"We will continue to progress the 3Q Project into advance development stage in record time."
Waldo Perez, CEO of Neo Lithium Corp | Official Website
I have to admit, I am fairly attracted by confident CEO's and prefer to invest my funds in companies that are run by a management with a proven track record. Neo Lithium Corp, a junior lithium miner, is exactly one of these companies. However, this does not prevent me from having an extra skeptical view on the company. When stocks are trading on surprisingly low levels, very often there is a good reason for it. So, I will simply never stop asking.
Earlier this year, when an interviewer from 'Proactive Investors' asked the CEO of NLC why investors should take a position in Neo Lithium Corp now, Waldo Perez responded by saying it should happen before they actually strike a deal with a major and/or a strategic partner, and added, that the appreciation of the stock is going to be huge. In the companies presentations, the financing is scheduled to happen around Q3/Q4 2019. Of course, this is highly speculative. In the following research report, I dig into the details to find out the likelihood of this deal occurring.
It's all about batteries these days. Every smartphone contains between 5 and 7 grams of lithium. A notebook already needs 20 to 45 grams. Batteries for electric cars require between 40 and 80 kilograms. Battery storage for electric grids, which is already taking off, will only further increase the need for lithium. Such a solution may need around 1.5 tons of lithium. With hundreds of millions of smartphones, notebooks, e-bikes and electric vehicles (EV's) to be produced in the coming years, lithium production is probably going to increase rapidly, and very soon.
For many years, there were three big companies that produced most of the worlds Lithium:
The above mentioned companies are all publicly traded at the New York Stock Exchange and seem to be a rather safe bet to invest in, especially when considering current prices. There are dozens of juniors or lower cap companies on the sideline, seeking financing. However, only a handful of them will survive the current bear market and make it into production.
In recent years, China has entered the market in a big way. Australia’s largest mine, the Greenbushes, is now 51% controlled by China’s Tianqi Lithium and 49% owned by Albemarle.
The market share of the 'big three' has dropped from 85% some years ago to about 53% today. Chinese companies now control about 40% of the world’s lithium market. The two biggest from those are:
From discovery to production in record time
Between 2009 and 2013, Waldo Perez served as president and CEO of Lithium Americas Corp, and he managed to bring the Cauchari lithium salar project through all the permitting stages, to full feasibility and eventually closed a deal for a joint venture. Today, it is one of the largest lithium brine resources in the world. With Neo Lithium Corp, he is now probably trying to do exactly the same thing.
In late 2015, after his time at Lithium Americas Corp, Perez discovered what today is called the 3Q project in the Province of Catamarca, Argentina. Perez took samples from this area and could not believe what he had found. Right after the discovery, in December 2015, he approached Constantine Karayannopouulos, who was, between 2010 and 2015, also at Lithium Americas Corp. Perez said to him: "This is what I found, I think it is very good, what do you think?"
In an interview with Andrew Scott from Proactive Investors, Karayannopouulos later revealed that if he didn't knew Perez from the time at Lithium Americas, he would have thought he had made it up.
"If you had the top 10 attributes of the ideal lithium deposit, this thing would tick off every single one. That's why I said to Waldo, you know, this is almost too good to be true. Positive surprise, it is only getting better. I'd like to call the deposit a freak of nature."
Constantine Karayannopouulos, Director at NLC
So, what makes it a freak of nature?
First of all, we have to distinguish between the following:
Lithium hard rock mines
Lithium found in hard rock forms in crystals that are embedded in Pegmatites. These Pegmatites form when mineral-rich magma intrudes into fissures in continental plates. Rock minerals resources are fairly evenly distributed on Earth with deposits located on each continent. Most mines are currently operating in Canada, Australia and China.
Lithium brine projects
Lithium brine deposits are accumulations of saline groundwater that are enriched in dissolved lithium. The brine is pumped to the surface and collected into pools which heat up under the sun, and in this way, through evaporation the brine is then concentrated. After a few months to about a year, depending on climate, the concentrate is further processed in a chemical plant.
