Lithium Americas Valuation (LAC)
Lithium Americas is a mining corporation focused on extracting sedimentary lithium from Thacker Pass, “The largest known Measured and Indicated Resource in North America.”
NOTE: $ is in the USD denomination
Recently, Lithium Americas announced a share issuance of 55,000,000 shares for a total of 250,000,000 ($5/share). The first part values the company using efficient market hypothesis. The second part is a quasi-dividend discount model.
Valuing Based on Efficient Market Hypothesis
Fair price of $4.97. Upside of 30 cents of 8% on top of required rate of return.
Price Before Announcement = $6.66
Shares outstanding before = 162.16M
Market Cap Before = $6.66 * 162.16 = 1,080M
Shares added = 55M
Shares outstanding present = 217.16
Price Ceteris Paribus = $4.97
Upside 0.37 cents per share or 8% based on recent after close pricing.
Commentary: This is more of a question on whether the market will figure out that LAC is trading at a discount. I remember when PBR dropped 11%+ and it came back up for the dividend. I sold it before the CEO was replaced.
Valuing Based on Future Dividend Distributions
Lithium Americas is fairly valued at [4.43, 4.9] using conservative assumptions.
A rough valuation was done using conservative assumptions:
- 192.9 Mega ton of proven reserves equivalent to 3.3 mega tons of Lithium Carbonate (Li2CO3)
- Price per ton: US $5,400
- Once the Thacker Pass is operational, selling at a price higher than this lower bound will draw returns over 10% on the investment
- Useful life: 40 years
- Although production will be smaller in the earlier years and double in the later years, we will assume a smoothened annuity
- Mining net profit margin = 7%
- Net profit margins vary between the years and can be as high as 20% or as low as -7%. Better to pick a number that makes sense in the long-term. 7% could be an over-estimate, but if mining corporations were known to have low net profit margins, the market would be valuing it a significantly less
- Discount rate of 10%
Profit Annuity = 3.3 * 1000000 * 5400 * 0.07 / 40 = $31,185,000 per year
Using the annuity formula, we get a present value of 304,959,697. The PV is a year before the plant becomes operational. We will assume 2025, but the longer it takes, the longer we will under-perform the market.
Add back Net Tangible Assets of 407,462,000
Plus the Cash infusion of $250,000,000
Fair Value = 712,421,697 + 250,000,000 = 962,421,697
Divided by shares outstanding of 217.16M and we get US $4.43, which is only 4% less than the last price of $4.60 and 6% less than the last closing price.
Since the fair value price at the end of the year is higher than the current price, the current price is fair.
Recommendation
Using EMH, LAC is a buy. After a valuation, the risk is if Phase 1 will be passed, which is likely given the $250,000,000 cash infusion. Since the stock is valued fairly using safe assumptions, LAC is a buy for risk-seekers. For the risk-averse, fair-value without profits can never be a buy.