Lithium Americas (LAC): From Dust To Dust
LAC is a pre-revenue junior miner with aspirations to turn its lithium clay deposit at the Thacker Pass mine in Nevada into the world’s sixth-largest lithium producer by 2028, eventually rising to 25% of global supply.
LAC’s Thacker Pass mine is grossly uneconomic. Using the company’s own inputs, Thacker Pass has an NPV of zero at current lithium prices, which remain far above long-term averages.
The Thacker Pass mine is a clay deposit mine. There does not appear to be a single operational lithium clay mine globally. Experts agree that extracting lithium from clay does not work using reasonable output price assumptions.
LAC’s claims suggest it has solved lithium clay extraction at mega scale, yet its flowsheet is simply a collection of “decades-old, off-the-shelf processes that have been strung together.” Engineering consultants quietly warn that “technical challenges may occur.”
LAC is an underfunded, Vancouver-based stock promotion. After running from $4 to $7 on the hype of a Conditional DOE loan approval, LAC recently “bagged” equity holders with a $275m offering, diluting shareholders by 33%.
LAC’s DOE loan approval is a double-edged sword: the program requires companies applying for loans to have sufficient cash to finalize loans. LAC’s equity raise last month was the appetizer, and we calculate that an additional 50% in dilution is needed.
General Motors has invested substantially, but GM’s track record with partnerships for its EV initiatives has been atrocious. (Nikola down 99%, Lordstown Motors down 100%).
The second tranche of dilution from GM stands to dilute common equity holders by a further 27% at current prices, and that still doesn’t even get LAC to production - meaning more stock issuance to come.
Initial Disclosure: Bleecker Street is short Lithium Americas (LAC). Please see full disclosure below.
Introduction
Lithium Americas (LAC) is attempting to mine clay-based lithium on the border of Oregon and Nevada at its Thacker Pass mine. Clay-based lithium mining projects have historically failed, and we cannot find a single example of a clay-based mine working in the world.
The Thacker Pass mine, operating at full capacity, could produce 8% of the current world supply of Lithium Carbonate Equivalent (80,000 tons annually, compared to 1 million tons in 2023 global output). General Motors supports the mine, having invested $650 million in the project in January 2023.
In mid-March, the company announced it received terms for a $2.26 billion conditional loan from the Department of Energy under the Advanced Technology Vehicles Manufacturing (ATVM) program to fund Lithium Processing at its Nevada mining site. This caused LAC shares to surge 100% in the ensuing month, excitement that was quickly quelled by a $275 million stock offering that diluted shareholders by 33%.
We think this dilution is just the beginning; our calculations indicate the company has a $465 million funding shortfall, and further dilution will be coming to satisfy typical DOE underwriting provisions.
The arc of lithium excitement is waning. We wrote about lithium mining stock promotion Atlas Lithium (ATLX) in May 2023 during the lithium’s run-up when the idea that surging EV demand would cause skyrocketing lithium demand soon was en vogue.
What has happened with lithium and EVs? Just this week, Ford announced it was cutting orders from battery suppliers for its EV business.
At current lithium spot prices of $14,000, the project would be uneconomic and have close to negative NPV based on operational assumptions in LAC’s 2022 financial viability report. We estimate that for LAC’s project to get to a $0 NPV for equity holders, lithium prices would need to rebound to well over $17,000, a 20% increase, and stay above these values for the next 20 years. We find this to be highly unlikely.
Two other Nevada clay lithium mining firms, Century Lithium Corp and Ioneer, have had numerous false starts on great promises of unlocking value in the volcanic clay lithium reserves, only to see projects stalled while burning cash and suffering cratering stock prices. The primary issue with LAC’s Thacker Pass deposit is that it is a clay-based deposit, a mining method that has not historically been successful. The impracticality of Lithium clay extraction can only be overcome by assuming high lithium prices for decades into the future.
Clay-Based Lithium Mining: A Fraught History
Most of the lithium in the world presents itself in three ways: hard rock deposits, brines, and sedimentary clay deposits. Most, if not all, of the operating lithium mines in the world mine lithium from either hard-rock deposits or brine water mines.
We conducted an expansive search, consulted academics and industry experts, and found that there is not a single lithium clay mine operating in the world at a commercial scale. These clay deposits have long been something of a holy grail of lithium extraction; they contain a high portion of total reserves and are located on every continent on Earth. However, the clay and sediment layers lock the lithium in tightly packed strata. The workaround has been to coax the lithium from the sediment using brute force: typically extremely high heat and/or exposure to large volumes of corrosive acids. These techniques have high operational costs associated with energy-intensive extraction plants and liabilities associated with using environmentally sensitive chemicals such as concentrated sulfuric acid.
