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Lithium Power International
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== Investment summary == '''Company description: Advanced lithium project in Chile''' LPI holds 51.6% of the advanced-stage lithium brine project in Salar de Maricunga, Chile, which is situated in the well-known ‘lithium triangle’. Based on the updated 2022 definitive feasibility study (DFS), the first stage of the Maricunga project is expected to produce 15.2ktpa of high-quality lithium carbonate over 20 years and is underpinned by the concessions formed under the old Chilean mining code and therefore do not require the CEOL. The remaining concessions (Litio 1–6) represent a significant expansion potential subject to obtaining the required permits. Despite the smaller footprint and relatively high capital intensity, the 15.2ktpa project has attractive economics supported by favourable lithium market fundamentals and low opex. It also significantly lowers the project’s execution risk due to its permitted status. Maricunga is the most advanced greenfield lithium asset in Chile, which is one of the largest lithium-producing countries. LPI signed a non-binding MOU with Mitsui in May 2021 and is looking to advance the project to final investment decision (FID) in 2022. '''Valuation: Smaller-scale operation yields healthy upside''' Our main valuation scenario is based on the 15.2ktpa carbonate project supported by the old code concessions (OCC) and key operating and cost assumptions from the 2022 DFS. Our net present value (NPV) is based on the discounted cash flow to equity holders and reflects equity dilution at the prevailing share price. At a 10% discount rate, it yields the valuation of A$0.85/share for LPI. To this, we add the value of the remaining lithium resources represented by the Litio 1–6 concessions, which we estimate at A$0.18/share using the company’s current EV/Resource multiple and an arbitrary 25% discount to account for the permitting related risks for these concessions. Our valuation is most sensitive to changes in the lithium price and discount rate. A 10% increase in our long-term carbonate price of US$17,000/t increases our base case NPV by c 20%, while a 1pp increase in the discount rate lowers our valuation by c 10%. '''Financials: Funded through to the final investment decision''' At end December LPI had a cash position of A$15.4m and we estimate that it will finish FY22 with cash of A$12.9m. We believe this should be sufficient to get it through to the FID. If the development goes according to the current plan, with the construction start in 2023 and project commissioning in 2026, the joint venture (JV) will have to secure project funding in 2022. As part of the package, we assume debt will represent 60% of the overall capital cost (US$626m) and expect it to be raised at the project level. This leaves c US$250m to be raised in equity. We expect LPI to contribute its 51.6% share on a pro-rata basis, which equates to c A$181m over 2023–26. This compares to the company’s current market cap of A$237m and represents c 43% dilution. We expect Maricunga to be highly cash generative. Based on our long-term lithium price and cost assumptions (direct cash cost of US$3,864/t), we expect the project to generate average direct EBITDA of c US$167m per annum. '''Sensitivities: Political uncertainty in Chile''' While lithium market fundamentals are favourable, we believe the main risk attached to the project is the uncertain political situation in Chile. Following the recent presidential elections, there appears to be significant opposition to lithium extraction, both from environmental and political points of view. Other risks include funding/dilution as well as commodity prices and lithium fundamentals. '''Company description: Ahead of the lithium curve''' LPI’s main asset is a 51.6% interest in the Maricunga JV (Minera Salar Blanco, or MSB), an advanced-stage lithium brine project in Chile. This is a permitted project with the updated DFS published in early 2022. Maricunga is expected to produce 15.2ktpa of high-grade lithium carbonate over 20 years. The JV’s key focus is now on securing a strategic partner and/or an offtake agreement, which should pave the way for the FID and the subsequent development of the project. LPI believes that it will be able to advance the project to the FID in 2022. With an estimated construction period of three years, the project is then expected to commence production in 2026. LPI also owns early-stage hard rock lithium exploration projects in Western Australia. '''Maricunga JV overview''' The project is comprised of 10 mining concessions in the northern part of Salar de Maricunga (Atacama region) in Chile. Maricunga is a mid-sized salar that forms part of the well-known ‘lithium triangle’ (Exhibit 1). The project’s mining tenements consist of the four ‘old code’ concessions (OCC), which were constituted under the 1932 Chilean Mining Law and, according to LPI, do not require a special operating licence (CEOL) to produce lithium. The other six concessions (Litio 1–6) require the CEOL. The first stage of the project (15.2ktpa) is underpinned by the OCC, while the potential expansion can be supported by Litio 1–6, subject to obtaining the required permits (CEOL, CCheN, environmental). The Maricunga project is the most advanced exploration and development asset in the salar, which at present does not host any producing