Lithium market peer analysis - SP Outlook Analysis (Short/Med term)

Preamble: I’ve seen a lot of ramping on this stock, and an increasingly negative sentiment surrounding LTR’s operational viability, criticism of timing for commencement of commercial activity. Yes, LTR is heavily shorted and has hit 12 month SP lows; however this post will present my research as to why I don’t think there is any cause for concern and why I have accelerated my accumulation with the recent Slump in SP.

I will present a summary of Australian owned lithium miners, analyse why some are more commercially viable than others, and then link that to LTR’s data to present my conclusion on LTR’s commercial viability.

Market Analysis – CXO, SYA, PLS, IGO, MIN

Commercially viable miners: PLS, MIN, IGO(indirect Ownership of Greenbushes)

PLS: (FY23/24 Q4)

FOB OPEX: US$444 (A$675)

CIF OPEX: US$519 (A$789)

Realised Sale Price: US$804 (A$1206)

Prev Qtr sales US$1113(A$1,668)

Average SC production: SC4.8 @ 64% recovery

So what: average Realised price last 6-8 Months is US$950 for SC4.8, Therefore Lithium production in isolation averaged a profit of US$430/t over last 6 months despite Spot price multi-year lows), also if recovery was at SC6, Realised price profit margin would jump to US$668/t

MIN (Mt Marion): (FY23/24 Q4)

FOB OPEX: US$345 (A$518)

Realised Sale Price: US$718(A$1,079)

Average SC production: SC4.2 @ unknown recovery %

Profit of US$373(A$559)/t

MIN (Wodgina): (FY23/24 Q4)

FOB OPEX: US$620 (A$930)

Realised Sale Price: US$974(A$1,462)

Average SC production: SC5.6 @ unknown recovery %

Profit of US$354(A$531)/t

MIN (Bald Hill): (FY23/24 Q4)

FOB OPEX: Unspecified

Realised Sale Price: US$878(A$1,319)

Average SC production: SC5.2 @ unknown recovery %

Profit : unknown

IGO: (Greenbushes TLEA) (FY23/24 Q4)

OPEX: US$257 (A$386)

Realised Sale Price: US$1034(A$1,552)

Average SC production: SC6.0 recovered from (from 2.25% contained li ore)

Profit of US$777(A$1165)/t

Note: OPEX not specified as CIF/FOB or other, assumed additional costs in royalties/Transports, sustainment will erode profit margin

Non-Viable miners CXO, SYA

CXO (Finnis): (FY23/24 Q3)

FOB OPEX: US$1,366 (A$1,952)

Realised Sale Price: US$1,418 (A$2,101)

Average SC production: SC4.7 @ 60% recovery(50% prev Qtr)

Including royalties,Operatingat a loss

SYA: (FY23/24 Q3)

FOB OPEX: US$1027 (A$1,539)

Realised Sale Price: US$657 (A$999)

Average SC production: SC5.1 @ 67% recovery

operating at a loss

General Observations:

· Lower SC% products are selling at a % discount to SC6, reducing realised price and eroding profit margins.

· Reduced Lithium recovery rates (see CXO) significantly enhanced cost of extraction.

· Larger scale mining operations (PLS, MIN, Greenbushes) have significantly lower FOB OPEX more closely in-line with their respect pre production Feasibility studies. Smaller Scale production (CXO, SYA) had dramatically higher operating costs per tone (Economies of scale)

· Despite 85% reduction in SC6 spot price, large scale lithium mining operations remain commercially viable.

· Most producer’s sold product in the range SC4.7-5.6, realised average price on an SC6 basis was around US$1,040/t

LTR Project Economics Analysis

Applying the above data lets revisit LTR’s economics based on DFS Assumptions in current market environment.

DFS FOB OPEX Yr 1-10: US$319 (A$474)

Royalties @ US$1,040: $81 (approx. See DFS 26/07/21 Table 13)

Averaged Realised SC6 basis price: $1,040

Net: US$640(A$966)

At 511ktpa = Annualised profit US$327m(A$494m) Which is commensurate with LTR assessment of an NPV in the range of $2.5b with a US$1,000/t SC6 spot price.

Now these figures are based on mainly pre-covid economic environment, we have had significant recent inflation, cost of shipping increased, cost of employment, labour shortages etc. so lets revisit DFS FOB OPEX assumptions:

FOBOPEX:

Mining: $185/t +20% = $222

Processing: $89/t +20%=$106

Transport and log: $55+ 50%=$82

General and admin: $38 + 20%= $45

Tantalum Credits: ($48) – n/c = ($48)

Adjusted FOB OPEX Yr1-10 = $407/t

Averaged Realised SC6 basis price: $1,040

Royalties @ US$1,040: $81

Net: US$552(A$833)/t

Annualised profit: US$282(A$425)

Near to medium term SP outlook:

Allowing for a period of Ramp up, loan payback can occur within the initial 2 years estimated in the DFS assumption, and at 2.5Mtpa production, trading at a PE of 10, LTR justifies a MC in the 4.2-5b range, or a SP around $2. Once the 4Mtpa expansion occurs, this adjusts forecast yearly profit to between $583-$676m at current Spot price, which as an establish producer can apply an PE 12 justifies a MC of $7-8.1b, with a commensurate SP of $2.90-$3.40.

Lithium spot price outlook:

The rate of Lithium demand growth has slowed, which will likely push out the timeline for a Supply deficit to occur, which may begin to be evident from 26’-28’ however it is a reasonable assessment that long term price will settle around US$1,300-500/t, so lets revisit project economics.

Realised SC6 price: US$1,400 (avg)

Adjusted FOB OPEX Yr1-10 = $407/t

Royalties @ US$1,400: $106

Net:US$887 (A$1,339)

Annualised profit: US$621m(A$938m)

EPS: 39c

MC @ PE12: A$11.3b

SP: around A$4.60-4.70

Any shortage to Lithium supply can cause significant increase to Spot price for an extended period of time, so if a US$2-2,500/t occurs then LTR can conduct share buy back, special dividend etc.

Risks:

It is very possible that SC6 spot prices drop below US$1,000/t which could even occur for 2-3 years until supply deficit begins to occur. Fortunately, LTR remains viable at reduced rate from the high quality resource they have, and so some patience will see LTr weather the economic conditions which may see additional marginally economical miners pushed out of business, which will bring forward a possible supply deficit.

It is also possible that LTR’s recovery rates are not in the high 70’s% and SC% is not as planned, however the option to go DMS provides the greatest likelihood that a high quality SC5.8+ product is likely.

Summary:

My research indicates that within the next 12 months LTR comfortably justifies a $1.60+ SP, and within 3-4 years, even with near term severe Lithium market conditions can justify a SP in the $3+ range, Looking 6+ years I would expect $4.6-$5.

As such opportunity to accumulate at <$1, in a Tier 1 lithium producer is excellent. PLS is an excellent benchmark of what a project of such scale is worth, whose MC follows similarly to my modelling as an indication of what LTR can be worth in time.

I invite any feedback or your own thoughts, I'm not an analyst so it's just some layman's calculations. I know some staunch supporters would prefer >$3 next year, but unfortunately I don’t think the market or data can support that level MC without a significant unforeseen catalyst. However that doesn't detract from the medium term price outlook against current SP of a 70% return in 6-12 months, 200% return in 3-4 years and 350% in 6ish years. Also noting that if market sentiment, or even SP sentiment shifts, that These SP's can be realised much sooner based on the perception of future earnings.

Disclaimer: this is not financial advice. I am a Share holder. GLTAH