Lake Resources NL (ASX:LKE, OTCQB:LLKKF) has had its buy rating maintained by Red Cloud Securities and received a significant share price target increase to A$2.20 per share from A$1.25 following predictions that the Kachi Lithium Project will double production to 50,000 tonnes per annum.
Lake’s upcoming definitive feasibility study (DFS) will use 50,000 tonnes as its base case, with the increased production expected to be supported by an updated resource estimate.
“We view this production increase very positively, as the PFS which utilized a 25,500 tonnes per annum scenario, had already shown robust economics,” says Red Cloud managing director and mining analyst David Talbot.
“We anticipate the DFS to demonstrate even stronger economics and are therefore increasing our target price for Lake to A$2.20/sh (was A$1.25/sh).”
The following is an edited excerpt of Red Cloud Securities’ research coverage of Lake Resources.
'Very positive' production predictions
Several drivers led to double production decision.
These drivers included:
1) Increased demand for high-purity lithium carbonate equivalent (LCE) from interested parties (offtakes pending);
2) Support by UK and Canadian Export Credit Agencies (ECAs) to cover 70% of the project debt, with additional interest from various international banks;
3) Lowering of export taxes by the Argentinian government; and
4) Confidence in its technology partner, Lilac Solutions, to scale up the modular and cost-effective direct lithium extraction (DLE) technology to be implemented at Kachi.
Expect a resource upgrade shortly
Only 25% of its 4.4 million tonne LCE JORC-compliant brine resource is classified as measured and indicated resources.
Furthermore, only 20% of the resource was being utilized to support the 25,500 tonnes per annum production scenario, thus we believe existing resources can already support the increased LCE production.
Expect recent drilling to help upgrade resources to a level suitable for inclusion in the DFS.
Increasing target price to A$2.20/sh.
While details were not provided, Red Cloud is updating its model to include the expanded production scenario.
Red Cloud assumes Kachi will begin producing in the fourth quarter of 2024 and ramp up to 50,000 tonnes per annum by the second half of 2026.
Red Cloud also assumes that doubling production will increase capital expenditure (US$544 million in the 2021 PFS) by about 60%, yielding total capex requirements of US$870 million.
Given the commitments received from the ECAs, Red Cloud assumes that 70% of capex will be funded via project debt with the rest covered by Lilac Solutions and through future equity financings.
Primary focus remains on Kachi in 2022
An initial 1,200 metres, four-well drill program is underway to expand resources and more importantly upgrade measured resources from inferred to indicated.
While Kachi continues to be the focus, a 10-hole program is expected to commence shortly at its 100%-owned Olaroz, Cauchari and Paso brine projects.
Red Cloud Securities says…
“We maintain our BUY rating and are increasing our price target to A$2.20/share (was A$1.25/share).
“Our target price is derived using the discounted cash flow method (DCF) to which we apply a 0.7x multiple.
“We believe the upcoming DFS, drilling results as well as general advancements at Kachi should continue to re-rate the stock.
“Upcoming catalysts: 1) Demo plant (Q1/22), 2) Assays from brine projects (2022), 2) Offtake discussions (ongoing), 3) Resource update, DFS and ESIA (Q2/22), 4) Construction decision (H2/22), and 5) H2/24 production.”