Greetings Sayona family, on a breezy, chilly Thursday night from Melbourne. SAY the share price has been ON A deep slumber for the past month, like watching paint dry. April was the highlight of performance last year… remember those days? Indeed, in the meantime Sayona is quietly humming to achieve a world-class lithium operation.
The goal: to extract the NEAR-TERM (2024) value Sayona’s upgrades are bringing, and how it should reflect in the share price. To do this, I’ve narrowed down from last time, to compare a few peer lithium hard-rock plays asset portfolios. I looked at five key-ratios shown below (click on image to zoom in, I know it's tiny).
Note: The information is from current announcements so reflects market knowledge. Only defined resources are used, omitting any exploration targets (e.g. for Sayona, Tansim: 5-25 Mt @1.2-1.3% Li2O [November 2019]). Currency is $US with a 0.74 CAD:USD and 1.5 USD:AUD exchange rate applied. Interpolation from sensitivity graphs was used for the NPV calculations, where possible. Same spodumene grade applied to simplify calculations. All the referenced material can be found here: https://www.dropbox.com/sh/59ckyic447dpcyl/AAD3hWNoglN33GUBym5p1MUfa?dl=0
Mineral Resources: Market Cap Ratio
Core, Sigma and Pilbara demonstrated a low ratio, below 0.4. Liontown’s mineral resources ratio is at least 50% larger. Sayona’s is comfortably the largest, over twice Core’s ratio. To align with peers’ ~0.4 ratio:
- Liontown’s market cap must increase by 59% to US$5,824M
- Sayona’s must increase by 82% to US$2,393M
Ore Reserves: Market Cap Ratio
Ore reserves are the economically extractable resources so this may give a better picture. On the other side, they are often identified and reported much later, so some values are missing. Giving a less accurate picture of reserves for Sayona, Core and Liontown. When you are growing, resources are critical to define… because the reserves will be proven up naturally. Still it was a good exercise, showing again Sayona gives the most “bang-for-your-buck”. Core’s outlier low ratio is because it is pending an update to the Finniss ore reserves.
Reserves: Resources Ratio
The trend seems to be, the greater the tonnage, the more % of resources have been analysed and converted to reserves. That makes sense. Sigma and Pilbara both have 50%+ so making good use of their lithium deposits. Sayona is nothing special here, sitting nicely in the middle.
NPV: Market Cap Ratio
Sensitivity analysis is important to compare the NPV at a specific price point, so it was impossible to extrapolate from outdated sensitivities from Core and Pilbara’s outdated reports. What you can see, is the ratio is near “1” at a US$1,500 spodumene price. Meaning, markets are valuing lithium producers at these prices. I’ve assumed 100% project ownership here, so Sayona’s number is inflated. However, regardless, we can see that as spodumene concentrate prices are rebounding to US$5000 per ton and above, you can easily TRIPLE the NPV for all producers = TRIPLE market cap. Obviously, markets are forward-looking and anticipate prices going lower in the near future. Yet, when you are bringing in dollars at CURRENT prices, and will do so in the foreseeable FUTURE (prices are moving up again, so 1-2 years minimum), markets should adjust sooner or later. Even cautiously, we can DOUBLE NPV and market cap for lithium producers. Bullish sign for lithium.
Tonnage: Market Cap Ratio
Here Sayona is again fairly valued RELATIVE to peers. Pilbara seems to be overvalued on this metric, giving almost HALF the tonnage ratio to its peers.
Summary
4/5 metrics say Sayona is valued in-line with peers. The resources: market cap ratio shows Sayona and Liontown stand out CLEARLY and are undervalued. I’m not cherry-picking to show only the “bullish” metrics. No. What is vital to recognise is:
- Proving up resources eventually increases the rest of the ratios. Leads to more ore reserves, increases in tonnage, and thus increased NPV. Resource size is the “leading indicator” to predict the “growth” in a growth company. Because really, a producer only scales-up by finding MORE lithium to sell. Brett and Guy have the good business foresight to do extensive drilling and tie the seperate projects into “hubs” to feed central plants / refineries to vastly improve economics.