As EVs began taking off in the 2010s in the United States, projections for lithium demand soared. As spot lithium prices rose, speculators began evaluating mining the metal domestically in Nevada from these non-traditional deposits.
With no technological improvements to speak of, LAC claims its Thacker Pass deposit can supply 8% of the global lithium demand by 2028. A recent sell-side report said:
“LAC’s flowsheet is in essence a set of decades-old, off the shelf processes that have been strung together for the purpose of lithium carbonate production.”
And LAC’s technical consultants caution that LAC’s method of extraction may not work:
“The project will be the first of its kind with respect to lithium extraction, and therefore lithium carbonate production, from clay mineralization. As such, technical challenges could occur.”
Despite claims by some bulls that clay extraction techniques have improved significantly in recent years, it should be noted that a Sulfuric Acid leach extraction, using a 5:1 (or 0.5 tons Acid/Solids) ratio achieved 90% extraction in 2008.
Sixteen years later, in 2024, LAC’s own study demonstrates that a nearly identical leaching regime (0.49 tons Sulfuric Acid) yields 87% extraction:
It is clear that the only change in Clay Lithium mining dynamics is at the cost one can sell the final product (processed Lithium) for and regulatory or financial incentives to do so. Century Lithium, another Canadian-owned Nevada lithium miner, has been operating a pilot plant on its reserves using a chloride-acid extraction since late 2021. Century Lithium finalized its own feasibility study just last month, and 2 years of operation of the pilot plant forced the company to walk back total recovery claims by 5 percentage points
LAC contends that it has validated its flowsheet at the 30,000-square-foot pilot facility in Reno, Nevada. Yet the Reno plant has produced just 24kg of lithium carbonate to date. Even penny stock Century Lithium, which is generally seen as a failure by the market, was providing investors with real-time updates of the extraction achieved at the pilot scale:
The recovery rate issue is critical, as LAC’s own sensitivity analysis shows that a recovery rate of as little as 10% lower than forecast will cut LAC’s NPV in half.
Most other prospective lithium clay mines are owned by Canadian or Australian penny stocks, but there have been some high-profile exceptions. In November 2023 Gangfeng’s Sonora Lithium Project in Mexico was shelved. The press reported it was due to a dispute with the Mexican government, yet in the four years it operated, it was plagued with issues.
DOE Loan Likely Assures Further Dilution
On March 14, DOE issued a press release regarding LAC’s application announcing that conditional approval had been granted for a $2.26 billion loan to construct the Thacker Pass processing facility in Northern Nevada.
“The United States has an incredible opportunity to lead the next chapter of global electrification in a way that both strengthens our battery supply chains and ensures that the economic benefits are directed toward American workers, companies and communities,” said Jonathan Evans, President and Chief Executive Officer of Lithium Americas. “The ATVM Loan Conditional Commitment announced today by the DOE is a significant milestone for Thacker Pass, which will help meet the growing domestic need for lithium chemicals and strengthen our nation’s security.” - Lithium Americas Press Release, 14 March 2024
Shares initially rallied 100% but soon fell as the company announced a $275 million raise in mid-April, with shares dropping 30%. The company assured investors that this capital raise would be sufficient to finalize the DOE loan:
“The Offering, together with the DOE Loan, satisfies the funding condition to closing General Motors Holdings LLC ("GM") second tranche investment. At the same time, the Offering and GM funding will allow the Company to meet the financing related condition related to closing the DOE Loan Conditional Commitment. These financings are expected to fund Thacker Pass Phase 1 construction capital expenditures.”
However, a close examination of the specifics of the DOE program reveals that more dilution is all but assured. LAC’s application for a loan under the Advanced Technology Vehicles Manufacturing (ATVM) Program came off the heels of the Inflation Reduction Act, which boosted federal funding for EV manufacturing. This program is administered by the same office that oversees the power and utility Title 17 loan program, and the underwriting requirements for these loans are governed by the same legal requirements. Two decades of DOE loan issuances can be used to project what further steps LAC must take to finalize the loan.
Specifically, DOE guidance states that ATVM projects must:
Reduce carbon or air toxic emissions to a sufficient degree
Be associated with vehicle projects, from car manufacturers down to battery mineral processors
Use “America Made” construction materials
There are financial conditions that include:
A reasonable prospect that the applicant will be able to pay principal interest when due”
Applicant must have “a net present value that is positive, taking all costs, existing and future, into account.”
