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Research: Metals & Mining
We have raised our near-term lithium price expectations to reflect the current supply/demand cycle and upgraded our long-run (post 2031) price forecasts (from US$17,000/t to US$22,500/t LCE) to reflect lithium’s high demand growth and highly concentrated supply fundamentals. On the back of this, our valuation of Lithium Power International (LPI) has increased from A$1.24/share to A$1.42/share assuming the full project equity dilution. We have also updated our model to reflect 100% consolidation of the Maricunga project as well as LPI’s (now somewhat more dilutive) lower share price.
Lithium Power International |
Lithium price upgrade calls for higher valuation |
Valuation update |
Metals and mining |
8 February 2023 |
Share price performance
Business description
Next events
Analysts
Lithium Power International is a research client of Edison Investment Research Limited |
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We have raised our near-term lithium price expectations to reflect the current supply/demand cycle and upgraded our long-run (post 2031) price forecasts (from US$17,000/t to US$22,500/t LCE) to reflect lithium’s high demand growth and highly concentrated supply fundamentals. On the back of this, our valuation of Lithium Power International (LPI) has increased from A$1.24/share to A$1.42/share assuming the full project equity dilution. We have also updated our model to reflect 100% consolidation of the Maricunga project as well as LPI’s (now somewhat more dilutive) lower share price.
Year end |
Revenue (A$m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
06/20 |
0.0 |
(12.7) |
(4.9) |
0.0 |
N/A |
N/A |
06/21 |
0.0 |
(6.0) |
(2.2) |
0.0 |
N/A |
N/A |
06/22 |
0.0 |
(12.6) |
(3.8) |
0.0 |
N/A |
N/A |
06/23e |
0.0 |
(2.7) |
(0.6) |
0.0 |
N/A |
N/A |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Strong long-term lithium demand fundamentals
Lithium is a solid long-term structural growth story, reflecting its use in electric vehicle (EV) batteries and other energy storage applications linked to grid decarbonisation. We see demand growing at a 20.3% CAGR from 2022 to 2030, which is exceptionally high in commodity and chemical markets. Our estimates point to lithium demand in 2030 of approximately 3Mt, broadly in line with industry and International Energy Agency projections and 4–5x current levels. At a typical capital intensity of US$25,000/t (according to our review of public project plans), we estimate that the 2.1Mtpa of additional industry capacity by 2030 will require US$52.5bn of investment. This is both a financing and a technical challenge in this timeframe. Supply chain security and the decarbonisation of critical minerals supply chains mean a wide variety of new entrants will be needed.
Maricunga update: Water rights acquisition
LPI has recently announced that it completed an acquisition of the water rights for the Maricunga project. This replaces a long-term lease that the company held for part of its water requirements and will secure water supply for both Stage 1 (15.2ktpa lithium carbonate) and any future expansions. LPI estimates the initial stage of the project will only require eight litres/second of water compared to the 62 litres/second rights acquired by the company.
Valuation: Up on higher lithium prices
Our valuation of LPI increases from A$1.24/share to A$1.42/share on the back of the higher lithium prices, which were partly offset by the lower share price (A$0.50 vs A$0.71) and the associated higher project equity dilution. Our underlying project assumptions remain largely unchanged and are based on Maricunga’s 2022 DFS. We now assume 100% consolidation of the project ownership by LPI and have also updated our model for the latest financial results. Despite the current backdrop of slower global growth and somewhat weaker lithium prices, lithium supply/demand fundamentals remain favourable, and the sector retains its attractive long-term growth potential.
Lithium price upgrade: Structurally tight market
Edison has recently published a thematic report on the lithium sector that looks at the industry supply/demand fundamentals, brine/hard rock project economics as well as the short- and long-term lithium price dynamics. Key conclusions from our report are as follows:
■
We raised our long-run prices from US$17,000/t to US$22,500/t lithium carbonate equivalent (LCE) to reflect the significant need for additional production capacity in the late 2020s. This is well below spot (c US$70,000/t), but we do not expect prices to move towards long-term pricing until post 2030 and also question if traditional long-term pricing methodology works well in high-growth industries. We argue that a significant premium to a traditional incentive price is required because of rapid demand growth (c 20% CAGR 2022–30, which is unusually high and probably unprecedented for a commodity industry). A multiple of traditional incentive prices is also not unprecedented in highly concentrated industries (iron ore has traded at approximately double incentive prices for large incumbent producers for the past decade and copper trades at 3–4x what were thought of as incentive prices as recently as the mid-2000s).
■
Our demand analysis indicated lithium demand growing at a 20% CAGR through to 2030, boosting demand to 3Mt by 2030, up 4–5x from current levels.
