Lithium Power International — Lower risk, higher reward

In April 2023, the Chilean government unveiled its national lithium strategy (NLS): a set of general guidelines and principles that define state efforts and activities aimed at developing the domestic lithium industry. The key elements of the strategy include public-private partnerships, participation of local communities and creation of a national lithium company. The strategy is a de facto confirmation of the dominating role played by the state in the sector. Acknowledging market concerns regarding the private ownership risks, we nevertheless believe that the new policy could be an important step towards breaking the current industry stalemate and establishing a clearer path to production for new projects. This bodes well for LPI as Maricunga is one of the most advanced pre-production lithium assets in Chile.

Lithium M&A continues apace

While the recent weakness in lithium prices brought a new wave of industry consolidation, in contrast to earlier M&A, the improved sector outlook saw a higher number of unsuccessful bids despite a visible increase in valuation premiums. Lithium remains a solid long-term structural growth story, reflecting its use in electric vehicle batteries and other energy storage applications. We see global lithium demand growing at a 20% CAGR from 2022 to 2030, which is exceptionally high in commodity and chemical markets. As such we believe that the sector is likely to continue experiencing high levels of M&A activity and expect large-scale, low-cost, advanced assets to attract visible takeout valuation premiums.

We have updated our undiluted valuation of LPI for the lower US$/A$ exchange rate and the latest cash position. Our project driven valuation has increased from A$1,813m to A$1,845m using a standard 10% discount rate. Assuming 40% of the project capital is raised via equity at the current price, our revised equity valuation translates into a per share value of A$1.16 (from A$1.42). We believe that the NLS lowers the political risk and should be viewed as a positive driver for LPI’s shares.

In April 2023, the Chilean government unveiled its NLS, which is the most significant industry announcement since the 1980s. It is a public policy defining the government’s efforts and activities aimed at developing the lithium industry, which is key for the country’s economic growth in light of the global transition to a green economy. The strategy contemplates general guidelines and principles, some of which will require legislative changes in the future. However, the majority of the proposed changes assume the application of the current legal framework.

The key elements of the NLS are:

At the initial stage, the Chilean government intends to participate in the development of the lithium industry through Codelco (the national copper corporation) and Enami (the national mining company). In the meantime, a new state-owned company, the National lithium corporation, will be created to coordinate the public-private initiatives to attract new industry participants and investments. This company will oversee the salt flats exploitation under public-private operation. The creation of the National lithium corporation will require congressional approval.

Unsurprisingly, the NLS gives special attention to Salar de Atacama, where Chile’s two currently producing operations, run by SQM and Albemarle, are based. These projects operate on the basis of leasing contracts signed with the state of Chile. These contracts will be respected by the government until their expiration, which is 2030 for SQM and 2043 for Albemarle (both are after the current government’s term).

As for the other salt flats, exploration contracts are expected to be awarded to private parties through a public and transparent bidding process. If exploration is successful, a private company will have the preferential right to request an exploitation contract in association with the state-owned company.

We note that a broadly similar mechanism of state involvement is already in operation in the country’s copper sector, in which both Codelco and Enami currently participate on a minority basis. Thus, Codelco controls 49% in El Abra (51% Freeport) and 29.5% in Los Bronces (50.1% Anglo American), while Enami owns 10% in Quebrada Blanca (60% Teck Resources). This shows that the state is potentially comfortable maintaining minority stakes in the mining projects. Further, according to press reports, the majority ownership is likely to only apply to projects that have strategic significance (such as the large-scale operations in Salar de Atacama). No additional information or details regarding potential state involvement in the lithium industry have been provided so far.

At present there are two different mining regulations applicable to lithium in Chile. Under the legislation that was in force until 1979 (‘old code’), lithium was considered a common mineral substance exploitable under the regular mining concessions, similar to copper, gold and other minerals. In 1979, the new regulation established the reservation of lithium in favour of the state. It was later incorporated into the legal framework as part of the 1980 constitution (still in force today). In reality, lithium deposits were no longer exploitable and in 1982 a new lithium statute (‘new code’) was created that stipulated lithium exploitation by the state through special lithium authorisation contracts. Importantly, despite the restrictions on lithium extraction introduced in 1979, mining concessions granted under the ‘old code’ maintained the right to exploit lithium. Since the introduction of the ‘new code’, the state has held two tenders to award special lithium operation contracts (CEOL), with only one of these agreements being awarded to Codelco. The only two currently producing lithium operations in Chile (run by Albemarle and SQM) exploit lithium using concessions granted under the ‘old code’. Both concessions are owned by the state (the Chilean Economic Development Agency or CORFO) and leased to SQM and Albemarle. To date, there have been no lithium projects approved under the ‘new code’.

LPI’s 100% owned Maricunga project is comprised of 10 mining concessions in the northern part of Salar de Maricunga in the Atacama region of Chile. Maricunga is a mid-sized salar forming part of the well-known ‘lithium triangle’. The project’s mining tenements consist of the four ‘old code’ concessions, which were constituted under the 1932 Chilean Mining Law and, therefore, according to the company, do not require the CEOL to produce lithium. The first stage of the project (15.2ktpa of battery grade carbonate) is underpinned by the ‘old code’ concessions. It is fully permitted for construction, with the Environmental Impact Assessment permit (EIA) approved in 2020 and an updated definitive feasibility study published in early 2022. It also holds a Chilean Nuclear Energy Commission (CCHEN) permit that allows LPI to export lithium products. Importantly, the EIA incorporates all required social and community agreements, including a comprehensive ILO C169 consultation process with indigenous communities executed by the government. This makes the project compliant with the newly introduced lithium strategy.

LPI recently acknowledged the possibility of future public-private alliances as declared by the NLS, in particular for the development of Stage 2 of the project, which is based on the ‘new code’ concessions. We note that Codelco owns adjacent properties in the salar and holds a CEOL, which creates opportunities for cooperation between the two companies. Finally, we believe that, given the size of the Maricunga salar and the scale of the project, it is unlikely to be considered of strategic importance and is, therefore, unlikely to require majority state participation.