Robust PFS Bolsters M&A Prospects

Metrics	Value
Current Price	CAD $0.54
Fair Value	CAD $1.28
Risk	5
52 Week Range	CAD $0.47-0.88
Shares O/S (M)	206
Market Cap. (M)	CAD $111
Current Yield (%)	N/A
P/E (forward)	N/A
P/B	1.9

Report Highlights

LITH has completed a Pre-Feasibility Study (PFS) on its flagship Arizaro de Salar project in Argentina. Argentina is the fourth largest lithium producer in the world, with the third largest reserve-base.
Compared to the 2023 Preliminary Economic Assessment (PEA), the project’s AT-NPV8% increased 26% to US$1.4B, while the AT-IRR increased slightly, using the five-year average Lithium Carbonate Equivalent (LCE) price of US$21k/t vs the current spot price of US$12k/t. LITH is trading at just 7% of its AT-NPV. The PEA did not include NPV/IRR estimates for scenarios with LCE prices <US$21k/t.

The PFS confirmed the effectiveness of using Direct Lithium Extraction (DLE) technology for lithium extraction. We note that while DLE technologies have demonstrated significant potential in laboratory and pilot-scale tests, large-scale commercialization is still in early stages.
In our view, the PFS was optimistic in using prices higher than the current spot, while being conservative by accounting for just 12% of Arizaro’s resources.
Lithium prices are down 70% YoY to US$12k/t vs the five-year average of US$21k/t. That said, we maintain a positive outlook on lithium stocks, as we believe lithium prices have stabilized, and battery/EV manufacturers/miners are actively seeking stable/long-term supply sources.
As announced earlier in the year, LITH is spinning out all of its other projects into two new publicly listed entities. Shareholders will get free shares of the new entities. We support this plan as it allows LITH to monetize these assets, while streamlining its corporate structure for potential M&A related to the Arizaro project.
ERAMET (LSE: ERA/MCAP: $2.9B), a European miner operating in 15+ countries, and LITH’s option partner in four lithium properties in Chile, is planning an exploration program this year.
Given the strong PFS, we believe the Arizaro project is becoming an increasingly attractive M&A target for larger players. Last year, Stellantis (NYSE: STLA), the owner of auto brands such as Fiat, Peugeot, and Chrysler, acquired a 19.9% stake in Argentina Lithium & Energy’s (TSXV: LIT) projects for US$90M. LIT is an early-stage junior with four pre-resource stage projects in Argentina. Additionally, Saudi Arabia's mining minister is currently visiting Brazil and Chile, as the oil-rich nation looks to expand its global mining footprint, particularly in the lithium sector. We believe these developments suggest a positive outlook for LIT's M&A prospects, although the Canadian government's reluctance towards mining deals with foreign state-owned entities remains a hurdle.

Price Performance (1-year)

	YTD	12M
LITH	-4%	-30%
HLIT (ETF)	-41%	-58%
TSXV	3%	-9%

*See important disclosures at the bottom of this report rating and risk definitions. All figures in C$ unless otherwise specified.

2024 PFS vs 2023 PEA

Relative to the 2023 PEA, the 2024 PFS showed superior economics, primarily driven by the incorporation of the Argentine government's tax breaks and other incentives for mining projects. The study also incorporated optimizations in project design, leading to operational efficiencies, and lower water requirement. Additionally, the PFS confirmed the effectiveness of Direct Lithium Extraction (DLE) technology in extracting lithium chloride, which is subsequently purified and converted into high-quality LCE. We note that while DLE technologies have shown significant potential in laboratory and pilot-scale tests, large-scale commercialization is still in its early stages.

The PFS returned superior economics. AT-NPV8% increased 26% to US$1.4B, while AT-IRR increased slightly, using the five-year average LCE price of US$21k/t vs the current spot price of US$12k/t

Cash costs increased 8% to US$6k/t, while CAPEX increased 28% to US$1.1B, driven by sector-wide inflation and modifications in project design

As with all large projects, NPV and IRR estimates are highly sensitive to LCE prices.

NPV increased despite higher cost estimates, primarily due to the incorporation of the Argentinian government's new tax incentives.

Since we had already factored in lower taxes in our April 2024 report, our NPV estimate (presented later in the report) decreased as we raised cost estimates to align with the PFS

According to the PFS, construction is set to begin in 2026, with commercial production expected to start in 2028. Upgraded resources by converting 20% of M&I resources to reserves

The PFS was based solely on reserves, representing 12% of resources. Subsequent to the April 2024 resource estimate, LIT completed another hole (ARGENTO-06), which returned an average grade of 656 mg/L, significantly higher than the current resource average of 323 mg/L

Incorporating the results of this hole in the resource estimate will likely increase both tonnage and grades

Financials & Valuation

Strong balance sheet. In-the-money options can bring in $1.26M

LITH is trading at $43/t (previously $67/t) vs the sector average of $66/t (previously $83/t)

By applying $66/t to LITH’s resources, we arrived at a revised comparables valuation of $0.77/share (previously $0.96/share).

Our DCF valuation decreased from $1.75 to $1.50/share, as we adjusted our CAPEX and OPEX estimates to align with the PFS

Using a sum-of-parts model, we arrived at a revised fair value estimate of $1.28/share (previously $1.57/share)

Valuation decreased due to higher OPEX/CAPEX estimates, and lower sector valuations

We are reiterating our BUY rating, and adjusting our fair value estimate from $1.57 to $1.28/share. Despite higher cost estimates, we believe the company's M&A prospects have greatly improved due to the PFS further derisking the project, and confirming the effectiveness of DLE technology for lithium extraction.