Cauchari JV With SQM Paves Way for Higher Valuation
We recommend Lithium Americas as a BUY and increase our target price to C$1.60/sh from Under Review (previously C$1.20) after incorporating Cauchari into our 10% DCF model for the first time since the WLC-LAC merger. We integrate current plans, price assumptions, and SQM's involvement. We believe LAC has unlocked much value through JV with SQM which should allow its Cauchari lithium brine in Argentina to move forward. SQM bought 50% for US$25 MM, including US$15 MM cash and a promise to fund US$10 MM development. While below our expectations, LAC gains an increased chance of production; a stalled project is kick-started; and further value may now be unlocked (see 29-March-16 note). Argentine economic reform, strong lithium demand, rising LCE prices, low cost, long life production potential, large resources, and full permits make LAC an attractive investment.
Cauchari valuation jumps over three-fold despite half the ownership. Our valuation increases from US$66 MM (merger book value; 100%) to US$221 MM for LAC's 50% interest using a 10% NPV. This suggests Cauchari is worth US$442 MM. This is an improvement. We previously assumed US$100 MM (10% NPV) with shorter start-up and lower production rate, pre- merger. Plus the smaller LAC was heavily diluted in order to finance the project. For easier comparison with feasibility, our 8% NPV is US$580 MM vs. US$404 MM from the 2012 study.
SQM brings more than cash. Increased CF certainty is immeasurable given SQM's marketing knowledge and construction expertise. While earn-in appears cheap, in reality, a partner who is the world's top lithium producer should help decrease LAC's technical and execution risk. Financing risk is also down considerably given a lower share of Capex ....