Lithium Power International Ltd (ASX:LPI) has maintained a A$1.14 billion valuation for its flagship Maricunga Lithium Project in Chile based on Edison Investment Research’s project update report.
The company is planning to acquire 100% control of Maricunga by way of a three-party all-share merger with the project’s minority owners.
This transaction values LPI’s remaining 48% share in the project at A$90 million, which is a significant discount on Edison's project valuation and allows the company to streamline the project’s ownership structure ahead of the anticipated final investment decision.
The analyst says that despite the current weakness in lithium shares against the backdrop of slowing economic growth, lithium prices remain high and the sector’s longer-term fundamentals are intact.
The following are the excerpts from Edison’s research report:
Acquiring 100% of Maricunga
LPI has announced its intention to merge with MSB SpA and Bearing Lithium, its two minority partners in its flagship Maricunga lithium brine project in Chile.
The transaction is structured as a three-party all-share merger and will take place in two independent stages. In the first transaction, MSB SpA will contribute its 31.31% interest to a Delaware company, which will then be acquired by LPI for 161.6 million LPI shares.
The Bearing Lithium transaction will see LPI issuing 0.7 shares for each Bearing Lithium common share, which in total represents c 76.3 million LPI shares (plus up to 18.2 million shares for options and warrants). Excluding Bearing Lithium’s dilutive instruments, LPI will issue c 238 million new shares (c 41% of the enlarged share capital) for the remaining 48.5% project interest.
At the current share price, the deal values LPI’s remaining interest at A$90 million (A$186 million on a 100% basis), or c A$108 million based on the one-month volume-weighted average price (VWAP) of A$0.464.
According to the company, the current LPI shareholders will increase their proportionate interest in the project from 51.6% to 57.9%. Both transactions should be approved by LPI shareholders, with completion of the deal targeted for September 2022.
Valuation: Consolidation is a positive step
Our valuation of the Maricunga project remains largely unchanged at A$1.14 billion at a 10% discount rate and the long-term carbonate price of US$17,000/tonne.
We have updated our LPI valuation to reflect the change in the ownership structure as well as the reduction in the share price assumed for the dilutive effects of the project’s equity funding.
On a diluted basis, our valuation of LPI reduces from A$1.1/share to A$1.0/share. If, as before, we assume that the project is funded at A$0.75/share, our diluted valuation would increase to A$1.3/share.
We believe that the announced transaction is positive for LPI as it is value accretive and also allows the company to streamline the project ownership structure ahead of the anticipated investment decision.
Valuation update
Our cash flow-based valuation of the Maricunga project remains broadly unchanged as we maintain all our underlying operational and financial assumptions based on the 2022 definitive feasibility study for the 15,200 tpa carbonate operation (see our initiation note for more details) but update slightly the USD/AUD FX rate (1.44 vs 1.40 previously).
At the 10% discount rate and the long-term carbonate price of US$17,000/t, we value the project at A$1.14 billion.
At the same time, we have revisited our LPI valuation to reflect the proposed change in ownership structure and recent weakness in the share price in line with the overall lithium sector and the broader market.
We have previously assumed that at the LPI level Maricunga is accounted for on an equity basis, which was consistent with the company’s current accounting and its 51.6% interest in the project.
Consequently, we assumed that the required debt funding (US$376 million) was raised at the project level and equity financing (US$250 million) was contributed by the project owners on a pro-rata basis.
Following the repayment of debt at the project level, the remaining cash was expected to be distributed among the three owners, with LPI receiving its effective 51.6% interest.
Given the announced change in ownership, we now assume that LPI fully consolidates and funds the project and therefore retains all the cash flows from the project.
Further, given the recent significant volatility in the LPI share price and the lithium sector in general, we now assume that the project’s equity funding is raised at the one-month VWAP of A$0.464/share (which is also used by the company for the transaction).
Based on the above assumptions, we now calculate the diluted value of LPI of A$1.0/share (excluding Bearing Lithium’s dilutive instruments).
This includes the value of the residual project resources at A$0.1/share and compares to our previous diluted valuation of A$1.1/share.
The diluted valuation of the company is highly sensitive to the share price assumptions.
We note that at the previous share price assumption of A$0.75/share, our updated diluted valuation of LPI would be A$1.3/share.