No more than 80% of total project costs can be funded through the program
We suspect that LAC will face significant hurdles with each finance requirement. The 80% DOE-funded maximum is not only a legal limit imposed by Congress, it is already considered an extreme upper limit by the DOE’s loan office itself, per guidance published by the agency:
“The sources and uses of funds should be presented on a monthly basis. Note that while 10 CFR 611.105(d)(3) allows for the principal amount of an ATVM Program to be up to 80% of total eligible project costs, strong applications will generally have financial plans providing for equity financing significantly in excess of 20% of total project costs.”
Using data provided by the company in its most recent quarterly report and accounting for reported cash on hand and the second and final General Motors equity investment, we estimate that even if the company was granted a full 80% loan by DOE, its cash on hand is insufficient:
In the unlikely but best-case scenario for LAC, if the company gets a DOE loan for 80% of the project, LAC would still be short $115 million, necessitating further 20% dilution in the best case. According to a former DOE Title 17 loan applicant who successfully completed a loan, 70% funding from DOE is a much more common arrangement. That level of DOE support would leave a $519 million equity shortfall, which is 53% of LAC’s current market capitalization.
This analysis leaves no room for R&D, non-startup-related Opex, or corporate overhead in the form of SG&A. We find it hard to believe that the DOE would allow a loan to consummate with no overhead for unexpected costs that will be taken on by a pre-revenue mining concern.
If we instead assume a 20% cushion after CapEx spending, an equity shortfall of $467 million can be calculated, or a roughly 50% further dilution of the current market capitalization:
The company indicated that the DOE loan, along with the final GM tranche and equity raise, “are expected to fund Thacker Pass Phase 1 construction capital expenditures.” However, as demonstrated in our cash flow analysis, this presumes no overhead for DOE’s suggested “equity financing significantly in excess of 20% of total project costs”, nor does it consider costs outside of the processing facility construction.
By law, DOE cannot fund operating expenses, corporate overhead, or any activity associated with operating the mine itself; the ATVM loan is explicitly for the capital needs of the lithium processing facility only.
We’d also note that LAC’s May 13 update stated that the “Offering and GM funding will allow the Company to meet the financing-related condition related to closing the DOE Loan Conditional Commitment.” LAC has not provided details on all pre-conditions for DOE loan closing.
The Unit Economics of LAC’s Project Are Broken and not projected to get better
In the financial portion of the Thacker Pass assessment (Completed November 2022), the consultants hired by LAC based on the Net Present Value and Capital Return calculations on the Q3 2022 Wood Mackenzie Lithium price forecast. At the time, Lithium prices were still soaring. The Wood Mackenzie report assumed a long-term price of $24,000/tonne of Lithium Carbonate Equivalent (LCE).
The economic returns on LAC’s Thacker Project are modeled using a simple Net Present Value model that considers only an 8% reference return and the Wood Mackenzie 2030-32 LCE price projection. LAC’s own model has the project as having an NPV of negative $623 million at a long-term price of $12,000 per ton.
These three data points in the NPV model are a straight line, confirming that the only variable used for NPV sensitivity was the price of Lithium. While that’s not how we’d model a $3 billion project with varying concentrations of lithium throughout the reserves, it does provide a helpful tool for holding LAC management to their own models.
The NPV turns negative at the $13,122 long-term LCE price. Wood Mackenzie’s 2022 forecasts may have aged as well as milk, but helpfully, they do continue to update projections over time. Wood Mackenzie’s current (Q1 2024) long-term price is projected at $950/Tonne of 6% Spodmium in 2029. Converting this value to LCE for a like-for-like comparison yields about $16,000/ton. This is 33% below the $24,000 projected price the company used for forecasts in 2022.
Putting all the information together:
Wood Mackenzie’s 2022 projection (orange) immediately decoupled from actual realized price (blue) shortly after this financial assessment was completed. The financial model used a $21,000 long term price (green) as a conservative baseline, but even the conservative forecast proved too lofty. The current 2024 Wood Mackenzie long term outlook (purple) is well below the rosy 2022 estimates and very close to the negative NPV cutoff (light blue).
At the current long-term Wood Mackenzie price of $16,000, the modeled NPV of the Thacker project would be around $1.5 billion. Given those expected returns, we should ask: Would you like some equity valued at $1 billion behind $2.26 billion in senior debt?
Conditional DOE Loan Announcements Have Historically Preceded Substantial Stock Price Declines
We looked at every current DOE loan in the agency's portfolio under Title 17 and ATVM programs issued to publicly traded companies. We did not include loans provided to Mega Caps (such as Ford, Mitsubishi, and Berkshire Hathaway Subsidiary NV Energy) or privately held firms (such as Tesla Adjacent Redwood Materials) due to the lack of transparency.
