Lithium Argentina Should Benefit From Strong Demand as Its First Project Ramps Up Production

Strategist

Seth Goldstein

Associate Equity Analyst

Samuel Siampaus

Lithium Argentina is a pure-play lithium producer with two assets in Argentina. The company was created as a result of the former Lithium Americas separation, which separated the firm's Argentina and North America businesses.

Cauchari-Olaroz is Lithium Argentina's first and largest project. The firm owns a 44.8% interest in the project, while Ganfeng, one of the world's largest lithium producers, owns 46.7%. The remaining 8.5% is owned by JEMSE, an Argentine state-owned mining company. The project recently entered production in 2023 and is in the process of ramping up production volumes to the project's first-phase annual capacity of 40,000 metric tons. Additionally, management is planning to begin construction on a second phase for at least an additional 20,000 metric tons of annual lithium capacity. On a cost basis, Cauchari-Olaroz will be one of the lowest-cost producers in the world, and will have a cost position similar to that of other Argentine brine assets in operation.

Lithium Argentina and Ganfeng are also developing a second resource in Argentina. This is in the Pastos Grandes basin, where Lithium Argentina and Ganfeng will likely combine three early stage projects, which are directly adjacent to one another, into one single project. The three projects are Pastos Grandes, Sal de la Puna and Pozuelos-Pastos Grandes. Lithium Argentina owns 85% of Pastos Grandes after selling a 15% stake to Ganfeng. Lithium Argentina also owns 65% of Sal de la Puna. Ganfeng owns the remaining stakes in the three projects. We forecast the single project to enter production early next decade and will likely have a low cost position relative to the global cost curve, but slightly higher than other Argentina brine projects, as early development studies indicate brine in the Pastos Grandes basin has a lower lithium concentration.

As electric vehicle adoption increases, we expect durable double-digit annual growth for lithium demand. Lithium Argentina should benefit as there should be more than enough demand for company's resources to enter production and expand capacity over time.

Business Strategy & Outlook

We award a narrow moat to Lithium Argentina. The firm’s Cauchari-Olaroz asset recently entered production, and given the high-quality brine resource, we think it will have a cost advantage when the first phase is fully ramped up. As the Pastos Grandes project is still in the early development phase, we assign the project a no moat rating. While initial development studies indicate the project would be cost advantaged, there is still too much uncertainty around the project. Cauchari-Olaroz is the larger of the company's two projects, and we estimate it will account for the majority of profits even after Pastos Grandes enters production.

Globally, lithium has been produced from either the evaporation of brine or the mining of hard rock minerals (spodumene or lepidolite). Both of Lithium Argentina's assets are brine-based projects. In general, lithium carbonate production via brine, which is prominent in Chile and Argentina, costs less than lithium from hard-rock resources, including spodumene, which is prevalent in Australia, or lepidolite, which occurs in China. 

The Salar de Atacama in Chile, (where both Albemarle and SQM operate) is the highest-quality lithium brine resource globally because of superior concentration levels and desirable climate conditions (arid climate with high evaporation rates), when compared with other brine resources.

While Chilean brine has a cost advantage on a cash cost basis, this advantage diminishes on an all-in maintaining cost basis, which includes taxes and royalties, and is our preferred cost measurement. Chile enforces a progressive tax rate for lithium producers, where higher realized lithium prices are met with a higher progressive tax rate, while we estimate Argentina’s total royalty and export taxes to be only 7%. Using our current marginal cost of production estimate of $20,000 per metric ton, the Chilean royalty amounts to an effective rate of 27%, well above the Argentine rate. Under our current lithium price forecast, we estimate that Cauchari-Olaroz will be the lowest-cost resource globally on an overall maintaining basis. Even if lithium prices fall below our marginal cost forecast, we estimate the project would still be the lowest-cost resource as long as lithium prices remain above $14,000 per metric ton. As a result, we think Cauchari-Olaroz will prove to have a strong cost advantage versus margin cost producers.

Alternatively, we assign Pastos Grandes a no moat rating. We see the potential for the resource to have a cost advantage versus marginal cost producers once in production. Early development studies indicate Pastos Grandes has a lower lithium concentration versus Cauchari-Olaroz and will likely be slightly higher cost, but still a low-cost project on the global cost curve. However, the project is still in the early development phase and will likely not begin production until at least later in the decade. Given that the project is still in the early development phase, we see too much uncertainty around it to award it a moat rating. Our base case is that Pastos Grandes will enter production early next decade and have a relatively low cost of production. However, additional development work may result in the project being delayed or canceled. Even if the project moves forward, construction risks include higher-than-expected capital costs or material delays. In operation, actual costs could be materially higher than our forecast. As a result of the project uncertainty, we view it as no moat for now, but will reevaluate our rating as the project advances.

Regardless, we think Cauchari-Olaroz’s strong cost advantage will materialize in the next couple of years to generate excess returns on invested capital even in a lower lithium price environment. Accordingly, we are confident Lithium Argentina is more likely than not to outearn its cost of capital over the next decade.

Narrow

Economic Moat

Lithium Americas Argentina Corp

Earnings data Q3 2023

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Lithium Americas (Argentina) Corp. is a resource company, which engages in lithium development projects. Its projects include: Thacker Pass and Caucharí-Olaroz. The company was founded by Raymond Edward Flood, Jr. on November 27, 2007 and is headquartered in Vancouver, Canada.

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