Categories: Energy / General Market Commentary
Topics: General Energy / General Market Commentary

Luster of Advantage Lithium Shines as Tesla Surpasses GM in Value

The markets are speaking and, according to Tesla (NASDAQ: TSLA) surpassing General Motors (NYSE: GM) in market valuation, they're saying that electric cars are the future of vehicles. Wall Street's conviction is exemplified by valuing Tesla at a stunning $667,000 per vehicle produced in 2016 compared to $5,000 per vehicle for GM. Of course, the market cap is more about what's down the road for Tesla, which is a lot more production of cars powered by lithium-ion batteries.

Given the focus on electric vehicles (EV), Goldman Sachs has gone so far as to call lithium "the new gasoline." Others have said lithium is the "next oil" or "new gold rush." As the EV market continues to come into its own, investors are increasingly looking at the lithium market. While established producers like Albemarle, SQM and Orocobre are obvious choices for investors looking for exposure to the lithium sector, smaller companies like Advantage Lithium Corp. (TSX-V: AAL)(OTCQX: AVLIF), offer unique opportunities for more than a handful of reasons. 

Let's look at just a few of the main talking points for lithium investment.

Lithium: It's not Just for Autos

Rightfully so, the hoopla around lithium demand and price catalysts are squarely centered on the EV market. However, let's not forget the diverse utility of lithium that has underscored increasing demand on its own over the years. About 175,000 tons of lithium are produced annually right now, with the majority consumed for uses outside the EV market. Lithium is used for a wide swath of applications, with the most commonly known being small-sized rechargeable batteries for computers, cell phones, tools, etc. It also should be noted that lithium-ion batteries are ideal for solar energy storage needs. After all, there is a good reason for Tesla's $2 billion deal for SolarCity. 

Batteries account for just over a third of overall demand, with ceramics and glass uses comprising about another 25 percent. The world's lightest metal is also integral to greases and used for metallurgy, medicines, polymers, air conditioning and more.

Autos Driving Increased Demand

Tesla, with its ambitious goal to produce 500,000 vehicles in 2018, is the household name in electric cars, but they are by no means the only player. Not even close. Every major car maker has skin in the game and there are dozens of companies overall building their own version of all-electric or hybrid vehicles.

There are countless reasons for the global initiatives centered on EVs, but perhaps none greater than the goal to reduce the hazardous emissions from fossil fueled cars and trucks. Pollution-riddled China is propping up its EV market with large government subsidies to promote cleaner driving practices. With China's efforts and several European countries contemplating following the lead of Norway in banning gasoline or diesel vehicles in the future, the U.S. could wind up an industry laggard, a position the country is not used to, which could lead to extra incentives for EVs.

Prices continue to drop for EVs, making them more enticing to consumers. Tesla's Model 3, which has over 400,000 pre-orders already, is expected to compete in the mid-$30,000 range alongside the Chevy Bolt, Nissan Leaf and others. 

A confluence of factors resulted in the Energy Information Administration again making stark upward revisions to its EV projections in its Annual Energy Outlook 2017. The EIA experts now see annual EV sales around 1.4 million cars and trucks in 2025, more than doubling its forecast in 2016 and 10-times in predictions in 2014.

Judging by forecasts of other pundits, the EIA is quite conservative in its expectations. For example, Greentech Media Research foresees 11.4 million EVs in use in 2025, 52% more than the EIA. Bloomberg New Energy Finance reported that sales of EVs will hit 41 million by 2040, equating to about 35% of all light duty vehicle sales.

Supply Shortfall / Higher Prices

Underscored by the emerging EV market, lithium demand is expected to grow by several multiples in less than a decade. Morningstar forecasts lithium demand to increase 16% annually from 175,000 tons in 2015 to 775,000 tons by 2025. Even with increased production, Morningstar foresees a shortfall of 100,000 tons by 2025.

Generally speaking, lithium is relatively expensive and slow to mine, so prices will need to rise to support higher supply levels. In this vein, Morningstar predicts lithium carbonate prices to climb from today's levels around $7,000 per ton to $10,000 per ton in the next eight years, a rise of 43%.

Advantage Lithium: 4 Desirable Qualities for a Lithium Portfolio Addition

The robust market opportunity has young companies cropping up globally waving their arms as they trumpet their potential. Too bad it's not that simple to grow sustainable corporate value. Companies with the greatest chance of success are best measured by experienced management, quality of assets, ability to raise capital and liquidity in their stock.

These four qualities are the strengths of Advantage Lithium.

Leadership – Been There, Done That

Management is led by CEO and President David Sidoo, a man with a strong track record of taking a company from start-up to sale. Sidoo previously was a partner and advisory board member at Yorkton Securities where he consistently generating commissions that ranked in the top five nationally. During his time at Yorkton, he consistently found success investing in startups in the resource sector, including working with and investing in deals of mining magnate Frank Giustra. Later, he founded Gasco Energy with the former founders of Ultra Petroleum (NASDAQ: UPL) to develop projects in the Powder River Basin in the United States. Most recently, Sidoo's career is highlighted by founding American Oil & Gas and selling it to Hess (NYSE: HES) in an all-stock deal worth over $630 million. Sidoo has surrounded himself with seasoned veterans in the resources space, including leading experts in their fields which includes strong exploration teams, where there is an emphasis on experience in the producing "Lithium Triangle" of Argentina.