operations. Other adjacent mining concessions in the salar are held by Sociedad Química y Minera (SQM), one of the world largest producers of lithium compounds, and Codelco, a large government-owned copper miner. LPI holds 51.6% in the JV that controls the project, with the remainder owned by Bearing Lithium (c 17%) and local partner Minera Salar Blanco (c 31%). '''2022 updated feasibility study: Smaller scale, lower risks''' In January 2019, LPI published a DFS on the Maricunga project. It followed the release of a preliminary economic assessment (PEA) in early 2017 and was based on the 2018 compliant mineral resource estimate. Subsequently, the company released an updated DFS on the project in January 2022. The 2019 DFS was supported by the project’s combined lithium resources from all mining concessions (OCC and Litio 1–6). It envisaged production of 20ktpa of lithium carbonate (Li2CO3) over 22 years (year 1 to 11 from the OCC and then from Litio 1–6). The updated January 2022 study is based on the resources underpinned by OCC only and assumes production of 15.2ktpa of lithium carbonate over the 20-year life. While the reduced footprint (1,125ha for OCC vs 2,563ha for all tenements) results in a smaller scale and somewhat weaker project economics, it significantly lowers licensing and execution risks. The Litio 1–6 concessions provide extension or expansion potential, should the JV succeed in obtaining the required permits. '''Lithium production: Brine evaporation versus hard rock mining''' By way of background, lithium is typically produced via two main routes: saltwater brines evaporation and hard rock mining. The latter production process is broadly similar to a traditional mineral resource extraction whereby lithium bearing pegmatitic minerals, such as spodumene, petalite or lepidolite, are mined and processed into concentrate (eg SC6, or spodumene concentrate, containing 6% lithium dioxide), which is then converted into lithium carbonate or hydroxide (LiOH). In contrast, the saltwater brine is processed by water evaporation under sunlight. For that purpose, the brine, which contains lithium chloride (LiCl) as well as a variety of salts in the form of sulphites and chlorides of sodium, potassium, magnesium, boron, etc, is pumped into shallow ponds. After 12–18 months the concentration of salts and LiCl in the brine increases, salts are harvested from the ponds, while lithium is further processed into carbonate. Due to the specific production routes and chemical/mineral composition, lithium from pegmatite is typically processed into hydroxide, while brines produce carbonate. In mineral processing, spodumene concentrate obtained from mining and subsequent beneficiation of ore is calcinated to convert α-spodumene into the beta phase; β-spodumene then reacts with calcium oxide to form lithium aluminate, which following leaching reacts with calcium hydroxide to form lithium hydroxide. In the schematic brine processing, sodium carbonate is added to the concentrated brine solution after the evaporation and salt removal stage, where it reacts with lithium chloride to form lithium carbonate, which can then be filtered out from the solution. Both carbonate and hydroxide are key raw materials used in production of positive electrodes in lithium-ion batteries and can be further processed into metallic lithium. In general, hard rock mining is more energy and capital intensive and characterised by higher operating costs compared to brine processing (which is however more water intensive but overall simpler). At the same time, it is more scalable (it is not uncommon to see an integrated 40–60kpa of LCE spodumene project compared to a 15–25ktpa brine operation) and historically produced higher value-added product. However, with the recent increase in the use of lithium iron phosphate (LFP) batteries in China, carbonate now trades on par with hydroxide. '''Maricunga production process: A three-stage approach''' With the exception of the salt removal plant, Maricunga’s production process is similar to other saltwater salars. It is comprised of three main stages: * Solar evaporation ponds. This is the initial stage that takes advantage of the natural water evaporation effect and solar radiation to concentrate the brine. Evaporation ponds operate in sequence and use the brine’s natural saturation property through water evaporation and salt precipitation. When the brine reaches its saturation point it is transported to the next pond while salt is removed (harvested). * Salt removal plant. Concentrated brine from the evaporation ponds is fed into the salt removal plant to continue brine purification and lithium concentration by means of a series of evaporation and crystallisation steps. During this stage, calcium, boron and magnesium are removed from the brine. The salt removal plant generates more concentrated brine feed to the lithium carbonate plant, improving processing efficiency and producing higher-quality material. Importantly, it allows control of the chemical composition and stability of the feed flow to the carbonate plant and therefor maintains the quality of the product. * Lithium carbonate plant. This is a chemical plant that receives concentrated brine from the salt removal plant. The lithium-rich brine still contains some concentration of impurities that need to be removed through mixing with specific reagents and ion exchange. Following the elimination of contaminants, the contaminant-free