Thesis

The Biden administration recently announced plans to use the Defense Production Act to try to increase domestic lithium mining; the latest indicator of the growing strategic importance of lithium. It happened just a month later. the The Pentagon announced its plans to increase the US lithium stockpile and just weeks after The Chinese government summoned major lithium players from that country in Beijing to discuss the current high lithium prices and the robustness of the supply chain.

Geopolitical tensions and technology migration from the internal combustion engine to battery electric vehicles are leading many countries to re-evaluate national natural resource policies and the importance of locally produced lithium. It’s a trend that’s only just beginning and will serve to push a lot of investment capital into the space. Domestic lithium production in the United States is totally insufficient to meet even some of the future demand, which will force the government to remove regulatory obstacles to the construction of new mines. Given the advanced stage of development of its Thacker Pass project, the first to benefit from this trend will be Lithium Americas Corp. (NYSE: ALC).

Request generator

Most readers are probably well aware of the growing demand for lithium batteries from the automotive sector. It extends beyond Tesla, Inc. and Chinese electric vehicle producers and has grown to include companies like Stellantis (STLA), which just 2 weeks ago announced plans to partner to battery maker LG Chem (OTCPK: LGCLF) and build a $4 billion electric vehicle. a battery plant in Canada that would have a production capacity of 45 gigawatt hours (“GWh”) per year. The company also has plans for a second US-based factory to be announced soon. Most of the other major traditional automakers have also announced ambitious plans to add new battery factories in the coming years.

In response, global battery producers are planning capacity additions that are many multiples of current production levels. Wood Mackenzie analysts predict that the current pace of battery factory construction will lead to a five-fold increase in lithium-ion battery capacity by 2030.

Market recognition of this developing trend, along with the realization that current and projected lithium supply may not be sufficient to meet growing demand, has resulted in lithium prices surging during the last year.

Macro outlook

However, markets and auto industry analysts weren’t the only ones to realize just how important lithium has become. Its centrality in the emerging new electric world is a fact that is slowly beginning to dawn on governments as well. And this trend is increasingly evident in the nationalist policies implemented by governments around the world to foster, and in some cases control, domestic production.

Significant amounts of lithium have only been found in a limited number of countries, most of which are located in Latin America.

And while the Chinese government’s involvement in that country’s lithium supply chain has been a well-known fact for many years, Latin American governments are also beginning to increase their role in the industry.

Mexico’s president recently proposed to nationalize his country’s lithium supply, a highly negative development for Bacanora Lithium Plc’s (OTCPK:BCLMF) already delayed project in the Mexican state of Sonora. If we look at Mexico’s national oil producer, PEMEX, for an example of how nationalization will play out. Its poor exploration and development record and the fact that it is the most indebted major oil producer in the world do not inspire much confidence. A transfer of lithium resources to a government-owned mining company could mean significant Mexican lithium production could come online much later than expected.

The South American countries of Argentina, Bolivia and Chile, which hold the world’s largest concentrations of the metal and form the Lithium Triangle, have discussed creating a “lithium OPEC”. The growing tide of resource nationalism played a major role in the coup against former Bolivian President Evo Morales and the Chilean President proposed to nationalize that country’s lithium mines; Chile’s constituent assembly even approved a first bill last month. These developments endanger the mining operations of Albemarle Corporation (ALB) in the country.

These trends show no signs of reversing and may even accelerate given resource shortages and the upheaval caused by the war in Ukraine. This will force the United States to gradually adopt more mining-friendly policies to foster a domestic production base.

A major environmental goal of the Biden administration has been to encourage the development of the U.S. battery supply chain in an effort to wean the auto industry off Chinese suppliers. It earmarked $6 billion for such efforts in last year’s infrastructure bill and recently turned its attention more upstream to the mining and mineral processing sector. The first signs of a change came last week when the Biden administration invoked the Defense Production Act (“DPA”) to encourage lithium mining.

The use of the DPA will have a limited impact, as the administration will use it mainly to offer assistance in the financing of potential and future projects. But its implementation is a sign that the administration is willing to encourage more US-based mining operations. This bodes well for the industry, as the president can likely count on strong support from the corporate and environmental wings of his party, as well as most Republicans. In the years to come, this will likely lead to an easing of environmental and regulatory constraints faced by US-based projects that are still in the development phase.

Lithium Americas

Lithium Americas is well positioned to take advantage of this trend. The company is a lithium miner with three projects in development, including two in Argentina and one in the United States. And it expects production at one of its two Argentinian sites to begin this year, which should be a major catalyst for the title. Argentina has taken a relatively more business-friendly stance toward miners than its two neighbors, which means Lithium America’s projects are subject to far less political risk.

The project that is expected to start production is the first phase of the company’s Caucharí-Olaroz property, a joint venture with Ganfeng Lithium Co., Ltd. (OTCPK:GNENY) from China. Stage One has an expected average production capacity of 40,000 tpa of battery-grade Li₂CO₃ with an estimated operating cost of $3,600 per ton. Under the terms of the JV, Lithium Americas’ production share will be 19,600 tons or 49% while Ganfeng will get the balance.

The company is also guiding its 100% owned Thacker Pass, Nevada project through the approvals process with the goal of starting construction next year. It is a property with proven reserves of almost 2.4 million tons compared to Caucharí’s 276,000. LAC has received all final key state permits for Thacker Pass, but is still involved in a lawsuit challenging the administrative process conducted by the Bureau of Land Management when it granted Thacker Pass its Record of Decision. The company expects the case to be resolved in the third quarter of 2022, but a negative decision for the company is a risk for the project.

The company, which had $510 million in cash at the end of last year, could have used the free cash flow generated by Caucharí to fund any additional investment needs for Thacker Pass. However, management recently revealed that it is considering spun off its US assets into a separate business. This information was made public in the same press release that discussed Lithium Americas’ loan application to the US Department of Energy (“DOE”). A DOE loan could be a good source of non-dilutive funding for Thacker Pass and allow management to claim that the project is partly funded and approved by the DOE. An obvious advantage given the strong politicization of the project.

Management hasn’t discussed why it wants the split, but given pressure from the Biden administration for more local production, LAC could try to steer Thacker Pass away from its Chinese JV partner in the Caucharí project. Jonathan Evans, CEO of Lithium Americas, made sure to invoke the administration’s preferred themes in the comments accompanying the press release when he said, “The project is aligned with the national energy improvement agenda. national supply of critical minerals and has the potential to be a major near-term source of lithium for the US battery supply chain.

The split of US operations would also leave Thacker Pass as an attractive takeover target. A fully approved lithium property in Nevada that just needed mine construction could catch the eye of a lithium consumer like Tesla, Inc. (TSLA). Just last week, Elon Musk tweeted a comment about Tesla’s entry into the lithium mining business.

Conclusion

But whether or not Lithium Americas splits into two companies, the fact that the company owns one of the top lithium properties in the United States at this point in the approval process makes it a stock worth owning. . Growing demand for lithium from the electric vehicle industry and increased focus on domestic supply development by both political parties will inject more capital into the space and LAC is well positioned to benefit.

Risk

As mentioned in the article, the most immediate risk to this thesis comes from the lawsuit regarding federal authorization to operate Thacker Pass. A loss in court would force the company to appeal the decision, which could lead to delays of several years and possibly the cancellation of the project altogether. The company’s shareholders would still have lithium exposure through the company’s Caucharí project, but Thacker’s loss would hit the stock hard.

Another risk is the switch from lithium to another type of battery chemistry by manufacturers of electric vehicles. Such a development would be a blow to the entire industry.