How to Create Value Out of Thin Air

by Keith Schaefer on March 15, 2016

The good management teams create value almost out of thin air.  That’s what Lithium X Chairman Paul Matysek has done in just four months.

Matysek was able to secure 80% of one of the Top 10 lithium assets in the world—called Salar de Diablillos—for no cash; just shares.

There’s a lot of lucky co-incidences for shareholders with this purchase.

One is that this asset is in Argentina, and Matysek bought it the same week that the new Argentine President Mauricio Macri paid out his  American bondholders in full—making any mining or energy asset in that country finance-able for the first time in over a decade.

The second is that Salar de Diablillos is in the Golden Triangle of lithium; the other junior companies with advanced stage projects in the area—Western Lithium (WLC-TSX), Orocobre (ORL-TSX) and Galaxy Resources (GXY-ASX) have at least triple the Enterprise Value of Lithium X. (EV=market cap + debt or –cash).

Matysek was able to leverage his track record in developing energy assets (three buyouts, including one previous lithium play, for over $2.3 billion total) to buy Diablillos—for just 8 million shares of stock, worth about $7 million on the day of the transaction (subject to closing still).  They have to give the seller $5 million worth of stock at a later date for 80% of the asset; so that $12 million total values the entire asset at $15 million.

This asset has had just over $16 million spent on it, including 140 holes, and had several pre-production well & pump tests completed.  It’s not a virgin asset.

So $15 million for a play that management estimates, based on a historic PEA completed in 2011 at a price of $5,000 / ton lithium, will payout in just 1.5 years, and have a 20+ year mine life. The price of lithium has increased a lot since then, with some Chinese prices quoted as high as $18,000/ton. That’s what I call buying right.

The Market liked the deal so much, Matysek was able to raise $7.5 million at over $1/share, before two (much) cheaper financings come free trading.  In four months, he raised money at 15 cents, 30 cents, and now $7.5 million at $1.02/share. And bought a Top 10 lithium asset.

Matysek is moving fast, because there is a race happening in the global lithium space. Everyone sees institutions and fund managers waiting with tens if not hundreds of millions of dollars to invest in the space—but can’t.

You see, when I ask fund managers about investing in lithium—the only commodity in a bull market right now—they all tell me the same thing:

They like the space, but there’s no good way to play it.

There’s no pure play senior producer; lithium accounts for less than 20% of revenues for the three largest producers:

Albemarle (ALB-NYSE)                  15%
FMC Technologies (FTI-NYSE)      7%
SQM (SQM-NYSE)                         12%

And right now the only junior producer that’s a pure play is Orocobre (ORL-TSX/ASX)—with an Enterprise Value of almost $1 billion for an asset only a few kilometers away from Lithium X in Argentina’s Golden Triangle.

These fund managers are begging for another high quality junior in which to invest.  Or even better, another junior producer. (Why Albemarle doesn’t spin off 49% of their lithium assets right now is beyond me.)

Lithium X now has a fully diluted Enterprise Value of roughly $50 million.  And in talking with Matysek, it will take a surprising little amount of spending—and time—to close that value gap.

In a wide-ranging interview last week, he outlined how he thinks the institutional buying will end up at Lithium X.

Matysek is drafting the technical team that can get Salar de Diablillos (renamed Sal de Los Angeles project)  through an updated measured and indicated resource estimate and feasibility and into production.  He said that this  work can start almost immediately, and estimated to cost just over $2.2 million.  There’s an excellent chance it can be completed in 18 months, so that by the end of September 2017 Lithium X will have all the same characteristics of companies that now enjoy triple the Enterprise Value of Lithium X.

For total spending of just $3.2 million, Lithium X can create $100 million in extra Enterprise Value, looking at the comparables today.  That’s what I mean by creating real value out of thin air.

Reading this article, you can tell I’m bullish on lithium and Lithium X.  I have to tell you though, there are 11.7 million shares with just a 15 cent cost base coming free trading on March 27.

Normally, that would cause the stock to have a deep pullback starting March 1. But Matysek has done so much so fast—and is broadcasting that he is 100% focused on this play right now—that shareholders are now afraid to sell.

Because they don’t know what Paul Matysek will do next—or when.

“We’ve got more in the pipeline,” Matysek says.  “We’re negotiating almost every day on something.  We are going to grow and consolidate.

“I’m off to Australia to do marketing and to look at other potential acquisitions and mergers. So we’ve got a pretty busy schedule and like Energy Metals (sold for $1.8 billion) or Potash One (Sold for $434 million) a lot of it has to be done quickly and efficiently.

“The lithium cycle is now. There is a supply squeeze and demand is crazy.  There’s a battery conference in Japan where people were hustling to just get an option on the purchase of spodume rock to mine.”

This could be the clincher for Lithium X—they have the cash now to start making a small scale production facility ready to go.

“If we can get some cash flow in a small way…,” Matysek said, “…one of the big concerns that buyers of lithium carbonate is that you have a certain type…they wait a year before they give you a big contract. They want to test your product over time.

“If we can start getting our product tested, that will save us a lot of angst and time when we actually build a bigger facility.

In a bear market, that long range planning doesn’t get rewarded.  But lithium is the only commodity in a raging bull market.  Matysek and his team will get rewarded now.

It’s rare to find a play with this kind of leverage—where a very small amount of money can create a large difference in Enterprise Value.

You need a management team that can leverage their track record to create value—seemingly out of thin air.

Lithium X management has sponsored and reviewed this article.

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