Disclosure: Lithium Chile Inc. has paid FRC a fee for research coverage and distribution of reports. See last page for other important disclosures, rating, and risk definitions.
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Price Performance (1-year)
Asset sale, spin-off, and focus shift to other promising lithium projects in Chile and Argentina
LITH’s portfolio consists of an 80% interest in the Arizaro project (29,245 hectares), along with 11 early-stage lithium properties covering 106,136 hectares in Chile. Additionally, the company owns four properties in Chile, totaling 22,433 hectares, which are prospective for gold, silver, and copper.
Following the Arizaro sale, and the spin-off of its gold-silver-copper projects to Kairos Gold, LITH will shift its focus to its remaining 11 early-stage lithium properties. Of these, ERAMET (LSE: ERA/MCAP: $2.3B), a European miner with operations in over 15 countries, has optioned four. LITH will prioritize the following two projects initially:
Arizaro Project, Argentina
Subsequent to the last resource estimate estimate in April 2024, 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
Source: Company
Incorporating the results of this hole in the resource estimate will likely increase both tonnage and grades
4Mt+ of LCE in resources. According to the PFS, construction is set to begin in 2026, with commercial production expected to start in 2028
The 2024 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 early stages.
The PFS was based solely on reserves, representing 12% of resources. AT-NPV8% of US$1.4B, using the five-year average LCE price of US$21k/t vs the current spot price of US$10k/t
Financials & Valuation
Healthy balance sheet
Source: FRC/Company
*LITH is obligated to pay $2.7M in cash, and issue 19M shares, to the previous owners of the Arizaro project.
In-the-money options can bring in $1.61M. LITH is trading at $59/t LCE (previously $43/t) vs the sector average of $73/t (previously $66/t)
Given that the offer price for Arizaro is consistent with our fair value estimate, we are maintaining our fair value estimate of $1.28/share
We are reiterating our BUY rating, and fair value estimate of $1.28/share. LITH has secured an attractive deal for its Arizaro project, confirming our valuation. The upcoming special dividend, and the spin-off of Kairos Gold, will unlock considerable value for investors. With the current MCAP significantly lower than the offer price, we believe the shares could move up once the deal is finalized.
Risks
Maintaining our risk rating of 5 (Highly Speculative)
We believe the company is exposed to the following key risks (not exhaustive):
