Lake Resources NL (ASX:LKE, OTCQB:LLKKF) is moving towards developing the Kachi Lithium Project in Argentina which will use a Direct Lithium Extraction (DLE) process to extract the lithium using ion exchange.
Euroz Hartleys sees the potential of DLE to disrupt medium-term industry forecasts by bringing large volumes of low-cost, high-quality battery chemicals in a shorter time frame.
Western Australia’s largest stockbroker has initiated LKE given it is an advanced DLE developer.
LKE remains high risk as it moves towards development, but unrisked it has a big valuation upside, according to Euroz Hartleys.
The following is an extract from the initiation report:
Investment case
The Direct Lithium Extraction (DLE) process by LKE uses ion exchange to extract the lithium. Ion exchange is mainstream technology, but it has historically not been used for lithium brines because
a. The purity of lithium chemical product has not been required / demanded;
b. The assumed long run lithium selling prices has meant the DLE process was uneconomic;
Neither of which is true anymore. Product quality/purity specifications have risen significantly and long run lithium price assumptions have also been rising.
Consensus long run price assumptions are often set to incentivise significant spodumene/spodumene conversion and conventional brines (with their long lead times and commissioning risks). Instead, we see potential that DLE disrupts medium term industry forecasts by bringing large volumes of low-cost, high-quality battery chemicals on shorter time frame. This should still mean lithium prices need to be high, but perhaps not as high as worst quartile brine and spodumene developers require, and it may also mean supply can be added to the market on faster timelines than integrated spodumene/converters or brines. Consequently, monitoring DLE is very important for medium term lithium supply/demand models.
We initiate on LKE given it is an advanced DLE developer. It remains high risk as it moves towards development, but unrisked it has big valuation upside. Lithium investors should also follow closely as an industry leader in DLE.
LKE is developing the Kachi (LKE 100%, selling down to 75%) project in Argentina alongside its partner Lilac (conditional 25%). The project is very advanced, with construction expected to begin mid-CY22. First production is targeted for 2024 (25ktpa). We assume an expansion to 51ktpa. PFS capex estimate is US$544m and cash costs of US$4.2k/t (we assume cash costs US$6k/t in our model).
Based on the Jun 22 options (unpaid capital A$60m), as long as the shareprice is above the option strike (75cps), it means that, on a 70/30 debt:equity mix, LKE requires only ~A$50-70m of additional equity to fund construction.
On our estimates, LKE is trading on peak net debt & fully funded EV/ EBITDA 8.5x FY25 and 5.4x @ 50ktpa on base case estimate and using spot prices 3.7x FY25 and 1.8x @ 50ktpa. These are attractive for a soon-to-be lithium producer, particularly as an early adopter of new techniques that could allow substantial growth if applied to further brine acquisitions.
We initiate with a Speculative Buy recommendation. Our valuation is $0.76, assuming LC prices of US$13k. Our spot price valuation is $2.92. We note that lithium stocks trade at a premium to our valuations, and so our price target is set at $1.28/sh.
Catalysts
- Demo plant – Mar Qtr 2022
- DFS – Jun Qtr 2022
- Offtake partners – Jun Qtr 2022
- Fid & financing - Jun Qtr 2022
- Construction – 2H CY22
- First production - 2023