In a prior post, I laid out a general thesis for lithium and discussed Piedmont Lithium (PLL) among some other publicly-traded companies that might be appropriate for speculative investors. In this post, I will examine PLL in detail. The company is a speculative pre-production mining company that is virtually guaranteed to dilute shareholders. The question for investors is: why endure dilution, delayed cash flows and political uncertainty?
Before getting into PLL’s details, I think it’s important to look at economies of scale in the auto industry OEMs because this is the primary end market for PLL’s battery-grade lithium hydroxide (LiOH). Tesla is the first company to scale electric vehicles (EV) beyond one million annual units (run rate Q4 2021). By comparison, in Q4 2021, GM delivered in the U.S. only 26 all-electric EVs. Design, superior engineering, silicon carbide chips, early development of thousands of Tesla supercharging stations all allowed the company to become the leader in EVs.
Today, Tesla’s market cap is greater than all the other OEMs combined. Soon, certainly by the end of this decade, EV adoptions will cause volumes for internal combustion engines (ICE) to fall, creating negative economies of scale. Tesla’s margins are high (about 30%) and stable – most others are in the single digits and falling. This partly explains the size of Tesla’s market cap compared to other OEMs. The ICE inflection point will kill many traditional auto makers. And it will kill GM because the company will not have achieved scale (profitability) in EVs. Since Tesla rolled out its first car in 2008, the year GM required a bailout by the U.S. government, GM has spent more than $37 billion on advertising. Tesla has spent zero on advertising over the same period and instead put the money into R&D. The U.S. government lost $11 billion on GM’s 2008 bankruptcy/bailout. The lesson from GM’s 2008 failure is: downscaling high fixed-cost manufacturing = bankruptcy. Economies of scale are shifting to EVs and there’s no going back. (Note: in the decade leading up to GM’s bailout, the company had accumulated about $100 million in losses.)
“What villains provide for heroes is a sharper vision of what makes the hero a hero. And in this saga, GM is the best kind of villain for Musk and a tragedy for free market capitalism.” – Simons Chase 2018
So the answer to the question about PLL’s prospect as an investment can be found in the company’s superior at-scale unit economics and NPV profile. PLL’s vision is to achieve near-term cash flows (via contractual off-take rights) from investments in the other lithium companies and then exploit a much bigger opportunity to become one of North America’s largest battery-grade lithium hydroxide producers – and also to become first company in the world where quarrying, concentration and chemical production occurs on one single site with superior economies of scale.
Furthermore, geo-political reality means a major North American lithium producer is likely to have an advantage over a Chinese supplier. In fact, President Biden recently took action to address strategic and critical materials necessary for the clean energy transition—such as lithium, nickel, cobalt, graphite, and manganese for large-capacity batteries—in the Defense Production Act of 1950, a war-time law. Today, China controls about 75% of the market for the raw materials that go into batteries, including lithium, cobalt and nickel.
My leveraged free cash flow to equity (LFCFE) NPV analysis shows a base case NPV of $5.95 billion on a current market cap of $1 billion, assuming LiOH price of $25,000 (versus current market of $81,500) and assuming spodumene concentrate (SC6) price of $2,000 (versus current market price of $5,750). The NPV case at current SC6 and LiOH prices is about $16 billion. Today, PLL’s enterprise value is about $500 million after deducting investments and cash from its market cap. Here’s the base case:
- PLL is a multi-asset company with three projects on two continents;
- Despite its pre-production status, PLL is more advanced than most greenfield USA lithium projects;
- Near term revenue potential from PLL’s acquisition of the re-start of the mining assets of North American Lithium (NAL) in Sayona Quebec;
- PLL’s wholly-owned USA resource comes from land privately owned by the company – no royalties to pay for publicly-owned land;
- Scale matters: OEMs want to partner with the largest producers;
- PLL can use its off-take rights over Ewoyya/Abitibi Hub as the basis for a development of a standalone converter plant at LHP2, with the much larger Carolina Project deferred until cash flows emerge;
- PLL investment in Atlantic Lithium (ALL) in Ghana, Africa: PLL purchased an earn-in for a total of ~US$102m of funding for feasibility studies, construction and a ~10% stake in ALL. PLL will earn 50% ownership of the project and offtake 50% of SC6 at market prices. According to Canaccord Genuity, ALL is the lowest cost and least capex intensive hard rock lithium project in its universe of coverage;