- All this data is from OFFICIAL announcements, so represents current market knowledge. That is why, you would EXPECT these companies to be fairly valued. To clarify, fairly valued at a specific price: US$1,500. So in other words, you can say markets are irrational and undervaluing lithium companies by 50% or even 66% (100%, 200% rise needed) at current and near-term prices. How in the world is that “fairly valued”?! Far from it! Well that is true. Which is why if you believe lithium prices will be much more than US$1,500 for a few years… you could throw a dart at ANY lithium producer and enjoy nice returns.
So the “growth” comes from 1) more resources ultimately leading to 2) more tonnage. There’s a huge CAPEX involved, and MANY uncertainties, leading to plans delaying, funds evaporating, and confidence waning. Sooner or later, shutting down due to no funds. Which is why you pick a producer you think can stick to their vision. Sayona’s reinvestment goals are to build up to 100,000 tpa hydroxide refinery at Moblan nearing 2030 (raking in tens of billions yearly)… this journey is all but certain. But, if you trust the team and project advantages (location, tier 1 location, first-mover, proximity of hubs & automakers, cheap hydroelectricity, etc), you can enjoy the ridiculous ROI. I want to look closer, more near-term, to see how this “growth” is happening going into 2024 and improving share price.
Step 1: “Big Steps, Faster”: Sayona’s extensive 2023 drilling program to ramp up its resource size
About 110,000m of drilling is stamped for this year, with more programs to be announced.
Moblan Drilling Program: 60,000m
Here is the set of properties Sayona owns in the Northern hub.
Moblan is 0.412% of this pie, leaving about 242X exploration area remaining, basically saying we can find as much resource as we need. Of course, aggressive drilling programs are needed to conjure up the resources. Owning and expanding land is the first step, and really where the “growth” in a growth company comes from. Guy and Brett have many nearby options to source more ore, and ultimately increase tonnage. Moblan has 60,000m of drilling underway so we can roughly expect 81.8 Mt @1.3% Li2O to be reported based on 37,000m of drilling producing 51.4 Mt @1.3% Li2O. That totals a stunning 152.7 Mt deposit at Moblan alone, which is OVER 150% larger than NAL’s now REDUCED 58.3 Mt @1.23% (from 101.9 Mt at a lower 1.06% grade) [April 2023].
NAL Drilling Program: 50,000m
Since May has commenced, Sayona started the partnership drilling program with Jourdan resources [March 2023]. The details were:
More than 50,000 metres of drilling are planned in 2023 – likely one of Québec’s largest drilling programs this year at NAL and Jourdan’s adjacent Vallée Lithium Project… More than 24,000m of drilling is planned at the Vallée project (earn-in claims), with the program expected to commence in May 2023.
To summarise this drilling program:
- 24,000m will be drilled in the light-blue “earn-in” area in the map above
- 26,000m spread across the dark-blue NAL leasing and yellow 100% owned areas.
- The first phase of this program (~16,000m) will primarily target conversions of Inferred resources to Indicated within the current pitshell footprint. A component for exploration along the northwest and southeast strike extensions of the NAL deposit is also part of the program. [April 2023]
- So really, only 10,000m of drilling to EXPAND resources and not CONVERT “inferred” (low probability of existing) to “indicated” (high probability of existing) resources.
Note a lot of pegmatites are MAXIMUM like 3 km of the NAL mine boundary, so transporting the ore is trivial and very easy. Of the 24,000m drilling in the earn-in regions, Sayona has the right to earn a 51% stake by spending C$10M over 2 years in exploration. Don’t forget, Sayona own 10% of Jourdan resources, even if it’s worth a tiny C$2.5M today. Overall, expect at least 34,000 metres of drilling. All the drilling during NAL’s history, from switching owners FOUR times and failing to produce spodumene, has amounted to 240,470 metres [September 2021] to build up a 58.3 Mt @1.23% giant resource [April 2023 - Updated Numbers in DFS]. That is broken into 54,630m of core drilling and 185,840m of geotechnical holes and blastholes. Being highly conservative to assume the same efficiency with this year’s program (should be MUCH higher because resource areas are now well-known), we can gauge 8.24 Mt @1.23% Li2O will be proven up for a total increase to 66.54 Mt @1.23% Li2O.