AAL leadership includes non-executive directors Richard Seville (also CEO of Orocobre) and Miguel Peral (Peral serves as Advantage's full-time VP Exploration), two men with extensive, highly relevant experience in the Lithium Triangle with lithium carbonate producer Orocobre Ltd. (TSX: ORL). Orocobre is one of Argentina's top lithium producers and one of the Top 5 in the world. Peral has brought his entire development and exploration team; as full-time employees to Advantage to drill and prove up the company's resources in Argentina. Seville, Peral and Rick Anthon were added to the Advantage Board as part of the closing conditions in a transaction in which Advantage acquired six lithium brine properties from Orocobre, giving it a significant presence in Argentina and, critically, the potential for near-term production. 

The transaction with Orocobre resulted in the ORL taking a 35% equity interest in AAL. 

Properties – Billion Dollar Neighbors

Quality lithium properties are bringing a premium price. Consider Australia's little known Birimian agreeing in January to sell its Bougouni lithium project in West Africa to Chinese company Shandong Mingrui Group for $107.5 million. The maiden resource estimate on the project showed 15.5 million tonnes grading 1.48% lithium.

Advantage Lithium has top tier assets in Argentina and Nevada, hitting the lithium hotbeds of the Western world. 

In Argentina, Advantage has 100% ownership of properties in the Guayatayoc, Incahuasi and Antofalla salt lakes and a large property position in its flagship project in the Cauchari salt lake. At Cauchari, AAL owns a 50% interest in the project with the potential to increase the stake to 75% by funding exploration.

Cauchari is south of Orocobre's producing Olaroz project and contains similar brine to Olaroz in all the important aspects, such as a low magnesium-to-lithium ratios. Drilling of 5 rotary holes and up to 12 diamond holes has begun this month to build upon an inferred 470,000 tonne lithium carbonate equivalent resource and to better define the five-million-tonne exploration target. To boot, the project also has an inferred resource of 1.62 million tonnes of potash. The initial resource likely doesn't do justice to the contained brine in the ground. For starters, it's only based upon five drill holes and considers a surface area of just 31 square kilometers, not the complete 55.44 square kilometers of the exploration target. That means there is potential to add substantially to the brine volume laterally and at depth that almost certainly will be realized.

Lending further weight to the potential at Cauchari is the fact that the exploration target areas and area of inferred resources (green in the adjacent figure) bookend the substantial Cauchari brine resource of Lithium America (TSX: LAC) and Sociedad Quimica Y Minera (NYSE: SQM), the later one of the top lithium producers in the world. LAC and SQM's pre-development project has an indicated and measured resource of 11.8 million tonnes lithium carbonate equivalent.

Andina Perforaciones, the same drill contractor that worked on the ORL and LAC/SQM project,s is doing the drilling at the AAL/ORL Cauchari project and Advantage has stated plans for an updated resource estimate and Preliminary Economic Assessment (PEA) study in Q1, 2018. That's not far away when it comes to this industry.

The JV with Orocobre has serious implications for success and value for Advantage Lithium. For starters, there's the experience and support of a team that has already brought a neighboring project to production that operates profitably. Next, Advantage can save hundreds of millions of dollars in project development by initially utilizing the nearby Olaroz processing facility that Orocobre spent some $230 million constructing.

When it comes to quality assets, it's arguable that Cauchari by itself positions Advantage as a formidable lithium company. 

That said, it would be a mistake to not mention the other projects AAL is acquiring from ORL. The 10,653-hectare Antofalla project is in the same salt lake as a lithium project being explored by Albemarle (NYSE: ALB), the world's largest lithium producer. In fact, when Albemarle acquired the project they stated that it is one of the largest salars (lithium- and potassium-rich salt flat, a dry lake) in the world and hosts the largest lithium resourcein Argentina. Moreover, early stage exploration on Incahuasi and Guayatayoc show strong lithium potential (326 ppm and 200 ppm, respectively), as well as potash (potassium values of 13,200 ppm and 7,000 ppm, respectively).

In the States, Albemarle is again a neighbor for Advantage Lithium with its Silver Peak Mine in Clayton Valley, North America's only lithium producing mine. There isn't any one company that surrounds Albemarle's Silver Peak like Advantage does, with five projects, Clayton NE, Aquarius, Neptune, Gemini and Jackson Wash in the immediate area. 

Given the fact that Albemarle is actively going back into lithium exploration, an investor would be remiss to not recognize the close proximity of these two companies in Argentina and Nevada. Advantage would simply be a natural fit for Albemarle in some capacity as Advantage proves it resources right next door to the industry giant.

Clayton NE, which is adjacent to Albemarle's property, is the company's most advanced exploration project in Nevada. Drilling of six holes hit lithium brine in each, including wide intercepts with strong assay values over 200 ppm lithium. The recently completed drilling successfully extended the mineralized brine trend to more than 5.5 kilometers. Exploration on the project may also have discovered a first in Clayton Valley with deep drilling encountering a previously untested aquifer.

For the sake of what's left of brevity, the other, less developed properties will be saved for another exercise.

Capital & Liquidity – Filled Coffers, Active Market

In February, Advantage completed a C$20 million capital raise, giving the company about C$23 million in cash on hand. This should fund exploration operations at Advantage for at least three years without concerns for any dilution. It also should equate to Advantage earning its 75% stake at Cauchari, likely during 2017, given that it only takes C$5 million in exploration to move from its current 50% to the full 75%interest.

In July and August of 2016, shares of AAL were thinly traded, but starting in September and certainly into the end of 2016 when the company was taking strides to establish itself as a premier lithium company, volume has become increasingly regular. According to Yahoo Finance, the average daily trading volume across the past 90 days has climbed to 228,054, meaning liquidity is more than sufficient for what is still a relatively new company.

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