September 7, 2017
Price (as of close, 9/6/17): A$.165
We believe that Altura, Ticker: AJM (ASX) or ALTAF(OTC), is one of the more undervalued Lithium stocks. In the following post, we strive to present our analysis on the the company and our outlook for the stock.
Altura Mining is an under-followed miner that is targeting production in 2018. We believe this name has flown somewhat under the radar and provides significant upside potential over the next few years as they ramp up production to full capacity. With the lithium supply market expected to remain tight, and demand potentially overshooting industry forecasts, there is significant room for upside in the stocks of miners that can properly develop and execute on their projects. We believe Altura Mining is such a candidate, with 2017, 2018, 2019, and 2020 fair values of A$.24, A$.37, A$.42, and A$.49, respectively, compared to a current stock price of A$.165. Our valuation is based on discounts to the 2020 acquisition valuation, the year in which we model Altura reaching full production.
Altura Mining, based in Western Australia, is operating a hard-rock lithium project in Pilgangoora, Western Australia. The company is expecting to be the first new hard-rock producer coming online in 2018. Although many investors have probably heard about Pilbara Minerals, they do not know much about Altura, who is developing their project in the same neighborhood. This is why Altura caught our eye- they share a resource, are targeting to come online around the same time, but are currently trading at a lower multiple.
As the above chart from Altura’s recent presentation shows, their management team consists of experienced mining industry veterans with a high-level of knowledge about the mining and production process. That may seem obvious for a mining company, but a lack of relevant experience has never stopped companies from hiring executives in the past. Thus, we are encouraged by Altura’s operators and the passion they share for lithium.
However, the one issue with having so many operations oriented individuals is that the company isn’t as good at broadcasting their strengths to the market. We believe this is one of the reasons why the company isn’t as widely followed as some of their peers like Pilbara, Nemaska, or Lithium Americas. It should be noted though that while this is an issue for existing shareholders, it presents an opportunity for investors looking to get into the stock.
In our lengthy conversation with management we brought up this perceived lack of marketing and self-promotion many times. We certainly weren’t the first to notice or even bring up the issue to management, but it seems like they must have been thinking the same thing because over the last few weeks, they’ve been much more active on social media, using the platform to more effectively communicate their progress to investors and market watchers. We read this as a positive not only because it will bring more attention to their operations, but also because it shows that management is willing to take constructive advice from stakeholders.
Finally, we want to mention that we left our conversation with management reassured by their ability to execute and develop the Pilgangoora project. From our conversation, they seem like honest, straight-shooters. They provided very straightforward answers that made us confident they are focused 100% on developing the Pilgangoora project, and ramping up production as quickly and efficiently as possible without cutting corners.
Pilgangoora Lithium Project
The Pilgangoora project has many favorable characteristics- it has close proximity to ports, a good quality resource, and low operating costs. We know that they have an ore reserve estimate of 30Mt at 1.04% Li2O, and an initial mine life of 13 years (based on the original 20Mt reserves estimate from the 2016 DFS) while producing an average of 220 ktpa of 6% Li2O spodumene concentrate at an estimated operating cost of A$316/t. Additionally, the DFS revealed a low strip ratio of less than 3:1, which helps keep operating costs lower.
Altura’s location is ideal. They are in the heart of mining country for Australia and are very close to all the right roads and ports to help them ship out their Lithium efficiently. This is important to note with any Lithium provider since having easy access to necessary infrastructure will help lower the operating costs leading to the company having higher margins.
The initial capex for the Pilgangoora project is expected to be approximately A$140m, including sustaining capital requirements. The company raised this amount through a Senior Secured debt facility which was finalized at the end of July. The terms of the deal are summarized as follows:
- They’ll take 6.5% directly off the table
- Interest rate will start at 14% rising to 15% after 18 months
- The deals allows for a mechanism to pay down or replace entirely after 12 months
- The company can repay $25m at a time
Management told us that if all goes well, they hope to start the paydown of debt in the second half of 2018, expecting completion by 2019.
Finally, the company had about A$37m in cash at the end of March, which will help cushion the company in the event of delays or cost overruns. Any remaining cash will also help with working capital requirements.