Keep in mind, Moblan’s recent resource upgrade RATE was 51.4 Mt / 37,000 m = 1,389 tonnes/metre drilled. From the map you can see over 2/3 of the area is untouched exploration ground, so we can comfortably conjure resources at this rate. So, a more realistic estimate would be to prove up 47.2 Mt @1.23% Li2O, for a total almost doubling of NAL’s resource to 105.5 Mt @1.23% Li2O.
Ramped up resource size
What does this all add up to? Drilling outcomes should be released by 2024 latest.
- Updated Mineral Resources: NAL + Authier + Moblan = 105.5 @1.23% + 17.1 @1.01% + 152.7 @1.3% = 275.3 Mt @1.26%
- In other words, this sums to 1,297.7 + 172.7 + 1,985.1 = 3,455.5 Kt Li2O
Sayona’s resource base will soon match Pilbara’s Pilgangoora deposit of 3,509 Kt Li2O. That is the incredible size we are building towards, and beyond.
Step 2: Converting bigger lithium deposits into greater tonnage and revenue
Our roadmap for this decade is ambitious, daring, but aggressively pursued. Splitting targets by near-term, medium-term, and long-term, Sayona aims to:
- Near-term [2023, 2024]
- Target 226,000t nameplate capacity or 30Kt LCE
- Medium-term [2025, 2026]
- July 2026: Phase out spodumene for 30Kt carbonate production at NAL
- Long-term [2027+]
- January 2027: Target 200,000t spodumene at Moblan
I know the focus of this research is on NEAR-term, however, when Sayona “catches” up to peers in this next leg of movement, it will be in the spotlight like it was 12 months ago, and the market will “wake-up” and start pricing in medium-term events. So, let’s see how the 30Kt carbonate plant impacts the profit margin.
2023: July-December
Targeting 85,000-115,000t over four shipments, so expect 100,000t. Ignore revenue loss caused by lower spodumene grades, because the offtake pricing is an estimate anyway. Lot of room for variation. All calculations are in AUD.
Revenue
50,000t * $900 = $45M
50,000t * $7500 (Fastmarkets, plus prices are on the rise again) = $375M
Total $420M
Costs
100,000t * $1,481 (AISC) = $148M
Operating Profits = $272M
Profit margin is 272/375 = 72.5%
2024-July 2026:
Assuming nameplate 226,000t is reached by next year, annually:
Revenue
113,000t * $900 = $102M
113,000t * $7500 (High near-term pricing. Keep in mind, prices are reversing from a low of $7,500) = $848M
Total $950M
Costs
226,000t * $1,481 (AISC) = $335M
Operating Profits = $615M with same profit margin.
July 2026 onwards
Now we have a 30,000t carbonate plant buzzing along. Our beloved partner Piedmont’s Tennessee hydroxide DFS had [April 2023]:
- $2,952 AISC conversion costs - expect less as carbonate is less complex to produce
- $1,600 spodumene purchase price - expect $730, our AISC, as a conservative estimate because we are purchasing from ourselves
- $10,721 per ton of hydroxide, meaning a conversion rate of 6.7:1 from spodumene:hydroxide - expect $4,891 using our ASIC as the spodumene price
- Total cost for us could be $4,891 + $2,952 = $7,843/t
- Piedmont assumed a $26,000/t hydroxide price… let’s assume carbonate achieves parity by then. That gives a 69.9% profit margin.
NOTE these downstream products will likely be in more demand as the EV transition ramps up. Also, to be fair, if we used current hydroxide prices of $40,000/t (Fastmarkets) the profit margin would be 80.4% versus 72.5% derived before for the NAL spodumene plant. Remember, with carbonate the shackles from Piedmont also come off, so that’s another 50% of product being sold at FULL prices rather than a low, outdated contract. Using Australian dollars again, so $39,000/t for carbonate, our annual figures could look like this:
Revenue
30,000t * $39,000 = $1,170M
Cost
30,000t * $11,765 (AUD) = $353M
Operating Profits = $817M, compared to $615M caused by a) Piedmont off-take 50% volume cut removed and b) selling at a better margin. That’s a 33% boost to operating profits. Not bad at all!
