Disclaimer: The following is not an investment recommendation, it is an investment idea. I am not a certified investment professional, nor do I know you and your individual investment needs. Please perform your own due diligence to decide whether this is a company that is best suited for your personal investment criteria. I do not own Lithium X Energy Corporation stock. All Lithium X Energy Corporation analytics were taken from their website and press releases. I have not been paid to write this article.
In my opinion, one of the strongest trends in motion is the move toward clean energy. While lithium is not used to create clean energy, such as uranium, it does enable us to store electricity, which can be used to power our cars without emitting carbon emissions.
The lithium story is interesting, as lithium is relatively abundant throughout the world. Abundant and economic are two totally different things, however. As electric vehicles become more and more prevalent, the demand for lithium will undoubtedly spike and it will be a race to match that demand with lithium production.
Today, I have a review of a company that is poised to meet that coming lithium demand; Lithium X Energy Corporation. In my opinion, Lithium X has a top notch management team and all the right ingredients to make it a billion dollar company.
Let's take a closer look.
It's widely accepted that people are the backbone of any junior company, and when examining the team of people that make up Lithium X, you know this was their plan. In my discussion with CEO, Brian Paes-Braga, he explained that the team is supported by 4 key pillars: Financial, Geological, Mergers & Acquisitions, and Operations.
Beginning with Paes-Braga, he has varying work experience, having started out as a young entrepreneur, and later spent nearly a decade in the international financial sector.
The financial pillar is headlined by Paul Matysek and Fiore Advisory, which is a corporate advisory company led by Gord Keep and Frank Giustra. Matysek has transformed small market capitalization companies, including Energy Metals, Potash One and Lithium 1, into viable assets that were collectively sold for more than $2.3 billion in aggregate proceeds. With the odds so stacked against the success of a junior company, Matysek’s past success and involvement in this endeavour is a huge plus. Giustra is a heavy hitter in the resource space, with an established track record and a string of successes that speak to his ability to access capital and get the deals done.
The geological pillar is headed by VP of Project Development, Will Randall. Randall is a professional geologist with extensive exploration and development experience in the lithium industry. As summarized from Paes-Braga’s comments, the geological team is able to assess new opportunities in an efficient and effective way when completing their due diligence. Lithium X put this due diligence into practice with their purchase of Salar de Los Angeles in Argentina. It provided them with the information they needed to determine that the project was robust, with over $17 million dollars already spent on the property, and advance staged with respect to its nearness to production.
The deal for Salar de Los Angeles would not have been possible without the input of the Merger & Acquisitions pillar, which is headed by CFO, Daniel Kriznic. Kriznic is a chartered professional accountant with 10 years experience with Deloitte as a senior manager. Paes-Braga credits his due diligence as key to the Salar de Los Angeles deal.
Last, but certainly not least, the operations pillar, which is headed by COO, Eduardo Morales. Morales is formerly Rockwood Lithium’s South American President. Morales led the development, commissioning and operation of Rockwood’s Salar de Atacama project. Morales’ 36 years of experience make him one of the most important pieces of the puzzle. As summarized from Paes-Braga’s comments, the importance of operations is two-fold; Firstly, it's a race to production, as there is a huge demand curve in the lithium space. Secondly, operations have proven to be extremely challenging for lithium companies, which makes the strength of the pillar of operations just that much more vital. Paes-Braga says he considers the group of people at Lithium X to be the “best team in the business.” I, too, think that this A-list of people is a check in the right column for the future of Lithium X.
From my research, the Lithium X team is built on a strong foundation, which sets it apart from its peers. In a space where demand is accelerating, a strong team will most certainly be needed to survive and prosper.
Argentina and its Past
If you're skeptical about Argentina, you're not alone. For close to 2 decades, the actions of Argentina's government have caused a lot of skepticism, internationally. Most criticism, however, is directed at the actions of its most recent former leader, Christine Fernandez de Kirchner.
A brief summary of some of these actions are:
• 2001’s $100 billion sovereign debt default, the largest in history.
• Heavy government spending in social programs by both Nestor Kirchner (President 2003 to 2007) and his wife, Christine (President 2007 to 2015).
• In 2012, Argentina’s congress nationalized Repsol’s (a Spanish oil company) portion in the national energy company, YPF. Kirchner defended the move by stating, “it failed to boost oil and natural gas production needed to keep up with local demand” (Reuters)
• Nationalized private pension funds, known as “Las Administradoras de Fondos de Jubilaciones y Pensiones (AFJP)” (Wiki).
• Kirchner fostered relationships with China, Venezuela and Iran.
