If there’s one way to wow the market, it’s with a triple digit internal rate of return.
Some companies pull off that trick by having a small, but very high quality project.
Not so Sigma Lithium Corporation.
Sigma is big all round.
In fact, it looks likely to become the world’s fourth largest lithium producer by volume, with the first phase of construction fully funded and already well underway at the Grota do Cirilo project in Brazil.
Now, though, the company’s announced the results of a technical report into what the operation will look when the first and second phases of development are combined.
And the numbers are quite remarkable.
The overall net present value of Phase 1 and Phase 2 combined rings in at US$5.1bn. Then there’s that IRR, which works out at an extremely handsome 589% after tax.
How’s that possible?
Simple, really. Grades are good and costs are low, at U$454 per tonne.
The mid-range grade scenario reckons on production of 531,000 tonnes of lithium per year over a 13 year life, to produce annual after-tax free cash flow of US$595mln.
Given that Phase 1 is already fully funded, it’s not surprising that Sigma’s shares jumped by more than a buck and a half on the day of the announcement of the addition of Phase 2. At the close they had traded up to within whispering distance of the all-time high of US$17.54 per share reached earlier this month.
Indeed, a quick look at the share price graph over the past few years shows an almost unbroken line of growth as co-chief executive officers Calvyn Gardner and Ana Cabral Gardner have steered the company steadily closer and closer to production.
In four years the shares are up almost tenfold, partly because the market has been favourable, and partly because they haven’t put a foot wrong.
It’s a classic case of hard work and an exceptional project combining to create real value for all concerned.
“Phase 2 has been a long time in the making,” says Ana Cabral Gardner.
“We started working on the feasibility study for Phase 2 at the end of 2020 after we saw the electric vehicle data coming out of Europe, which was surprisingly high. It was clear to us there would be a tightening in the lithium market, but it was a difficult decision because lithium concentrate prices were at a low.”
Back then the pandemic was still raging too, creating a tricky environment in which to undertake economic modelling.
But the team at Sigma are well connected with battery-makers, which says Ana Cabral Gardner “gives us incredible visibility.”
They were sure they could see what was coming, and with lithium spot prices now on an absolute tear, there’s no doubt they were right.
With that in mind, it’s not surprising that Sigma Lithium has been so in demand on the market. Not only is it set to become the fourth largest producer of lithium in the world, but it’s likely to do that when other new supply is still a few years down the line.
BY contrast, Grota do Cirilo is set to be in production by the end of this year, with Phase 2 likely to come on line in 2024.
A small amount of extra funding is likely to be needed to make Phase 2 happen, but only because Sigma is keen to get a move on and capitalise on the strong demand environment. The estimate in the technical report puts the requirement at US$80mn, a sum which in theory could easily be sourced from the projected US$400mln-plus in annual free cash that’s set to be generated by Phase 1.
But this is not a company that’s under any kind of financial pressure.
Even the most worrying factor industry-wide – inflation – has been taken into account. The technical study is current and up-to-date and already incorporates all the price hikes we’ve seen across the board in a variety of areas.
So, it’s all systems go now. Four hundred people are down on site at Grota do Cirilo working on the construction of Phase 1, and according to Ana Cabral-Gardner the two workstreams – for Phase 1 and Phase 2 – will merge in November when the company starts laying out the earthworks for the second phase.
And just in case you thought that that was it, get ready for Phases 3 and 4 coming soon. All told, there are nine areas of interest on Sigma’s ground, so this could be one of those operations where the project life gets measured in decades rather than years.
Is there a downside?
If there is it’s hard to find one. The usual source for negativity in such cases is ESG, but here Sigma scores just about as well as anyone. Its electric power will be hydro. The water it uses will be 100 recycled internally, more than 400 direct jobs have already been created, and the aim is for the whole operation to be net-zero compliant by 2024.
Some big investors have come into Sigma on the back of its ESG credentials. And at this stage it looks likely they will be well rewarded.