There is a lot of lithium all over the world, but only a few regions gather brine in this way - using pools, or basins, where lithium salts are then extracted. Neo lithium controls a total of 350 square kilometer in the so-called lithium triangle. This dry desert area is spread between Argentina, Chile and Bolivia, and it's estimated to hold about 54% of the world's lithium resources.
High grade, low impurity, big resource
With 35*6km in size, the 3Q from Neo Lithium is now the 6th largest brine project worldwide on a total resource basis, and of those it's the only project with low critical impurities that is not in production yet. To have low impurities is important because there is a very direct correlation between impurity content and cost of production. Put simply: the higher the grade, the smaller the ponds required, and therefore the less capital needed. The 3Q project has the lowest combined critical impurities worldwide.
It is the 4th highest grade project worldwide. The high grade core in the north is the second (!) highest grade resource in the world. Therefore, NLC will have the ability to start to mine in the northern part first. Waldo Perez said the lifespan of the northern mine alone, which contains the high grade lithium, is about 20 years. For decades to come, NLC will be able to use both the high-grade product in the north and then the average grade product in the south.
In terms of size and quality, this project is simply outstanding.
Recyclable mineral deposit
Basically, what Perez found is a recyclable mineral deposit. When we look closer at the resource we find springs that are literally feeding lithium brine into a so-called lithium lake. There are only two lithium lakes currently known in the world. One of them is in China, the other one is now on NLC territory. The brine on the surface makes up only 2% of the total resource, the rest is under the ground or inside the salar. In the lake, the brine continues to evaporate. It could be seen as a recyclable mineral deposit. But realistically, NLC would mine much faster than the lithium could flow into the lake.
90 million raised
In early 2016 Perez and Karayannopouulos joined forces and started the company, naming it Neo Lithium Corp.. After a couple of financing rounds and a little bit of work in Argentina they listed the company in July 2016 at the Toronto Stock Exchange through a reverse takeover (RTO). In total, they have raised over 90 million and moved it from discovery, to resource estimation, to preliminary economic assessment, to an updated resource estimation and to pre-feasibility study in a little over three years.
For investors not familiar in the mining industry, before a project becomes a mine, several technical studies must be completed on a deposit before the real operation begins. All of these studies analyze and assess the same geological, engineering and economic factors but with different levels of detail and precision.
With more drilling on different spots and down to different depth levels, the estimation of the entire resource becomes increasingly more accurate and further economic and engineering factors are added to the study. These reports figure as continuing base line material for negotiations to finance pilot plants first and eventually full mine construction when numbers from pilot plant operations are confirmed.
The way into production
During this process, with no revenue and a high cash burn rate, many companies are under constant threat of running out of money. When results of new drilling campaigns are not confirmed later on or the deposit turns out to be less promising than originally expected, investors hesitate to provide further money, as it is not economically feasible or promising enough.
There are many factors that can bring a project down, starting from commodity prices that change too fast in the wrong direction or political factors, like additional forms of taxation or costly environmental permit requirements.
However, it is also possible that once the price of a commodity suddenly appreciates, a projects, once completely terminated years ago, becomes lucrative again for investors.
Finally, there are many ways to go into production. Often, a promising project is taken over by a big player in the industry. This can happen early, or after all the technical work has been done, all the permitting is in place, and the full feasibility study confirms the deposit and the economical feasibility.
However, many times a strategic partner comes on board in a joint venture and develops the project together with the original team that discovered the resource. There are many ways a project can go from discovery to production. In some cases, banks and institutional investors simply provide the money through further funding rounds to have the original team go into production themselves. This also depends on the background of the team.
In the case of NLC, the team are experts in discovery and the ability to lead it through the technical work to full feasibility. In an interview, the chairman has said they would have some knowledge to go into production themselves, but maybe not all of what's needed. To me it seems that they are trying to close down a deal in a joint venture.
Several factors to be considered
With cash burning fast, and financing rounds that usually only provide money for the next phase, companies are under constant pressure. If drilling campaigns fail to deliver on their promises, it gets hard to find new money for the next step. There are several factors that can kill a project before it goes into production. Share prices usually follow certain milestones, but with the usual hypes of the stock market - up and down.