• Nisman Allegations - Kirchner and Argentine Foreign Minister, Hector Timerman, were allegedly involved in a plot to cover up Iran’s role in the 1994 bombing of the Amia Jewish Community Centre, in which 85 people were killed. Alberto Nisman, who was investigating this bombing, made the allegations against Kirchner and Timerman. Days after the allegations, Nisman was found dead in his apartment.
• Raised taxes on exports, which the government later overturned, due to mass protests.
A New Beginning
With newly elected Argentine President, Mauricio Macri, now in power, the international perception of Argentina appears to be changing. In his inaugural speech, Macri stated,
“Confrontation has taken us down the wrong paths...We have to remove conflict from the center of the stage and replace it with meeting points.” (New York Times)
Macri has outlined a pro-business agenda for his new government, which he has started to execute since his inauguration. His pro-business agenda is headlined with:
• Filling his cabinet with former business executives.
• Cutting export taxes, most importantly on mineral products.
• Attracting foreign investment, most importantly repairing the relationship with the United States. As reported by Reuters on March 24, 2016, Barrack Obama stated, “Argentina is re-assuming its traditional leadership role in the region and around the world." From the same article, Reuters reports, “The American Chamber of Commerce in Argentina said U.S. firms would invest $2.3 billion in Argentina over the 18 months, including more than $100 million each from General Motors Co., Dow Chemical Co., AES Corp. and Ford Motor Co”
• These are great signs for there being a change in global perspective, one that will only help future investment in the country and make it safer for our investment dollars.
In my conversation with Paes-Braga, he also pointed out that Matysek’s last 2 companies had assets in Argentina, more specifically Salta province, which is the location of their flagship asset, Salar de Los Angeles. His successful navigation of the old Argentine regime should place Lithium X in a good position with this asset.
Clayton Valley, Nevada, United States
Source: Lithium X Energy Corporation
Nevada is considered by most to be a top tier jurisdiction for mining. Mostly known for its vast gold reserves in the Carlin Trend, Nevada has a long history of being a mining-friendly state with a workforce that knows the business.
Nevada is particularly advantageous for a lithium company, as billionaire, Elon Musk, has already said that Tesla will seek American lithium sources first for their Gigafactory needs in the future. Lithium X owns the largest land package in the region, surrounding Albemarle’s producing Silver Peak lithium brine operation.
From a jurisdictional standpoint, both of Lithium X’s properties appear to be in places where there is a bright future for mining.
PUSH – In my conversation with Paes-Braga, he also mentioned that Lithium X’s goal is to build a billion dollar company, which will mean bringing Salar de Los Angeles to production and being active on M&A opportunities that will be a good fit for the future of Lithium X. In my opinion, if they continue to choose properties like they did with the first two, this will be a huge positive for the company's future.
Flagship Asset - Salar de Los Angeles, Argentina
Source: Lithium X Energy Corporation
Lithium X released an upgraded mineral resource estimate on August 30, 2016. The NI 43-101 resource estimate was prepared by FloSolutions and the results are as follows:
Indicated (all in tonnes) Lithium = 194,860 @ 501 mg/L, Potassium = 2,143,491 @ 5,512 mg/L and Boron = 216,807 @ 556 mg/L
Inferred (all in tonnes) Lithium = 189,130 @ 410 mg/L, Potassium= 2,068,161 @ 4,489 mg/L and Boron = 232,601 @ 505 mg/L
(See news release for further reference)
This upgraded mineral resource estimate is icing on the cake for an already valuable asset. On December 22, 2011, a Preliminary Economic Assessment (PEA) was completed on the property by SRK consulting, in which the following was found:
• Values based on USD $5,000/tonne Lithium Carbonate, 15,000 tonnes/year lithium carbonate (LC) and approximately 51,000 tonnes of potash (KCl)
• Net Present Value (NPV) with an 8% discount rate – USD $561 million (pre-tax) with a 34% internal rate of return (IRR)
• When production is increased to 25,000/year LC and 85,000/year KCl, the NPV value explodes even higher, NPV with an 8% discount rate – USD $964 million (pre-tax) with a 36% IRR
Source: Lithium X Energy Corporation
Given that Lithium X’s current market cap sits around $129 million (CDN), and the updated mineral resource estimate completed in August of this year, there is a lot of upside potential in the stock price - and we have yet to value Clayton Valley.
PUSH – In my conversation with Paes-Braga, he mentioned that the next steps for the Salar de Los Angeles project include permitting and construction of the pond facilities. Successful permitting and construction, which is slated for completion in 2017, should provide good push for the share price.
Clayton Valley, Nevada, United States
PUSH – The Clayton Valley property is currently being drilled. Paes-Braga expects that the results should arrive very soon. This could definitely provide some push for the stock if the drill results are successful.