■
We raised our short-term price forecasts to reflect recent price moves, and acknowledge near-term uncertainty. We project a potential supply/demand surplus on an unrisked basis in 2023, but a more balanced market once potential risks are incorporated (including technical risks, commissioning risks and other general delays). Short-term price momentum may dominate sentiment, but the longer-term need for additional capital spending is the core theme underlying lithium for the 2020s.
Our updated lithium price deck is shown in Exhibit 1.
Exhibit 1: Edison contract lithium price expectations, US$/tonne
2022 |
2023e |
2024e |
2025e |
2026e |
2027e |
Long term |
|
Lithium hydroxide |
63,500 |
56,000 |
56,000 |
51,000 |
46,000 |
40,000 |
23,500 |
Lithium carbonate |
62,000 |
55,000 |
55,000 |
50,000 |
45,000 |
39,000 |
22,500 |
Source: Edison Investment Research
LPI valuation update
We have updated our valuation of LPI on the back of our higher lithium price forecasts, which was partly offset by the assumed lower share price used in our project equity dilution. As a result, our valuation of LPI has increased from A$1.24/share to A$1.42/share on a fully equity diluted basis assuming a current share price of A$0.50/share and our standard mining sector discount rate of 10%. At our previous share price assumption of A$0.71/share, our valuation of LPI would be A$1.67/share. We maintain all our underlying project assumptions bar one: we now assume that the construction of the project will start in CY24 (versus CY23 before). We note that Maricunga is at final investment decision (FID) stage and await more news from the company on the potential development routes and timelines. We have also updated our model to reflect the project’s full consolidation by LPI. Our valuation excludes the value of LPI’s West Australian hard rock lithium assets, which are early stage and which we previously valued at A$0.19/share based on an EV/resources multiple. We understand that the company is still looking to spin off these assets in Q1 CY23, which we believe should crystallise additional value for LPI shareholders.
Exhibit 2: LPI valuation summary
Units |
Value |
||
Maricunga sum of DFCF |
US$m |
|
1,256 |
US$/A$ exchange rate |
x |
|
1.44 |
Maricunga sum of DFCF |
A$m |
|
1,808 |
Less FV of corporate overheads |
A$m |
|
14.8 |
Add net cash (December 2022) |
A$m |
|
20.0 |
Estimated equity value |
A$m |
|
1,813 |
Current number of shares |
m |
|
629.1 |
Current share price |
A$ |
|
0.5 |
Project equity to be raised |
A$m |
|
324.6 |
New shares to be issued |
m |
|
649.2 |
Total number of shares including project equity funding |
m |
|
1,278 |
Diluted value per share |
A$ |
|
1.42 |
Source: Edison Investment Research
Exhibit 3: Lithium carbonate prices used in the LPI valuation, US$/tonne
2024 |
2025 |
2026 |
2027 |
2028 |
2029 |
2030 |
2031 |
Long-term |
|
Updated forecast |
55,000 |
50,000 |
45,000 |
39,000 |
34,000 |
29,000 |
24,000 |
22,500 |
22,500 |
Previous forecast |
24,000 |
24,000 |
24,000 |
21,000 |
19,000 |
17,000 |
17,000 |
17,000 |
17,000 |
Source: Edison Investment Research
To recap, our valuation of LPI is based on the assumption of 60/40% debt/equity split. We assume that equity (US$225m) is raised at the current share price. Our model uses underlying project assumptions from the definitive feasibility study (DFS) published in January 2022. In particular, we assume development capex of US$564m and a direct cash cost of US$3,772/tonne of LCE. We note that while the project’s capital intensity came in at a relatively high level of c US$37,000/t LCE in early 2022, the recent opex and capex pressures and a number of capital cost overruns from LPI’s peers demonstrate that the company was relatively conservative and prudent in its project cost assumptions.