Takeaway
Sayona has an incredibly low US$278M capex to fund the carbonate plant commissioning, upgrades and restart. Our operating profits just THIS year plus a few months next year are enough to cover it. There’s also a $200M debt facility we could touch, and $100M in the bank. The US$278M CAPEX does not consider funds needed for additional drilling, Moblan downstream hydroxide plans, etc. However, with $615M operating profits and input from a great off-take partner (e.g Ford), we should go a long way towards making these plans a reality. Our ASIC is quite higher than other producers except Pilbara, but the NPV shows we are more than profitable.
The big question: Sayona’s Near-term valuation
So, Step 1 of the growth journey begins with proving up more resources. As soon as next year, imagine having a resource potentially equalling Pilbara’s (current) resource. Our mineral resources / market cap ratio skyrockets to a mind-boggling 2.628. Compare that with the ~0.4 ratio of our peers (yes, some of which likely will increase too in due time, requiring a re-rate to bring it back down). The market cap must increase by 6.57X, from US$1,315M to US$8,640M or in Australian dollars, $12,959M giving a remarkable share price of $1.45 within the next 12-18 months latest [near-term].
The delicate balance between technicals and fundamentals
Problem is, many holders have waited 12 months to be left disappointed. Every announcement seems like “the one”. Share price goes up, down, stays flat completely seperate from the broader market at times. Things will NOT make sense if you think the market is “rational” or “fully-prices-in information”. The reality is, just 1.5 years ago producers and analysts were forecasting $1,500 long-term average spodumene prices. Oh, how wrong we all were. Think of the market as a foolish, completely irrational beast. It moves PRIMARILY to satisfy the current technical analysis patterns, with fundamental company events SECONDARILY deciding the “levels” hit when a re-rate or plummeting occurs. BUT don’t think that this secondary impact is trivial… fundamental analysis drives the share price north over the long-term. It’s the short-term, when technical analysis patterns govern the movement. We’re well aware of the bullish pennant pattern on our chart right? A triangle that you can draw over 2 YEARS that is very close to the “breaking point”.
How foolish would you have to be, to think that this pattern is “random”? Or that some great news was going to cause the technical analysis to break out prematurely? Or on the other side, that we’re going to dive into the “10 cent, 5 cent” or some ridiculous figures that some presumably shorters have taken out of thin air? When we rose from 11 cents to 39 cents last year, on no news, it was because the fundamentals and charts aligned beautifully at the time. The fundamentals kept pushing the share price past the 20 cent, 30 cent, to touch 39 cents. Fundamentals say “keep going” to the charts.
Charts have decided a movement must occur this month… I’m hoping this WEEK. Fundamentals have already set a target level right up to $1.45, of course with many vital steppingstones on the way: 40 cents, 80 cents, $1. They are about to align perfectly. It was amazing seeing the technicals get caught off-guard in Liontown when the takeover offer was released. Fundamentals were SO strong and immediately material, technicals got thrown behind the bus and Liontown rose by 70% in one day. Hurt a lot of shorts, ouchy. I know, many here were hoping such a strong news event would appear with Sayona. But we are pressured by 10% shorts, they will offload as per their plan and try to not get burnt.
If you still feel uncomfortable with this framework for thinking, consider the numerous patterns that were previously set up and later broken as decided by fundamentals: U-shaped pattern, cup-and-handle pattern, now converted into the bullish pennant.
U-shaped pattern: rejected
… that became the cup-and-handle pattern: rejected
… that is NOW the bullish pennant: cannot be rejected? Why?
- It forms over a 2 year time frame, strong bullish momentum
- Fundamental events have accumulated to prepare the “springboard”… plus carbonate PFS, Moblan PFS all this month
- High short-interest and low-volume cross-trades signal institutions urging to exit short positions and enter more longs
- Lithium prices, underlying commodity, on the rise after 5 months of decline
It’s a rough sketch… but that is the ULTIMATE direction Sayona is headed. If the technicals reject a strong re-rate, perhaps, the fundamentals have deteriorated. That’s why you should always stay cautious. Even if it seems highly unlikely in the near-term, with all the factors above playing a part. Trust the numbers and the future… lithium. For the foreseeable future…let’s go, “Big Steps, Faster”. Take care and keep Kraken’ 
(20min delay)