When companies do further drilling and discover more or better resources, the project becomes more valuable and share prices often go up. When companies receive approvals for mine construction or if environmental studies get approved by the authorities, the risks of a project failing goes down, which makes it more likely to earn money in the future. This usually also leads to a stock price boost.
On the other hand, bad drilling results, approval delay for mine construction applications, or anything related to political head wind is usually seen as big risks, which puts pressure on the stock price. It is therefore a constant valuation between risk/reward.
One of the most important factors is obviously the underlying commodity. If demand is expected to increase over the next decade and supply from other mines will struggle to deliver, then it is more likely that the price will stay high and the project, becomes, or remains, feasible and profitable. In the case of lithium, the question is this: How much demand will there be in the coming years, and what is the supply relative to this.
Lithium is not a commodity.
The biggest problem is, that lithium is not a real commodity.
Yes, it could be seen as a commodity since it is taken out of the ground, but it can't be immediately loaded on to a truck and sold. It is more of a chemical product.
We have to distinguish between the following:
- Lithium carbonate
- Lithium hydroxide
Lithium carbonate usually comes from brine projects, like the ones from Neo Lithium. It is used in most of the current batteries that power EV's. However, some analysts see and predict new types of batteries, which require more lithium hydroxide, growing faster. Lithium hydroxide is usually produced by hard rock projects.
New battery type 811
There are huge innovations happening in the battery sector and composition of the perfect battery is probably still far away. However, there are a lot of talks about the NCM 811 (cathode with nickel, cobalt and manganese in a ratio of 8:1:1) type of battery.
The main stream battery - NCM - began to gain popularity shortly before the first iPhone from Apple was released. NMC 111 or NCM 333 (⅓ Ni, ⅓ Mn, ⅓ Co) was the first to become commercially successful. Today, NCM523 (nickel/cobalt/manganese in a ratio of 5:2:3) and NCM622 (nickel/cobalt/manganese in a ratio of 6:2:2) are widely used in EV's.
But new EV models in China have started to use the NCM 811, and also other big auto manufacturers are shifting to it. Despite speculation that this type of battery would quickly reach mass adoption, most analysts don't see the shift happening that fast, due to safety concerns and costs challenges.
Total market share of NCM 811 (by capacity deployed) was in May 2019 at 2% at global level, and 4% in China. However, it is important to keep an eye on it, because this would shift demand more to lithium hydroxide.
Is Neo Lithium mining the wrong lithium?
This is up for discussion. Forecasts indicate that demand for both types of lithium is about to increase heavily in the coming years. While hydroxide will grow faster in percentage, in absolute numbers lithium carbonate demand will still be higher over the next decade.
Gabriel Pindar, chief operating officer of NLC, said in an interview that:
"You could also go from carbonate to hydroxide. The advantage of this way is that the quality gets assured. It's a little bit more expensive to get there but you don't have impurities. You are almost guaranteed not to have impurities in the hydroxide."
To me, it seems that if the 3Q project can be operated as low cost as the management believes, especially in the first years by starting mining in the very high grade zone in the north, they should be able to adapt to changing market environments whatever form of lithium is needed. However, Pindar did not reveal how much more expensive this 'little bit' is. If anybody has numbers here, please contact me.
High in the mountains
The 3Q project is located 30km from the Chilean border and has direct road access to pacific ports. The paved highway, which the company states is 60km of all-weather road, sounds attractive. But because the project is in the Andes mountains, at an altitude of 4000 meters above sea level, there are still complicating factors to get their product to coastal ports. Weather conditions are difficult and can stop or delay production. On the other hand, big players have profitably been operating lithium mines inside the lithium triangle for years.
Constantine Karayannopouulos, who is also chairman of Neo Performance Materials, a company in the rare earth sector and trading on the Toronto Stock Exchange, said in an interview that they were a little bit in a hurry at the beginning of the project as they needed to prove the resource fairly quickly. In the Andes, at 4000 meter altitude, with seasonal weather patterns that impact progress, the window for drilling campaigns are between October and April, which is the Argentinian summer. Once they had some numbers, they could build on that and obtain further financing. After new drilling the next year, they found even better resources. And recently, they released a press statement reporting a resource upgrade of another 227%. The project seems to get even bigger and better, in terms of size and quality. And in the last update, they stated that they could still drill deeper.