brine enters the carbonation stage where it is placed in contact with soda ash to produce lithium carbonate. '''Updated reserves and resources: Estimates increased at depth''' The 2022 DFS is based on the OCC mining concessions covering an area of 1,125ha, versus the 2,563ha area for the combined OCC and Litio 1–6 concessions considered in the 2019 study. Despite the smaller footprint, the project’s OCC lithium resources were significantly upgraded in the 2022 study by considering brines to a depth of 400m versus 200m in the earlier study. The project is now estimated to have a measured and indicated (M&I) resource of 358kt of contained lithium (1.9mt of lithium carbonate equivalent (LCE)) compared to 389kt of lithium (2.1mt of LCE) in the 2019 study. The project’s proven and probable reserves for OCC were upgraded to 479kt of LCE compared to 346kt of LCE before. These reserves are sufficient to sustain a 15.2ktpa LCE operation for an estimated 20-year project life. The average lithium concentration in the updated P&P reserve is 976mg/l versus 1,115mg/l for the earlier combined OCC and Litio 1–6 P&P reserve estimate, while the brine’s chemical composition is also broadly similar. In the 2018 resource statement, Litio 1–6 had M&I resources of 184kt of lithium (979kt of LCE) defined to a depth of 200m. This resource and its extension potential to below the 200m depth level should be viewed in addition to the recently upgraded OCC estimates. The project also has significant potassium resources, which can be processed into potassium chloride (KCL). While this is currently outside of the project scope (and therefore has no value contribution), KCL production can be considered in the future and can potentially reduce operating cost as a by-product. '''Brine quality and impurities''' When it comes to the quality of the brine, lithium concentration is not the only parameter to consider. It is important to look at impurities that could have a significant detrimental effect on brine processing. For Maricunga, the main deleterious elements are magnesium (Mg), sulphate (SO4) and calcium (Ca). Its brine is characterised by a relatively high lithium concentration and low potassium content, which is favourable for processing. At the same time, the project has a high proportion of calcium in its brines. Looking at the specific values, Maricunga’s Mg/Li ratio of 6.5x is similar to Atacama, Chile’s largest and only producing salar, while its sulphate to lithium ratio of only 0.64x is the lowest among the main exploration and producing salars in Latin America (Exhibit 7). The project’s Ca/Li ratio of 12x significantly exceeds the levels reported in other salars. The relatively high concentration of calcium and magnesium, which lowers the brine activity, as well as the levels of solar radiation at the salar are the main reasons for the introduction of an additional processing step in the form of a salt removal plant. It reduces the target concentration rate during the evaporation stage to only c 0.9% and therefore addresses the risk of the brine not reaching the required concentration of 3–4% lithium in the ponds. As a result, the salt removal plant considerably shortens the processing time. It also allows water to be recovered during processing, which is crucial as high water use during brine processing in general represents a major environmental concern, and reduces the consumption of reagents. The chemical composition of the brine is broadly similar for the 2022 and 2019 feasibility studies, which cover OCC only and the combined OCC and Litio 1–6 resources respectively. Of note is a slightly lower calcium content in the 2022 DFS. '''Opex and capex analysis''' The 2022 DFS estimates the project’s total capital cost at US$626m for 15.2ktpa, including the direct cost of US$420m and US$63m in contingencies. The main capex items are the evaporation ponds (US$90m), the salt removal plant (US$110m) and general services (US$84m). We note that the cost of the carbonate plant represents less than 10% of the overall capex. The total capital expenditure for the 15.2ktpa operation of US$626m compares to the previously estimated capital cost of US$563m for the 20ktpa operation in the 2019 DFS. The main differences are the higher cost of the salt removal plant (the cost of mechanical equipment more than doubled to US$73m) and significantly higher indirect costs (no indirect cost breakdown was provided in the 2019 BFS). The 2022 DFS is one of the most recent studies for a lithium project in Latin America and therefore includes up-to-date cost estimates that reflect COVID-19 effects. The increased cost of the salt removal plant is also due to the additional test work undertaken by the company in 2021. In terms of operating costs, the 2022 BFS estimates total opex at US$3,864/t of carbonate, which is similar to the 2019 DFS figure. The main cost components are chemicals and reagents (28% of total operating cost), and energy (30%). The project is expected to require both electrical and diesel power, with the latter used to generate steam for the salt removal plant and it represents a significant proportion of total costs. Given the high solar radiation rates at the salar there is a potential to replace diesel with solar energy. This could significantly reduce opex. We provide opex and capex breakdowns for the 2022 and 2019 studies in Exhibit 10. We note that opex excludes royalties that are discussed in the valuation