Piedmont Lithium (NASDAQ: PLL) reports a considerable amount of probable reserves and interesting lithium projects in Ghana, Quebec and the United States. In my view, with sufficient investment in exploration and reserve measurement, I believe there is upside potential in the inventory valuation. With that, the business still needs a lot of permits, and a lot more funding will be required. In my opinion, this is a title for non-conservative stock pickers to follow.
Piedmont Lithium operates multi-asset lithium businesses to support the electric vehicle revolution. Given the number of financial institutions covering the stock, I think most investors will take the company’s expectations and production numbers very seriously.
I believe that the company’s flagship project in Carolina most likely appealed to the investment community because of its easy access to road and rail infrastructure. In addition, the project is located near a historic lithium district. These are, in my opinion, good reasons to conduct research on mining projects. With this, in my opinion, most investors will most likely disagree on the valuation assessment. My financial models indicated that Piedmont Lithium is an attractive investment for bullish people.
The sum of the parts under my base case gives a valuation of $134 per action
Piedmont Lithium earns interest in Quebec, Ghana and the United States. According to a presentation released in June, the company’s project in Quebec has a net present value of nearly $517 million. However, considering that Piedmont holds a 25% interest in the project, in my opinion, Piedmont’s interest could be worth close to $142 million.
Management also acquired an exploration-stage project in Ghana with a valuation of nearly $789 million. Applying the 9% interest in the project, the interest should be worth approximately $71 million. I used these numbers for the company’s total valuation in my base case scenario.
The lithium project in the United States is the biggest investment in Piedmont, so I took longer to evaluate it. The company estimates that it has probable reserves estimated at 18.26 million tonnes at a grade of 1.1%. Management still needs to do a lot of work to measure reserves. To date, the company only reports indicated and inferred resources. Many investors may not invest in the company due to the work required to assess the reserves.
For the valuation of the project, I used a price of $18,000 per ton of lithium and operations for about 30 years. I have included the life of the ore reserve of 11 years and 30 years of the life of the plant. My figures are close to the figures reported by Piedmont in the technical report. Note that the company has announced a net present value, for the entire project, of $2.04 billion.
The BFS assumes a fixed price of $18,000/t for battery grade lithium hydroxide and $900/t for spodumene concentrate (SC6). Source: Technical Report
For the first 11 years, I assumed between 0.24 million tons of lithium and 0.48 million tons of lithium produced per quarter. Revenue would increase from $48 million per quarter to $96 million per quarter in year five. From year 11 to year 30, the company would generate after-tax cash flow of $244 million, which is close to the assumption made by Piedmont Lithium.
Now adding it all up at an 8% discount and adding cash of $139m and $213m from Ghana and Quebec, I got an implied valuation of $2.39bn and a price of the share of $134 per share. Note that I assume the company will be cash flow positive from year 1 to year 30.
In bearish conditions I got a valuation of $59 per share
Very conservative people may not use net present value to assess the valuation of projects in Ghana and Quebec. In the last annual report, Piedmont Lithium reported investments of $44 million in Quebec. Separately, Piedmont Lithium has paid $16 million for its investments in Ghana and expects to pay a total of $87 million. A very conservative investor would value these two holdings at $60 million.
On August 31, 2021, we paid approximately $16.0 million to acquire an approximate 10% interest in Atlantic Lithium. Additionally, we have entered into a long-term supply agreement for spodumene concentrate, under which we have the ability to acquire a 50% interest in Atlantic Lithium Ghana, through future milestone payments totaling approximately $87 .0 million in two phases over a period of three to four years. Source: 10-k
Most of the reserves declared by Piedmont Lithium are probable reserves, which means that there is between 50% and 90% probability of recovery. Therefore, in this scenario, I assumed that the company would recover 50% of its probable reserves.
Probable reserves are those whose probability of recovery is between possible and proven reserves, or greater than 50% but less than 90%. Source: Definition of probable reserves
I also assumed $13,000 per ton, 1% lithium, 8% discount and $60 million valuation for interest in Ghana and Quebec. My results include a net worth of $1 billion and a fair valuation of $59 per share.
Conclusion: Piedmont Lithium needs more cash
As of June 30, 2022, the company had reported $139 million in cash, $273 million in total assets, and $6 million in total liabilities. As mentioned, the development of the mine is still not worth much because the company has to invest more money in exploration and development.
With this, it is very advantageous that the company does not declare a lot of long-term debts. In my opinion, financial institutions will probably provide financing in the near future. Keep in mind that Piedmont has already found a car manufacturer and entered into a sales agreement with them.
On September 28, 2020, we entered into a sales agreement with an automobile manufacturer to supply spodumene concentrate to the Buyer. Source: 10-k
With that on the total amount of cash on hand, note that Piedmont Lithium needs a substantial amount of cash to produce lithium in the United States. According to the technical report, Piedmont Lithium needs more than $900 million for the conversion plant, mine, concentrator and the rest of the project.
New customer contracts, more financing, permits and more measured reserves will likely push the valuation up
I think the company’s stock price will likely rise to more reasonable levels once management signs more deals with lithium buyers. According to the annual report, Piedmont continues to deploy substantial efforts within the framework of a defined marketing and sales strategy:
We continue to develop a marketing and sales strategy that includes production from our Carolina Lithium project as well as our other lithium projects. Based on historical and current production in the Carolina tin-spodumene belt and other requests from North Carolina producers, we plan to produce battery-grade lithium hydroxide, spodumene concentrate and certain other by-products including quartz, feldspar and mica, all of which can be used by the global electric vehicle, energy storage and building materials markets. Source: 10-k
Once Piedmont brings in enough customers, financial institutions and banks will most likely offer cheap financing. With fresh money, management could fund further exploration to define resources as well as calculate the amount of measured reserves.
Finally, I believe Piedmont’s share price will rise as the company receives additional permits for further exploration and development. In the latest annual report, the company disclosed a significant number of permits needed to continue operations.
We may require additional permits for our Carolina Lithium Project, including, but not limited to, an NCG01 general stormwater permit for stormwater discharges from construction activities issued by DEMLR, an individual permit mine dewatering storm drain issued by DEMLR, a road abandonment approved by the North Carolina Department of Transportation and Gaston County under North Carolina General Statute 136-63, a railroad crossing encroachment permit issued by NCDOT, various entry permits issued by NCDOT, Gaston County Watershed Permit approved by Gaston County Planning, various buildings permits approved by Gaston County Planning, explosives permits approved by the Bureau of Alcohol, Tobacco and Firearms and Hazardous Chemicals Permits issued by the Gaston County Fire Department. Source: 10-k
Risk factors would include a faulty geological model, lower-than-expected production, or new environmental laws
Piedmont is still in the development stage, so in my opinion the most serious risk is a faulty geological model or faulty production estimates. In the worst case, the amount of proven reserves would be lower than forecast. Analysts would most likely reduce their production expectations and free cash flow expectations would also decrease. Finally, the stock price could fall.
Piedmont Lithium’s business model would also suffer significantly if new environmental laws change the way mining is conducted in the United States. As a result, the company may change its feasibility plan and the project may not be profitable. The worst outcome would create significant destruction of shareholder value.
Piedmont Lithium could see its share price climb to $134 per share with sufficient investment in exploration and measurement of its reserves. If Piedmont increases its proven reserves, obtains enough permits and signs new agreements, demand for shares will likely drive the stock price higher. With that, I obviously see the risks of new environmental regulations and failed production estimates, so most ultra-conservative investors will pass on that name.