A race into production
However, it was important to hurry up. Waldo Perez described it as 'a race into production' between all the companies trying to ship lithium to the market. Analysts are therefore trying to find out if this could lead to an oversupply, although demand is likely to sky-rocket soon.
For me, it is impossible to calculate the numbers here. Currently only about 1-3% of all new cars registered are EV's, a number which I find still very low. I do believe that once this number reaches maybe about 20-30% it could lead to a hockey stick growth, meaning that the time it takes from 30% to 60% market penetration is a lot faster then it took from 1% to 30%.
As soon as prices for EV's are down to comparable levels in the range of current gasoline cars and charging stations are widely spread over the countries, customers would feel a lot more comfortable to finally shift to electric vehicles. This number could then go up quickly to maybe 90% or more. Governments worldwide are supporting and incentivizing this transformation.
China, for example, wants to have all its cars to be EV's by the year 2040. Also, big car manufactures are pouring in literally billions into the development of new EV models and are announcing new EV models on a regular basis. It's hard to see this transformation stop or reverse.
Therefore, the transformation looks to me almost inevitable. However, we have to keep an eye on the battery technology itself to be ready to change positioning in case batteries come to market that do not require lithium anymore, or less of it. However, so far I only see the shift away from lithium carbonate to lithium hydroxide.
Supply side of the story
What about the supply side?
There are big names in the game that have mines up and running not far from the 3Q project. In May, the second biggest lithium producer SQM said it would delay a key expansion of production capacity from the Atacama salt flat until the end of 2021.
This means, SQM does not believe demand will pick up sharply before 2021 when considering also the supply side of it. For NLC the question is, if they can find a JV partner that wants to invest now, signing a deal which is financially good for NLC, when supply and demand is still fairly even. With USD 40 million in the bank, they should be able to survive for at least two or three years, although they have accumulated a workforce of nearly 100 people today. NLC is operating a camp high up in the mountain, internally referred as the lithium city.
Pilot plant is up and running
Constantine Karayannopouulos said about himself that, as a chemical engineer with his experience and background, he knows how to start with an idea, using sophisticated engineering and technology aspect to develop it into a cash flow project.
Perez has assured investors that every tool they use in the operation is proven from other lithium mines close by. There is nothing new, and therefore, there is no risk from a technical standpoint. They are now fine-tuning the pilot plant to take the new numbers into the feasibility study.
Gabriel Pindar, director and COO, said they are using proven technologies that have been utilized by major companies in the region to minimize operational and construction risks.
Neo lithium has now already over nine ponds and pumps in operations. The pilot plant was commissioned to operate with a designed capacity to produce 50 tonnes of lithium carbonate per year.
In my opinion, I believe the team should not run into major problems from a technical perspective since they have done it before and proved themselves, when leading the technical work at Lithium Americas.
For investors, there are just three big questions. Who will help them finance to go into production, how will the deal look like for shareholders and when will it be announced?
Last year, Karayannopoulos said:
"We are having a number of discussions with potential strategic partners who would bring, in addition to a balance sheet and the ability to help us finance the project to construction and startup, they perhaps would be bringing market skills and technical skills. We are waiting to decide on who are partner will be, before we start formally the full scale feasibility study, which is not a cheap thing to do. So we are making sure we get it done right."
Now, a half a year later, in march 2019, NLC have presented the PFS, the pre feasibility study, with updated numbers:
"The robust project economics generated from the PFS further validates our view that the 3Q Project is an exceptional project, particularly when our industry faces unprecedented growth and it needs predictable, long term, low cost producers. We are not short of options, and the next step is a careful analysis of how to maximize value for our shareholders.”
Neo Lithium believes that they need a total CapEx of USD 318,9 million (before PFS - USD 490 million), in a conservative estimation, and ??? (before PFS - USD 320 million) to go into production. Cost of production is at USD 2914 (before PFS - USD 2791.-) dollar a tone per lithium carbonate equivalent but is likely to be further optimized.
