent Corp. (LTHM:NYSE) and Orocobre Ltd. (ORL:TSX; ORE:ASX).
Chile’s Albemarle Corp. (ALB:NYSE) and SQM (SQM:NYSE), and Argentina’s Livent, Orocobre, Galaxy and Lithium Americas are public companies. Problems with ponds or processing facilities at those companies will become known to Millennial’s technical team. Therefore, there’s a decent chance that mishaps at other projects can be avoided. Sometimes there are benefits to not being a first mover.
In addition to benefiting from the learning curve others are ascending, Millennial will enjoy regional infrastructure that is being built and/or expanded: roads, rail, power lines, natural gas pipelines, etc. Mining equipment and service providers are setting up offices to serve companies including Lithium Americas/Ganfeng, Livent, Orocobre, Galaxy, POSCO (PKX:NYSE), Neo Lithium Corp. (NLC:TSX.V), Argosy Minerals Ltd. (AGY:ASX), Advantage Lithium Corp. (AAL:TSX.V; AVLIF:OTCQX) and Millennial.
Readers should not take for granted the fact that Millennial owns 100% of its project. By contrast, Advantage Lithium owns 75% of its flagship project, Argosy Minerals owns 77.5%, Lithium Americas owns 50%, and Orocobre owns 66.5% of their respective projects.
Owning 100% of Pastos Grandes, with a BFS and fiscal stability pact in place, greatly enhances management’s ability to fund construction. Selling a meaningful portion of the project could raise a substantial amount of capital. That, combined with debt financing and (possible) advance payments from offtake agreements, would minimize the need for excessive equity capital.
Important derisking events to continue in H1 2020
In speaking with CEO Farhad Abasov, he and his board believe that news on one or more parts of a funding package could come within three to six months. Management is speaking with global industrial companies, some of which have already done substantial due diligence.
A few interested parties would like to see a staged ramp-up to minimize capex, so instead of moving to 24,000 tonnes LCE/year by 2025–26, [the company would get] to 10,000 tonnes and remain at that level, only expanding if/when market conditions warrant. In that scenario, capex could be reduced from US$448.2 million to under US$300 million. Then, operating cash flow could be deployed to partially fund an expansion from 10,000 to 24,000 tonnes at a later date.
Also, a few prospective partners have lithium extraction/processing technologies, or access to technologies, that (if they work at commercial scale) could further optimize Millennial’s operating flow sheet, potentially enhancing project economics. In some cases, the need for evaporation ponds would be eliminated.
Giant auto and battery manufacturers can very comfortably afford to fund projects like Millennial’s, with capex requirements of around half a billion US dollars. Although we haven’t seen much of that yet, it’s coming. Look no further than Benchmark Mineral Intelligence’s running tally of lithium-ion battery mega-factories. Benchmark Mineral Intelligence has been tracking the number of global mega-factories for years. The number has soared, currently standing at 115.
Ranked by size, the top 10 global automakers—Volkswagen, Daimler, Toyota, Ford, BMW, GM, Hyundai, Tesla, Honda and Ferrari—have an average enterprise value (EV) of about US$135 billion. Any of these companies could fund even the largest lithium projects in the world. Yet, I estimate that fewer than ten new projects, brine, hard rock or clay-hosted, (>20,000 tonnes LCE/year) are likely coming online by 2025.
Lithium prices below US$10,000/tonne unlikely to last
One of the main reasons for such negative sentiment in the lithium junior space has been the decline in lithium prices from unsustainably high levels above US$20,000/tonne. However, now below US$10,000/tonne, prices may have overshot to the downside. Many analysts and pundits believe that 2020 or 2021 will mark a bottom in the three-year slide in prices.
In the chart below, Roskill demonstrates why prices are likely to improve. At current spot levels, all advanced-stage hard rock and brine projects in the pipeline come in at under a 16% internal rate of return (IRR). Some projects have negative IRRs; the average is closer to 5% than 10%.
Millennial is poised for a great decade, and the 2030s could be even better. Management expects Pastos Grandes to be next in line in Argentina after Lithium Americas/Ganfeng. Any project, anywhere in the world, that comes to market and ramps up over the next five years should enjoy strong demand for its lithium offerings.
A major global supply source (about 1/3 of the market) is experiencing unexpected bottlenecks, uncertainty and delays. In Chile’s Atacama salar, both Albemarle and SQM had planned massive expansions to lithium carbonate production, upward of a tripling, from 2018 to 2021. Two years into these expansions, annual production has hardly budged.
More uncertainty and caution is expected as local communities have convinced a Chilean environmental court to uphold claims of excessive water use by SQM and Albemarle, seriously threatening their expansion plans. Therefore, this news should be supportive of lithium prices in the mid-to-longer term.
Millennial Lithium has an excellent asset, more advanced (BFS-stage) than all but two or three global brine projects, with relatively low upfront capex compared to other mining and metals projects, producing a metal with expected annual demand growth of 15% (or more) over the next 10 years. Millennial has over $20 million in cash on its balance sheet.
Not many significant projects could possibly commence production by 2022—not many at all, besides Lithium Americas and Galaxy. No new operations are coming in Chile in the next three to five years, and only a small handful in North America (Bacanora Minerals Ltd., Standard Lithium Ltd. [SLL:TSX.V; STLHF:OTCQX]). If lithium demand really takes off, few companies on the planet are better positioned to capture that need than Millennial Lithium.
Adjusted for ownership interests in their respective flagship projects, all but Lithium Americas trade at similar valuations. Any of these companies that successfully advance toward production (secure cornerstone investor[s], offtake agreement[s], commencement of construction, etc.) offer the potential for significant share price gains. Notice that Lithium Americas’ valuation is about four times that of the others.
Millennial is trading at just one-fourth the valuation, but could be only 12–18 months behind Lithium Americas. Is this 75% discount warranted? Lithium Americas is fully funded on its 50% JV project and construction is well underway. Millennial owns 100% of its project, has ample cash liquidity, no debt, a BFS, four of five mining licenses have been granted, and has secured a signed federal fiscal stability certificate.
If one believes, like I do, that lithium prices will rebound, Millennial Lithium could be an excellent way to benefit from the rebound.
Peter Epstein is the founder of Epstein Research. His background is in company and financial analysis. He holds an MBA degree in financial analysis from New York University’s Stern School of Business.
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( Companies Mentioned: ML:TSX.V; MLNLF:OTCMKTS,