Source: Lithium X Energy Corporation
Cashed Up and Ready to Execute
At the time of this report, Lithium X had a market capitalization of around $129 million. On July 13, 2016, Lithium X announced the closing of a private placement of 6,060,603 shares, at a price of $1.65 per share for gross proceeds of $10,000,000. To note, these will become free trading on November 14, 2016. Also, 300,000 incentive stock options have been granted to certain directors and consultants of the Company. The options are exercisable at $1.65 for a period of 5 years, subject to regulatory approval. See the report for further details. This financing gives them around $18 million dollars in the bank, which should allow them to execute their 2nd stage of development.
PUSH: Also, in my conversation with Paes-Braga, he mentioned that in the coming months, they will be listing the Company on the Nasdaq, giving Lithium X greater exposure.
Lithium X Comparables
To really gain perspective on Lithium X’s potential value, we need to compare it to some of its peers. Specifically, I would like to show you how it stacks up against Orocobre Limited and Nemaska Lithium.
Orocobre Limited is an Australian based lithium producer, and is listed on both the ASX and TSX. Its flagship Olaroz lithium project in Argentina is a great comparison for Lithium X’s Salar de Los Angeles project.
Olaroz Brine Project Summary: (Information taken from Orocobre Limited News Release – Definitive Feasbility Study)
• After-tax NPV @ 7.5% discount rate – USD $449 million with a 27% IRR
• Production Rate of 17,500 tpa
• 6.4 Mt (Measured – 1.44 Mt / Indicated – 5.0 Mt) lithium @ 690 mg/L
• 19.3 Mt potassium @ 5,730 mg/L
As you can see, Orocobre used a different discount rate and expressed their values in after tax figures rather than those used in Salar de Los Angeles’ 2013 FEA. Overall, however, you can see that the Olaroz project has some very good numbers, something which the market is recognizing with their almost CDN $900 million MCAP. While Lithium X’s Salar de Los Angeles project is not quite as large, it has very close lithium concentrations and a solid 25,000 tpa proposed production rate. The market hasn’t recognized this yet, leaving a lot of room to be re-evaluated to the upside, especially with permitting and pond construction upcoming.
Nemaska Lithium is a Canadian based lithium producer and is listed on the TSX. Its flagship property, Whabouchi, is a lithium hard-rock deposit in Quebec, which is slated for production in 2019. As you already know, there’s a big difference between a hard-rock mine and a brine project, but they’re still comparable as far as the numbers go.
Whabouchi Project Summary: (Information taken from Nemaska Lithium website)
• Pre-Tax NPV @ 8% discount rate USD $1.5 billion with a 37.7% IRR
• Production Rate of 28,000 tpa lithium hydroxide, 3250 kt of lithium carbonate
• Combined open pit and underground resources – 27.3 Mt @ 1.46% Li2O Proven & Probable
• Nemaska’s 2016 Feasibility study was conducted with a higher $/t selling price than their 2014 study, which was USD $ 9,500/t lithium hydroxide, and USD $7,000/t lithium carbonate
Nemaska’s 2016 FEA study reflects lithium’s current selling prices, which is also reflected in the company’s MCAP. Salar de Los Angeles’ FEA was completed by a former owner in 2013, with a lithium carbonate price of USD $5,000/tonne. Change that to Nemaska’s FEA lithium carbonate price of USD $7000/t, an almost 50% increase in selling price, and I think it’s obvious that there’s upside potential.
Also to note, Nemaska has an MCAP of close to CDN $457 million, which is nearly 4 times higher than Lithium X, again showing the potential in share price appreciation.
The world’s governments are working toward tougher and tougher clean air legislation, like the Paris Accord or the 450 Scenario. These actions will make it that much more expensive to use carbon-emitting utilities. Especially in North America, the solution is to reduce the amount of carbon produced by fossil fuel burning vehicles, and to move to battery powered electric cars.
A surge in demand for these lithium-laced batteries will have a ripple effect on the lithium market, rewarding those who got a head start on the clean air trend and invested early. Because this trend is already in motion and politically driven, for me, it's not a question of if it will cause an increase in demand for lithium, but how well does a hockey bag fit in the trunk of a Tesla Roadster?!
Now, let's be clear, the future of the lithium market won't be without challenges; lithium deposit jurisdiction, a possible future supply glut, and lithium brine operation blunders are common barriers to success. But, a junior company like Lithium X Energy Corporation, which was built on a solid foundation and, to me, is more than equipped to navigate the challenges of the lithium business, has the best shot at bringing their assets to production.
Lithium X offers great value, and I believe it’s only going to become more valuable when the lithium market explodes!
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Until next time,
Brian Leni P.Eng
Founder - Junior Stock Review