Their goal is to produce 'battery grade lithium carbonate' and in a phase 2 and 3 'lithium hydroxide' and other products.
In November 2018, Perez said:
"I am hoping that by the end of next year (2019) the FS (feasibility study) should be complete. As you notice I always deliver what I say and I have been keeping a very good record so far. I don't want to fail on that one."
Only to add:
"Engineering is always a complex task. Our objective is next year but a time lag in between is always possible".
NLC has almost every permit so far:
The last permit which is missing, is for mine construction. This could only have been sent after the pre-feasibility stage. In an interview earlier, Perez said it will take about 1-2 quarters after submission to get the last permit for construction of the mine. This would mean that the permit could be granted between July and October 2019.
NLC owns 100% of the 3Q project. In Argentina there are two mines already in production. NLC believes they will be the third.
The upcoming election in Argentina is a factor to watch out. It currently looks like Mauricio Macri, who has been generally supportive of the mining sector, could again win the national election.
There is hardly any junior miner with a shareholders base like that of NLC. The reason is the quality of the project and the experienced management team. JP Morgan, Blackrock, Royal bank of Canada, and big funds have been buying into the stock at around one dollar. The current price is much lower.
In an interview with 'Proactive Investors' at the end of November 2018, four months before NLC published the new updated PFS (pre feasibility study) with the new numbers and the updated valuation, Waldo Perez was asked how it is going regarding the talks for a potential partner.
Perez responded by saying: 'Very well, very well, actually there are even more partners lining up on the discussions. '
In the months before, new drillings have been made and this data was about to find its way into the new study.
'It is very important, in order to guide this discussion, to have this pre feasibility study. Because otherwise, it is more difficult to have discussion based on an outdated original economic evaluation as we had. which basically was from the year 2017. It is very important that now we update with all the information with what we have been producing.'
When asked about what he is looking for, in particular, from potential partners. What they need to have, Perez responded:
'Honestly, it's a combination. What we are looking for is full financing. I am looking to finance the lithium project to production. Now, different partners have different qualities. Some of them are related to the mining industry. Some of them are related to the lithium business. Some of them are related to distributing or selling the product worldwide. And those are the type of things that match what we need. We are basically very good in mining lithium, finding and discovery. But others are also end consumers. Considering that there are different partners in line, they have also different objectives. "
Andrew Scott, the interviewer from 'Proactive Investors', then asked Perez about when, realistically, he might be looking to have some deal done?
'Well, it is a dance of two. So, one thing is my wish. As you and many shareholders are probably aware. I was trying to close a deal this year. Now I know, it is going to go to the next year (2019).
But Andrew, it's better to have a good deal with the right valuation as a not so good deal with an old valuation. So, patience sometimes is important and pays off. So, I ask the shareholder just hold on, let's get the new valuation and get a better deal.'
NLC remains a speculative buy since they are still missing one permit and have no financing nailed down yet. SQM, Albemarle and Livent are probably the lithium stocks to go with at current levels.
However, risk/rewards seems to be getting more and more attractive at NLC and the next months could finally bring further clarification. The final permit may be granted soon and discussions might now be going to the final stages since it is already 4 months after they published the PFS.
If the offers in the current market environment are not good enough, NLC does have enough cash to wait for better offers. That is a luxury not every junior miner has. In their back, they have a strong shareholder base with names like JPMorgan, BlackRock and others. NLC own 100% of one of the biggest and highest-grade lithium resource in the world.
Interestingly, only two months ago in early May 2019, diversified company Westfarmers offered AUD 776 million to take over lithium developer Kidman Resources. According to Benchmark Mineral Intelligence, Wesfarmers could be the first in a wave of large diversified conglomerates that move into the battery metals space.
Today, on 19th of July 2019, Waldo Perez bought additional NLC shares worth around USD 55'000.- at a price of CAD 0.63 and at a market cap of CAD 70 million.
Yes, I have to admit, I am fairly attracted by confident CEO's.
Share price today at 19th of July, 2019:
CAD 0.61 (Toronto, Canada)