John Moore
Shares of Standard Lithium (NYSE:SLI) have gained 24.71% since my last article on the company in March 2023 against the S&P 500 at +16.13%. Over the past year, SLI has dropped 20.95% (YoY) but it is up 52.82% (YTD). According to me, the share price has remained resilient (surging 60.77% above the 52-week low of $2.83) after SLI answered the Hindenburg Research short report last year. I believe the company is on the cusp of a paradigm shift due to the growth of the electric vehicle (EV) industry and strong infrastructural developments.
Thesis
Despite not being profitable, SLI announced that it had drilled and sampled, according to the company, the highest confirmed lithium-grade brine. This discovery was made in South West Arkansas Mining Project, with the lithium brine said to be grade 581 mg/L. I believe this is an important achievement toward the commercialization of its lithium supply. Additionally, SLI had already awarded front-end engineering design (FEED) and definitive feasibility study [DFS] for the Lanxess Project by the beginning of 2023 indicating a strong push towards commercialization. The company also has existing infrastructure and will be ready to begin production once construction starts. If In consideration of the carbon capture pilot program coupled with its potential high-quality lithium production status, then this company will be worth the salt in the long run.
Arkansas and the Lithium Boom
From my viewpoint, SLI’s story gets more exciting if it is scaled up beyond the US state of Arkansas. To reckon, the opportunity in Arkansas is globally significant. As an investor, I am hoping to see SLI replicate its technology with extraction facilities across South Arkansas and beyond the US. This move will ensure the company delivers quality battery lifting chemicals while focusing on the EV/ stationary battery industry. I also feel that the geographical location of South Arkansas is strategic to SLI’s overall growth plans.
Recent reports indicated that Exxon Mobil (XOM) paid $100 million to lease about 120,000 acres in South Arkansas for the extraction of lithium. The company intends to produce approximately 75,000 to 100,000 metric tons of lithium annually. In its Q2 2023 earnings call, XOM confirmed that it was evaluating the opportunity presented by lithium, especially the processing of brine, drilling, and injections of the commodity into the economy. With this purchase, XOM will likely make this energy transition with a focus on the expanding electricity and EV market space. It is also estimated that XOM’s projected lithium production in Arkansas would equate to about 15% of the global lithium produced in 2022. Interest from the global players illustrates that SLI is headed on the right trajectory as far as lithium production is concerned.
Speaking of direction, Standard Lithium announced the ratification of a joint development agreement with Koch Technology Solutions in May 2023. While inaugurating this agreement, SLI’s president Andy Robinson stated, “Today’s announcement is about greater certainty, speed, and choice. The performance guarantees the KTS Li-Pro™ technology license will provide significant risk reduction for Standard Lithium and its shareholders. The partnership will help accelerate the Company’s first project to commercial reality; and the exclusivity will allow us to benefit from a second Direct Lithium Extraction (DLE) technology that works with Smackover Formation brines in addition to our own proprietary LiSTR technology.” Overall, we are looking at the processing of more than 1.4 million brine, loading of close to 5,000 lithium cycles, and production of pure lithium eluates. These are efforts to scale SLI’s first commercial lithium facility and improve the application of direct lithium extraction- DLE technology.
Highest-grade Lithium discovery
SLI stated that it had to the best of its knowledge identified the highest confirmed grade of lithium in its Arkansas brines. The tested sample in its resource definition work had 581 mg/L of Lithium presenting a strong economic case for the company. Using an 8% discount rate, analysts estimated that the Arkansas project with this discovery had a possible net value of $1.97 billion. Studies as early as 2021 indicated that the unitized production area at Arkansas Resource contained at least 1.195 metric tons of lithium carbonate. Additionally, analysts also believe the resource can sustain a “20-year mine life producing an average of 30,000 tons/ year of battery-quality lithium hydroxide monohydrate.”
I am alive to the fact that EV automakers such as Tesla are making deals worth billions of dollars with lithium mining companies sidestepping traditional suppliers. Recent news indicates that Tesla, Ford Motor, and Volkswagen were in talks with XOM to supply lithium for their EV batteries. I believe XOM will need to study ways to develop the Arkansas area that is rich in this lithium brine since it currently has no lithium manufacturing capacity. I speculate that we could see potential partnerships between SLI and XOM shortly if SLI succeeds in its project development.
EV inventories
By mid-2022, EV inventories stood at 92,000 with new EV automakers such as KIA, Porsche, Jaguar, and Hyundai encountering lower sales due to low production capacities. An average EV battery has been stated to require nearly 18 pounds of lithium, 77 pounds of nickel, and 31 pounds of cobalt. Further, there is a supply constraint for the lithium needed by batteries powering EV vehicles. According to the International Energy Agency (IEA), the mineral demand for EVs and battery storage could increase 30 times by 2040.
Recently, Prospect Lithium Zimbabwe, a subsidiary of Chinese firm Zhejiang Huayou Cobalt opened a $300 million Lithium processing facility in Zimbabwe. From my understanding, the US is falling behind countries such as China, Zimbabwe, Namibia, Congo, and Mali among other African countries that have notable lithium supplies. In Zimbabwe, Prospect Lithium is looking to process about “4.5 million metric tons of hard-rock lithium into concentrate for export” annually.
As seen above, there have been considerable efforts to boost lithium production to cope with the supply shock. Prices of lithium carbonate in China dropped below CNY265, 000 ($36,880) per ton at the start of August 2023 after hitting a high of CNY 300,000 by the end of May 2023.
Trading Economies
Prices are yet to hit the November 2022 high of CNY 600,000 after a sell-off was triggered by the end of Chinese subsidies/ tax breaks for energy companies. Analysts are, however, optimistic that the global lithium demand will rise 76% to 1.57 million metric tons LCE by 2025. About 55% of Chinese lithium comes from importation indicating that we are likely to see a surge in prices into 2024.
Risk
SLI is yet to give updates on the progress of its DFS and FEED reports indicating development timelines in 2023 and 2024. This gap in the delivery of critical information may give way to negative speculation concerning the expected developmental progress.
Valuation
SLI’s price-to-book ratio [TTM] is 6.15 against an industry average of 1.75. It shows a difference of more than 250%. The stock’s five-year P/B average ratio is also 6.46 indicating that the stock is slightly overvalued.
Bottom Line
SLI is slowly gaining momentum as far as its potential to exploit lithium resources in South Arkansas is concerned. However, there are some gray areas regarding the availability of current data on the progress of its DFS and FEED. On a positive note though, I still think that SLI’s management will release more data on its development progress soon after it ratified its deal with Koch Solutions. For these reasons, I recommend a hold rating for the stock.
