Tesla Inc. (NASDAQ:TSLA) remains one of the hottest stocks on the market. Armed with a $40 billion market cap, investors must bet on the company achieving mass-scale with its current and future lineup of electric vehicles. Today, it only produces the Model X, Model S and Model 3 in fairly limited quantities. Plenty needs to be done before Tesla can justify its current valuation.
While opinions on Tesla's ultimate success vary, one thing is for certain: electric vehicles are taking over. It's a slow process given the replacement cycle for a vehicle can take 10 to 15 years, yet slowly but surely electric vehicles are taking market share from their conventional internal combustion peers.
Tesla's Model S is now one of the highest-selling luxury sedans in the world. The Model 3, alongside Nissan's (TSE:7201) Leaf, outsells several other well-known brands. Ford (NYSE:F), General Motors (NYSE:GM) and Tesla are also set to unveil electric pickup trucks that can outperform gas and diesel alternatives. This could open the floodgates to every vehicle category on the market.
Range, battery performance and charging station infrastructure continue to improve at breakneck speed. For example, there are no highways in the U.S. outside the reach of a Tesla Supercharger station. Thousands of new stations come online every year, a pace that is only expected to accelerate.
Here's the takeaway: Regardless of whether Tesla in particular wins the race, electric vehicles as a whole should represent a multidecade growth opportunity. So far, investors have been piling into electric vehicle manufacturers. Instead, they should be looking at electric vehicle suppliers.
If you want to make money off the electrification of cars, trucks, motorcycles, trains and even planes, Lithium Americas Corp. (NYSE:LAC) looks like your best bet.
Get direct exposure
Lithium Americas is a pure-play lithium mining company. It owns two pre-production assets--one in Argentina and another in Nevada. These mines aren't producing yet, meaning the market is assigning a big discount to the assets. Next year, however, the first few tons of output should be mined, likely resulting in a rapid reset in valuation.
Where could the valuation go? A lot higher than the current $315 million market cap. The company's Argentina mine is expected to produce 25,000 tons of battery-grade lithium per year. The mine is expected to produce for 40 years. Assuming a $12,000 per ton selling price (prices were double that in 2016 and 2017) and a 10% discount rate results in a net present value of roughly $800 million. After subtracting around $50 million in net debt, that gives an expected market cap of $750 million, more than twice the current trading price.
Keep in mind this assigns zero value to Lithium Americas' Nevada mine, which could be just as valuable. The mine could produce 60,000 tons of battery-grade lithium annually with a life of 46 years. Using a 10% discount rate results in a net present value of nearly $2 billion. Several hurdles remain, including finance and regulatory considerations. But for now, investors are getting that option for free.
Asymmetric risk and reward
The big if is whether Lithium Americas can get these projects online on time. That's a risk I'm willing to take.
First production for the Argentina mine should begin in as little as 12 months. All regulatory and financing hurdles have been cleared. In fact, the company recently increased its resource model, with reserves going from 11.8 million tons to 18 million tons. With some of the highest lithium concentrations in the world, this project should have no problem being free cash flow positive by 2021, potentially funding the construction of the Nevada mine using internal sources (read: no dilution).
Management expects the Nevada mine to begin construction in 2021, with first production in 2023. These types of timelines are always overly aggressive. Still, this mine holds incredible value and, even if developed years down the road, should add significant upside to shares.
Importantly, valuing the Argentina asset alone results in an intrinsic value of more than $7 per share--twice the current price. I expect the market to rerate shares quickly in late 2020, when first production revenues are booked. That could result in a quick 50% pop, with the discount being wound down over the coming quarters. If the Nevada mine gains traction, that could add another 100% or more in multiyear upside.
The best part is it doesn't matter which electric vehicle manufacturer wins. If electric vehicles take over, Lithium Americas should benefit tremendously.
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This article first appeared on GuruFocus.
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