Friday, 17 February 2012

Stifel Nicolaus sees "considerable upside potential" in Lithium Americas

Stifel Nicolaus has initiated coverage on Lithium Americas Corp. (TSE:LAC) with a "buy" rating and $3.20 target price, seeing "considerable upside potential" in the company.

Friday morning, Lithium Americas stock was up 1.61 percent at $1.26.

Lithium Americas is a Canadian resource company focused on the exploration of lithium, potassium, borax, and other mineral resources in South America.

All of the company’s exploration properties are currently located in Argentina with its principal and most advanced property being the Cauchari-Olaroz Lithium Project located in the Puna Plateau of Argentina.

The company's Cauchari-Olaroz lithium project comprises a significant portion of two adjacent Argentinean salt lakes, Cauchari and Olaroz, covering 82,498 hectares located in the "Lithium Triangle" region of South America.

The property is considered the third-largest deposit of lithium in the world, and has a total lithium and potash resource of 8.0 million tonnes and 25.4 million tonnes, respectively.

A  Preliminary Economic Assessment prepared by the independent engineering firm ARA WorleyParsons indicates that Lithium Americas’ operating cost per tonne of lithium carbonate is $1,434 (prior to expected potash and boron by-product credits),  based on available industry information; this would make Lithium Americas the world's lowest cost lithium producer.

Major automotive players Mitsubishi Corp and Magna International are shareholders of the company, in addition to them both having off-take arrangements with Lithium Americas.

In late 2011, Mackie Research said that the company was "on track to becoming a leading player in the lithium market".

In a research note, Stifel Nicolaus analyst Nick Morton said he viewed Lithium Americas as "a high risk investment with considerable upside potential".

Stifel Nicolaus's Morton said that investors are waiting for the release of the full feasibility study for the Cauchari-Olaroz project, expected in mid-2012.

"This could be viewed as a potential catalyst for the stock. Once these numbers are crunched by the investment community and other interested parties (potential acquirers perhaps), the discount rate used to present value the project is expected to drop to reflect a lower risk profile," the analyst said.

While Morton had no knowledge of any M&A discussion or activity, he added: "We expect Lithium Americas to be acquired by a larger mining firm or specialty chemical producer."
Indeed, Morton said a well-capitalized industry buyer with a long-term positive view of lithium demand might well be tempted to acquire the project, enter into a joint venture, or buy the whole company.

Another potential outcome could be the merger of the company with another junior active in the area, which would reduce capital expenditure requirements and possibly make financing easier.

One other lithium explorer in Argentina is Rodinia Lithium (CVE:RM), which has interests in four salars - salt deposits - in the

The key salar property is Diablillos, where the company holds 100 percent of the extraction rights for this lithium-potash-boron
project in Salta province where work on the first production well has recently been started.

In terms of future catalysts, Morton identified the following events that may be share price drivers for Lithium Americas: the
release of feasibility study expected in the second quarter of 2012; environmental permitting approval, and news on a joint venture, which would reduce financing risk and secure a market for some of the mine’s output.

Stifel Nicolaus believes preliminary discussions with Mitsubishi and other Asian trading houses (possibly Korean, Japanese, and
Chinese) have occurred, but it does not expect an agreement until after a definitive feasibility study is released.

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