In the DOE’s active projects file, we found five projects that were granted at minimum a conditional commitment from the agency to either back or directly issue a loan under the DOE’s Title 17 (and adjacent) programs.
To date, only one of the five examples commitments has been finalized into an actual loan. This was a $100 million loan to Syrah Resources for a lithium reprocessing facility in Vidalia, Louisiana.
In addition to the drastically smaller loan size (23x less than LAC’s loan application), we suspect that Syrah’s financial condition played a significant role in rapid conversion (3 months) from commitment to issuance. Syrah had roughly two times the loan value in net cash at the end of 2021.
The three other projects used for comparison have been stuck in “conditional commitment” status for significant periods of time. And the equity returns for all four prior “conditional commitment” companies has been atrocious.
Congress modified Title 17 of the Clean Energy Financing Act in 2023, removing certain strict underwriting requirements on projects to greenlight more US-funded green infrastructure and industry projects, yielding more applications.
However, as our chart comparing recent DOE “Commitments” shows, more flexible conditions doesn’t mean there aren’t any underwriting requirements. In addition to the moderate financial criteria relaxation, Title 17 Law changes also eliminated lots of legal hoops and fees on the front end, making applying for an application easier and cheaper. Perhaps this is why functionally insolvent EOS Energy was able to get a “commitment” press release out of the DOE for its absurd liquid battery project despite having a threadbare customer book and constantly being on the knife’s edge of filing for bankruptcy protection.
In January of last year, Australian Company Ioneer Inc announced (alongside DOE) a “conditional commitment” for a Lithium Mine processing facility, also in Nevada.
As previously noted, the equity returns off of this announcement have been less than stellar. We think Ioneer provides an example of LAC’s future.
Perhaps more fascinating is that Ioneer’s project shares striking similarities to the LAC project. DOE’s (currently on hold) loan to Ioneer would support the construction of a lithium processing facility associated with a Nevada mine. LAC’s $2.26 billion loan is about 3.2x larger than Ioneer’s proposed $700 million facility. Annual output of the Ioneer plant is projected at roughly 20,600 tons of lithium carbonate per year, or about 3.9x smaller than LAC’s proposed combined phase one and two output of 80,000 tons. The marginal efficiency of scale achieved (implied by a slightly better processing rate per invested dollar) tracks with generally expected outcomes in scaling industrial mining operations.
Ioneer’s net cash in the calendar year prior to DOE commitment announcement was $69 million (YE 2022), or about 10% of the total loan value. This is important, as the DOE Title 17 regulations have explicit terms tied to the total project value, as discussed above.
However, on a strict like-for-like basis, comparing these two foreign-owned, US-listed Lithium companies provides an eye-opening illustration of LAC’s excessive market valuation:
Ioneer’s lithium carbonate reserves are nearly identical to LAC’s, using an economic recoverability model and a nearly identical lithium cutoff concentration (1,090 ppm for Ioneer, 1,047 ppm for LAC).
But General Motors is the largest shareholder? Doesn’t that count for something?
Lithium Americas’ investor relations page helpfully suggests four reasons to invest: one related to the DOE ATVM loan, one related to its dual NYSE and TSX listing, and two related to General Motors’ investment in the company as well as its exclusive rights to Phase 1 production.
We believe that General Motors’ involvement counts for something, but it may not be what bulls think it does. GM has been involved in some of the biggest “green” frauds, including Nikola (NKLA) and Workhorse (WKHS).
GM CEO Mary Barra said this about Nikola:
“This strategic partnership with Nikola, an industry leading disrupter, continues the broader deployment of General Motors’ all-new Ultium battery and Hydrotec fuel cell systems.”
GM also loaned Lordstown $40 million, money it wouldn’t see back.
And when Reuters asked whether a favorable property transaction with Workhorse was a face-saving publicity stunt, Mary Barra defended the plan to sell the 6.2M square-foot manufacturing facility to the flailing company by claiming that Workhorse “has technology and contracts” and had been “thoroughly vetted…General Motors did a lot of vetting,” before telling the reporter, “a little optimism wouldn’t hurt anyone.”
A little optimism might not hurt anyone. Using a spot lithium price 65% over current prices might make your mine economical, but it doesn’t change the current price of lithium, and we think that goes well beyond optimism. We could go on for paragraphs on taking the opposite side of GM investments in Green Energy, but we won’t continue to beat that dead Workhorse.
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