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Lithium Power International
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== Valuation and sensitivities == Our valuation of LPI is based on the Maricunga project. We consider the first phase of the project, with production of 15.2ktpa of carbonate over 20 years supported by the OCC concessions and key operating and cost assumptions outlined in the January 2022 DFS, as a base case valuation scenario. To this, we add the value of the remaining lithium resources represented by the Litio 1–6 concessions. Given the difficulty in selecting an appropriate peer group (different types of projects/products, different development stages and regional exposures), we chose to use the company’s current EV/resource multiple, which we have discounted by 25% to account for the permitting uncertainty, as an appropriate approach to the Litio 1–6 resource valuation. We have also considered the valuation of the 20ktpa project supported by the combined OCC and Litio 1–6 resources with operating parameters provided in the 2019 DFS. Our NPV of the Maricunga project is based on the discounted cash flow to equity holders (DCFE) and takes into account potential equity dilution. This approach assumes that the company pays out all free cash flow after debt repayments as a theoretical dividend to equity holders. We note that LPI owns 51.6% of the project and accounts for it on an equity basis. For the purpose of our valuation, we have assumed that development funding is split 60%/40% between debt and equity and that the equity portion of funding is provided by the owners of the project on a pro rata basis, while debt is raised at a project level. After debt is paid out at the project level, the remaining cash flow is distributed among the three current owners of the project, with LPI receiving its effective 51.6% share. Based on this approach to funding, our lithium price assumptions and key operating and cost parameters from the 2022 DFS, our base case diluted valuation of LPI is A$0.85/share. We have assumed that the company finances its A$182m equity portion of capex (51.6% of total estimated project equity funding of US$251m) at the prevailing share price of A$0.68 (which implies 266m new shares). Our NPV is based on a 10% discount rate and assumes project start in 2026 (ie three years of construction and one year to raise funds) and a three-year ramp up to full production. To our NPV based valuation of the company we add the value of the Litio 1–6 lithium resources. LPI currently trades on an EV/Resource multiple (total M&I resource for OCC and Litio 1–6) of A$84.4/t of contained LCE. Assuming a 25% discount, this multiple implies a valuation of A$0.18/share when applied to the Litio 1–6 M&I resource of 0.98mt of LCE. This brings the company’s overall valuation to A$1.02/share. For illustrative purposes, we have also considered the valuation of the full-scale 20ktpa carbonate project, which was considered in the 2019 DFS. Based on the key operating parameters as outlined in the 2019 study and our long-term carbonate price of US$17,000/t, our diluted valuation of LPI for the larger project is A$1.18/share. We have used a 10% discount rate and therefore applied no risking related to the lack of the required production permits. Our LPI valuation is most sensitive to changes in the discount rate and long-term carbonate pricing. The main sensitivities for the company’s valuation based on the 15.2ktpa project are shown in the table below. Further, we note that a 10% change in the overall project capex results in a 7% reduction in LPI’s valuation, while a 10% increase in opex leads to a 4% reduction in the NPV. The valuation sensitivities to changes in the funding mix and the share price used to calculate dilution are shown is Exhibit 18. In addition to the above sensitivities, the royalty rate potentially payable on carbonate sales represents a significant uncertainty in the project’s economics and valuation. The company believes that because the project is based on the OCC concessions that were formed according to the old Chilean mining code, it should not be subject to any special royalty or lease payments regimes. Even though according to the current tax regime applicable in Chile, the specific mining tax rate for the project should be 1.2%, the 2022 DFS assumes a royalty rate of 3.0% payable on carbonate sales. This is also our base case assumption. The study notes that at present Chile is considering a number of options aiming at increasing royalties payable by mining companies. These options include a 3% rate on net sales and a 5% royalty on mining margin (defined as net profit excluding interest expense). Based on our model the latter is equivalent to a 2.4% sales-based royalty rate. We note that a 1pp change in our royalty rate assumption lowers our base case NPV valuation of LPI by only 1.4%. The valuation sensitivity to royalty payments is moderate due to the project’s high profitability.
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