Investors are Missing the Leverage in this Energy Play

by Keith Schaefer on November 28, 2016

INVESTORS ARE MISSING THE LEVERAGE IN THIS ENERGY PLAY
Advertorial by Keith Schaefer

You know what I think most investors are missing about the lithium boom right now?

Leverage.


Demand for lithium is high.  We know that because lithium prices are high.


In their latest quarterly, lithium producer SQM realized prices of US$12,000 per tonne for lithium from its Chilean operations.  In China, lithium is still trading at over US$17,000 per tonne.


Operating margins are high for the few lithium producers there exist today.  And that’s likely to continue, with lithium demand forecast to be strong for years now—driven by Electric Vehicles (EV) and battery storage needs.


But it doesn’t cost very much to prove up a lithium brine asset.  That means with little capital in, shareholders can get a lot out of an economic brine asset.  That’s leverage.


And
Advantage Lithium (AAL-TSXv) just backed into an incredible amount of leverage with their new Joint Venture with lithium producer Orocobre.  It fast tracks the value proposition for shareholders—allowing them to experience the rapid gains of exploration success much sooner than any other lithium stock.

Advantage is acquiring 50% of the
Cauchari lithium project—located just 20 km from Orocobre’s flagship Olaroz mine in one of the Top Producing Lithium Areas of the World—with the option to go to 75%.

Advantage won this beauty contest—this was a
highly sought-after land package, and there were lots of bidders—because of the reputation of the technical team, headed up by Ross McElroy, and CEO David Sidoo’s track record in raising the  capital for their projects.

And that money—they’re raising US$25 million now—is about to create a lot of leverage here for shareholders with
Cauchari

Cauchari already has enough data to hold an inferred resource that equals 477,000 Tonnes of lithium metal—and the deposit is open at depth.  It’s close to
Olaroz, and it has very similar metallurgy. It has everything going for it. It’s one of the top lithium prospects on the planet to be a producer.

McElroy told me on Friday they will likely spend US$7 million at Cauchari within the next two years, essentially taking it to pre-feasibility stage.


What does that mean?  That’s the stage where they’ve done enough drilling to know how much lithium is there, and how much they can economically take out of the ground.


This is the stage where exploration stocks basically peak out.  Look at this well-known graphic of how share prices react to the mining cycle:


1corp

With
Cauchari, Advantage has an asset that is already half way up the green incline.

What has me excited is that McElroy figures only $7 million gets Advantage and Orocobre to the green/yellow peak in the chart.


That $7 million is peanuts.  Many mining assets cost tens of millions in exploration and that again in a feasibility study. And Advantage will have double or triple that $7 million in the bank after this financing.


That is the leverage I’m talking about. A resource estimate on Cauchari conducted for Advantage by an Independent Consultant estimated an inferred resource of 470,000 tonnes LCE and an Exploration Target to be more than 10x—TEN TIMES—the current inferred resource.


So Advantage will spend a paltry $7 million—a miniscule increase in market cap—to create a resource that is possibly 10x what it is now.  With similar metallurgy to the producer 20 km away that their JV partner owns.


What are the chances of them expanding the Cauchari resource times 10?  It’s pretty simple, says McElroy. 


“We really only outlined the inferred resource in 2 zones: the south zone down to 50m depth and the northern zone down to 170m depth. There is a lot of depth potential there as well as lateral potential. On our property we have a drill hole down to 250 metres with mineralized brine and neighboring us, Lithium America’s has shown mineralized brine down to 450 meters. That is a lot of potential upside for us.”


The fact a neighbouring competitor has a resource down to 450 metres—right next door—is a strong sign. McElroy says they are on the other side of the same deposit.


The value creation here for $7 million has a (very) good shot at being incredible.  Shareholders should be very, very happy.


This deal with Orocobre really transforms Advantage.  Just having Orocobre choose you as their partner is a huge coup, and will attract institutional interest. It’s a great validation for both the technical team under McElroy, and the corporate finance team lead under the leadership of CEO Dave Sidoo.


“This is where a company like ourselves can come in and explain to Orocobre this is what we’ve done in the past; how we have developed assets from exploration to pre-feasibility to actual development,” says Sidoo.


“We can fund these projects, we create liquidity in the market and we pitched them on the idea and they thought it was a great that their goals and objective’s aligned with Advantage Lithium’s to become the exploration arm of Orocobre and that’s why they took a 3
rd interest in our company. And put two Orocobre board members on our 6-person board of directors.”

But not only is Orocobre their partner, and sharing their lead development asset with Advantage, the producer becomes a major shareholder.  Orocobre will own just under one-third of Advantage—and have a three-year lockup on that stock.

That’s a huge commitment.  Orocobre also has a 1% royalty on
Cauchari, and has first right of refusal on commercial lithium product.  That aligns their interests.

The
Cauchari JV is just the start.  In addition Advantage acquired from Orocobre a 100% interest in 3 other earlier stage projects as well as an additional 2 projects that are under application with the government.  This portfolio compliments Advantage’s Stella Marys project they acquired in September, which borders another key Orocobre property, the Salinas Grandes deposit. 

“All of our assets are located strategically, right in the heart of the salars and not on the edges and even further away as some companies have done,” says McElroy.  And of course, Orocobre staked them years ago, when nobody else cared about lithium.


Advantage got all this—for NO cash.  Orocobre took all Advantage stock, and agreed to stay invested for at least years.  Even on a stock basis, it was a cheap deal for AAL—it works out to under $500/hectare for the heart of the best lithium brine salars in Argentina, when many other companies are paying $2000/hectare for acreage along the edges of salars.

McElroy says they’re going to work right away on all these assets, and potentially create value even faster than people think:


“We’re going to be an aggressive company which is something I like a lot. This group of people that David Sidoo has assembled has a track record of successfully moving projects along. It’s fun to be involved with a company that’s dynamic. This is a group that won’t just sit on its heels and we’ll be working these assets.”


Creating the leverage that lithium assets can like almost no other in the energy mining business.

AAL management has reviewed and sponsored this article.
The information in this newsletter does not constitute an offer to sell or a solicitation of an offer to buy any securities of a corporation or entity, including U.S. Traded Securities or U.S. Quoted Securities, in the United States or to U.S. Persons.  Securities may not be offered or sold in the United States except in compliance with the registration requirements of the Securities Act and applicable U.S. state securities laws or pursuant to an exemption therefrom.  Any public offering of securities in the United States may only be made by means of a prospectus containing detailed information about the corporation or entity and its management as well as financial statements.  No securities regulatory authority in the United States has either approved or disapproved of the contents of any newsletter.
Keith Schaefer is not registered with the United States Securities and Exchange Commission (the “SEC”): as a “broker-dealer” under the Exchange Act, as an “investment adviser” under the Investment Advisers Act of 1940, or in any other capacity.  He is also not registered with any state securities commission or authority as a broker-dealer or investment advisor or in any other capacity.

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