- PLL’s location in the Carolina Tin-Spodumene Belt (North Carolina) means it will have access to road and rail infrastructure and human resources experienced in lithium mining for decades;
- LHP2: Merchant lithium hydroxide plant using existing SC6 off-take agreements to produce 30ktpa of LiOH. Together with PLL’s existing plans for a fully integrated mine and 30ktpa LiOH refinery at the Carolina Project, PLL’s potential total capacity will be 60kt LiOH, one of the largest producers in North America;
- In 2020, PLL inked a SC6 supply agreement with Tesla. It is for an initial five-year term on a fixed-price binding purchase commitment from the delivery of first product, and may be extended by mutual agreement for a second five-year. The agreement, which has been postponed, is for one-third of PLL’s planned SC6 production of 160ktpy;
- Chinese prices for lithium carbonate have increased five-fold over the past year. On the flip side, battery production efficiency partially offsets lithium increases through scaling. Most EV cars are in the premium category that is considered to be inelastic to price. EV ownership economics improves as oil prices rise;
- Political risk: PLL has not received a North Carolina mining permit;
U.S. sales of new light-duty plug-in electric vehicles, including EVs and plug-in hybrid electric vehicles (PHEVs), nearly doubled from 308,000 in 2020 to 608,000 in 2021. EV sales accounted for 73% of all plug-in electric vehicle sales in 2021. Tesla’s 936,000 global vehicle deliveries in 2021 represents an 87% increase from 2020, based on Tesla’s January 2, 2022 announcement, while the 306,600 deliveries for the quarter mean that Tesla delivered 71% more electric vehicles in Q4 2021 than it did a year earlier.
- 60ktpy LiHO steady state production;
- Production costs assumed from PLL’s Bankable Feasibility Study (BFS) & Preliminary Economic Assessments (PEA) for processes that are known (not experimental);
- PLL’s SYA SC6 offtake agreement ($900 ceiling), compared to $5,650 recorded at a Pilbara minerals auction on April 27, 2022, will give PLL a differentiated cost curve for LiOH production even if prices decline significantly;
- NPV excludes Carolina Lithium Project’s mineral resources, including marketable byproducts quartz, feldspar and mica;
- Additional equity will be raised through a mix of sell-downs of investments and/or new equity issuance.
- Discount rate: 9.37%, Terminal growth rate: 2%,
- Assumptions for Base Case: SC6: $2k/t, LiOH: $25k/t
- Assumptions for Spot: SC6: $5.65k/t, LiOH: $69.75k/t
- Assumed $1 billion in debt issuance with first year interest-only period and seven year payback;
- Assumed $100 million tax loss benefit;
Warning: PLL is a speculative investment. Modeling pre-revenue companies that involve operational, technical and financial complexity is closer to an art than a science. It’s the false precision problem. One secondary market for lithium is installed/stationary batteries for utilities, homes and businesses. For example, there are already 60,000 residential batteries in California, and that number is expected to grow substantially as the electric grid is battered by more extreme fires and storms fueled by climate change. Tesla supplies batteries for this market.
Lithium Supply/Demand Imbalance
Industry data provider Benchmark Mineral Intelligence projects that demand for lithium to grow from 429,000 tons in 2022 to 2.37 million tons in 2030. Accelerating EV adoption rates is outstripping the lithium supply response. For example, it takes five to seven years for a mine to produce starting from the time a deposit is discovered. The facilities to process the parent material and convert it into chemicals, i.e. hydroxides and carbonates, takes more time. And the battery makers convert lithium chemicals into cathodes and anodes, with a commissioning period of another two-to-three years for new gigafactories. So the longest lead time in this supply chain is the upstream part, exploration and mining. In terms of battery supply, in 2022, the US is forecast to account for just 7% of global battery production, according to Benchmark’s Lithium Ion Battery Database.
My discussions with the company leads me to believe they will not sell the company in this early stage. Instead, they are likely to partner with a large OEM that will resolve the outstanding question of how to finance the $1.6 billion the company will need in the next three years.
Finally, “Price of lithium has gone to insane levels! Tesla might actually have to get into the mining & refining directly at scale, unless costs improve,” says Tesla chief executive Elon Musk in an April 2022 tweet.
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