section. The Maricunga’s opex is broadly in line with the similar carbonate projects in Argentina and Mexico (Exhibit 11). However, its capital intensity is higher for both the 15.2ktpa and 20ktpa operations. This is especially so for the smaller-scale project whose lower capacity and higher capex compared to the 2019 DFS negatively affects the capital intensity. At the same time, we understand it includes the actual EPC proposals from the EPC bidding process and therefore represents an up-to-date realistic estimate. For the 2019 DFS, the project’s capex and capital intensity are relatively high mainly due to the inclusion of the salt removal plant. We also note that some of the technical studies on the comparable projects exclude owners’ costs and have a deferred capex component. While we have tried to adjust the numbers, there may still be discrepancies. '''Licensing and permitting status''' As mentioned above, the Maricunga project consists of the OCC and Litio 1–6 mining concessions. The OCC were formed according to the 1932 Chilean Mining Code and as such, according to the company, they do not require a special licence from the Chilean government to produce lithium. The OCC (essentially two main concessions that cover an area of 1,125ha) underpin the first stage of the Maricunga project (15.2ktpa). The 1983 exploitation concessions (Litio 1–6) do not allow exploitation of lithium without a CEOL but do permit the exploration. However, historically there has been no clear and transparent process for awarding the CEOL. Under the current legislation, without the CEOL, lithium exploitation can only be undertaken by the state, state-owned companies or under administrative concessions. We understand that the JV remains in communication with Codelco, which owns adjacent properties in the salar and holds a CEOL for the area, but these discussions have not yet yielded any results. At present, the only lithium producing salar in Chile is Salar de Atacama. Both SQM and Albemarle, the world’s largest producers of lithium compounds roughly accounting for c 20% of the market each, operate in this salar. The exploitation rights in the Atacama Salar are held by the Chilean Economic Development Agency (CORFO) and are leased to SQM and Albemarle for a limited period of time. In addition to regular lease payments and other financial conditions, both SQM and Albemarle are required to pay a certain percentage of the lithium sales price to CORFO. According to SQM, these payments are incremental and at carbonate and hydroxide prices above $10,000/t and $12,000/t they could reach 40% of the price. We discuss royalty rates and other potential payments for the project later in the report, but note here that the BFS assumes Maricunga will be subject to a standard Chilean mining tax regime. The main reason for this is that the JV owns the mining concessions for the project and will therefore not be required to make lease payments to the state. In 2019, the JV was a awarded a key operating licence by the Chilean Nuclear Energy Commission (CChEN) to produce, market and export lithium products from Salar de Maricunga. This permit is limited to the OCC concessions and allows production of 88,885 tonnes of lithium (c 473kt of LCE) over 30 years. It therefore covers the first stage of the project. In 2020, the project received an environmental approval (EIA, the environmental impact assessment), which considered the construction and operation of a 58ktpa KCL plant (not included in the DFS) and a 20ktpa lithium carbonate plant over a period of 20 years. The JV also secured the water supply for the project through a long-term lease agreement, which was approved by the environmental agency. '''Strategic agreement with Mitsui''' In May 2021 LPI announced signing a non-binding MOU with Mitsui. The agreement covers offtake and financing rights for the first stage of the project as well as the potential expansion. Subject to Mitsui agreeing to provide a certain portion of the development capital, it will have the first right for an offtake agreement at the then prevailing lithium pricing. The agreement includes the following: * Mitsui will have the right to purchase up to 15ktpa of battery-grade carbonate over 10 years, extendable for two consecutive five-year periods. The agreement might include a minimum price, discount and/or ceiling price for the initial period, if that’s a requirement stipulated by the project finance structure. Any extensions will be based on the market pricing. * Mitsui will have the right to participate directly in the funding of the project. The funding structure is expected to include equity, debt, streaming and advance payments against the offtake. * MSB and Mitsui will create a partnership to expand Mitsui’s lithium business in Chile using environmentally friendly processing technologies. In addition, MSB will use its best efforts to utilise the direct lithium extraction (DLE) technology that is currently being tested by Misui’s technology partners. '''Other assets: Early-stage hard rock lithium assets in Australia''' In addition to the Maricunga project in Chile, LPI owns three exploration-stage hard rock lithium projects in Australia. Two of these projects are adjacent to the currently producing Pilgangoora and Greenbushes lithium mines in Western Australia. The projects are at an early stage of their development and are pre-resources.
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