Exhibit 4: Financial summary
A$'000s |
2020 |
2021 |
2022 |
2023e |
||
Year end June |
IFRS |
IFRS |
IFRS |
IFRS |
||
INCOME STATEMENT |
||||||
Revenue |
|
|
0.0 |
0.0 |
0.0 |
0.0 |
Operating costs |
(2,942.3) |
(2,448.0) |
(3,014.9) |
(2,700.0) |
||
EBIT from continuing operations |
|
|
(2,942.3) |
(2,448.0) |
(3,014.9) |
(2,700.0) |
Share of JV losses/profits |
(3,786.9) |
(1,967.3) |
(2,731.9) |
0.0 |
||
Net financing costs |
183.6 |
8.2 |
(3.2) |
0.0 |
||
Forex |
(6,203.2) |
(1,573.2) |
(6,894.9) |
0.0 |
||
Profit Before Tax (norm) |
|
|
(12,748.8) |
(5,980.3) |
(12,644.9) |
(2,700.0) |
Tax |
0.0 |
0.0 |
0.0 |
0.0 |
||
Profit After Tax |
|
|
(12,748.8) |
(5,980.3) |
(12,644.9) |
(2,700.0) |
Minority interests |
(95.7) |
(57.3) |
350.9 |
0.0 |
||
Discontinued operations |
(319.2) |
(191.1) |
108.6 |
0.0 |
||
Net income |
|
|
(12,972.2) |
(6,114.1) |
(12,887.1) |
(2,700.0) |
Average Number of Shares Outstanding (m) |
263 |
283 |
342 |
489 |
||
EPS - normalised (c) |
|
|
(4.94) |
(2.16) |
(3.77) |
(0.55) |
Dividend (c) |
0.00 |
0.00 |
0.00 |
0.00 |
||
Revenue growth (%) |
N/A |
N/A |
N/A |
N/A |
||
Gross Margin (%) |
N/A |
N/A |
N/A |
N/A |
||
EBITDA Margin (%) |
N/A |
N/A |
N/A |
N/A |
||
Normalised Operating Margin |
N/A |
N/A |
N/A |
N/A |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
29,300.8 |
32,696.3 |
30,385.2 |
213,020.0 |
Equity investments |
25,074.9 |
28,594.9 |
30,379.0 |
0.0 |
||
PP&E |
26.4 |
24.2 |
6.2 |
212,770.0* |
||
Exploration assets |
4,199.4 |
4,077.2 |
0.0 |
250.0 |
||
Current Assets |
|
|
7,391.8 |
6,802.0 |
12,279.0 |
19,791.2 |
Cash |
7,141.6 |
6,280.7 |
6,428.9 |
13,941.0 |
||
Receivables |
74.7 |
16.3 |
138.7 |
138.7 |
||
Other |
175.5 |
188.4 |
1,125.7 |
1,125.7 |
||
Assets held for sale |
0.0 |
316.7 |
4,585.7 |
4,585.7 |
||
Current Liabilities |
|
|
(336.0) |
(359.1) |
(724.7) |
(724.7) |
Creditors |
(293.8) |
(322.2) |
(666.4) |
(666.4) |
||
Short term borrowings and leases |
(42.2) |
(36.9) |
(58.3) |
(58.3) |
||
Long Term Liabilities |
|
|
0.0 |
0.0 |
0.0 |
0.0 |
Debt |
0.0 |
0.0 |
0.0 |
0.0 |
||
Net Assets |
|
|
36,356.5 |
39,139.3 |
41,939.5 |
232,086.4 |
Minority interests |
(187.1) |
(183.0) |
0.0 |
0.0 |
||
Shareholders' equity |
|
|
36,543.6 |
39,322.3 |
41,939.5 |
232,086.4 |
CASH FLOW |
||||||
Operating Cash Flow |
(13,067.9) |
(6,171.4) |
(12,536.3) |
(2,700.0) |
||
JV contribution |
3,786.9 |
1,967.3 |
2,731.9 |
0.0 |
||
Forex |
6,503.3 |
1,479.6 |
7,606.2 |
0.0 |
||
Other |
853.5 |
382.2 |
(1,388.3) |
0.0 |
||
Net operating cash flow |
|
|
(1,924.3) |
(2,342.4) |
(3,586.5) |
(2,700.0) |
Project capex |
(5,173.5) |
(6,524.7) |
(8,361.0) |
(13,000.0) |
||
Exploration |
(1,202.2) |
(205.8) |
(738.1) |
(250.0) |
||
Equity financing |
100.0 |
7,789.6 |
11,989.5 |
23,462.0 |
||
Other |
0.0 |
452.6 |
882.9 |
0.0 |
||
Net Cash Flow |
(8,199.9) |
(830.7) |
186.7 |
7,512.0 |
||
Opening net debt/(cash) |
|
|
(15,341.5) |
(7,141.6) |
(6,280.7) |
(6,428.9) |
FX and other |
0.0 |
(30.2) |
(38.5) |
0.0 |
||
Closing net debt/(cash) |
|
|
(7,141.6) |
(6,280.7) |
(6,428.9) |
(13,940.9) |
Source: Lithium Power International, Edison Investment Research. Note: *The increase in PP&E is mainly due to the expected consolidation of 100% ownership of the Maricunga project.
|
|
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