- AUD to USD conversion ratio assumed at .79
- Management is hoping to produce around 100kt of 6% spodumene concentrate in year 1, or about 15,000t LCE. They are hoping to ramp up to full capacity by doubling that in Year 2 to 200kt. However, in our model, we wanted to be more pessimistic in case the company runs into delays in the construction and commissioning phases. So we estimated 50kt in 2018, growing to 100t in 2019, and 200t in 2020.
- We estimated that spodumene prices will remain stable in 2018. However, for modeling purposes we dropped the pricing in 2019 and 2020 to account for uncertainty in the outlook over a multi-year period.
- Operating costs per ton were taken from the DFS- A$316/t, of $249.64
- Maintenance capex was estimated at 3% of Invested Capital (A$139m). Also, the company has stated that the A$139 of capex includes maintenance capex requirements. So given that we don’t have a breakdown of that number, maintenance capex was by default slightly overestimated in our model. However, the difference is minimal and does not meaningfully impact the valuation.
- The EBITDA multiple used for valuation is low at 8x- with only a 15 year initial mine life, any potential acquirer of the business wouldn’t be willing to pay too many times yearly earnings. We feel that 8x would adequately account for the shorter mine life offset by the potential for doubling output via stage 2 expansion.
- In valuing Altura today, we set out to determine the company’s NAV at peak production, which we estimate could be reached by 2020. Then applied a discount to that NAV in each year. For example, in 2017, there is a long runway left to go and a lot of room for executional risk before they reach their peak production. Thus, we only value the company at 30% of 2020 NAV for 2017. As we move forward and the company continues to execute and ramp up production to full capacity, the gap between the current valuation and 2020 NAV will close, as evidenced in the third table above.
As we see above, if Altura can execute in a timely manner and ramp up to peak production, there is a lot of room for growth in the stock. Just based on the expected project operating performance, and a modest EBITDA multiple, the stock could reach A$.77 by 2020, or almost five times today’s price! While returns like this sound too good to be true, let us reiterate that there is a ton of execution risk between now and then, so this valuation should be revisited periodically (something that we will do for our readers) to make sure that it reflects accurate market conditions.
Discount to Peers
Now that we have outlined where we believe the valuation can grow to from current levels, we want to take a look at why the stock is currently trading at a discount. This analysis will help investors better understand what needs to happen before the stock can close the gap and reach it’s potential.
As we see in the table below, Altura is expecting to be one of the earliest producers to come online in the next year and will be one of the first new Lithium producers to come online since Orocobre, Galaxy or Mineral Resources. However, from a strictly market cap standpoint, Altura is more than 50% below Pilbara. It is almost 50% below Nemaska and Lithium Americas as well.
*Estimated based on company forecasts
Although that is a wide difference, we do understand that a lot is at play when it comes to sheer magnitude of market cap- expected production levels, EBITDA, growth rates, etc. Thus, we also took a look at valuation multiples for these same firms, as shown below.
*LAC is not expected to begin production until 2019, so their expected EBITDA is much lower than Altura or Pilbara. Thus it is not appropriate to compare multiples with those companies who will be in a more advanced stage of production. Using LAC’s 2020E EBITDA, which would be their second year of production, yields an EBITDA multiple of approximately 5.3x. This multiple is more inline with Altura and Pilbara’s Year 2 multiples.
As we see from the above table, Altura is trading at a discount to peers. However, we don’t view this as a reason to buy Altura relative to the group, because their project has an expected initial mine life of only 13 years, vs. 36 years for Pilbara and 40 years for Lithium Americas. Thus, that would explain why the market is valuing them at a discount- the duration of expected future cash flows is relatively shorter than those of their peers. Additionally, while we are on the topic, one could potentially wonder whether LAC is getting too high of a multiple at this present time given that they are still at least 18 months away from production. But we will be exploring that for you in our soon to come Lithium America’s analysis, so stay tuned!
So now that we know the stock is not cheap relative to peers, we can eliminate any arbitrage opportunity from reasons why the stock will close the gap between the current stock price and our expected valuation. However, that doesn’t mean that the stock is not undervalued? As we saw in the valuation section, the stock has a lot of room to the upside even without multiple expansion, given the fact that their EBITDA will grow over time. Now let’s take a look at a few other factors that will help the stock reach it’s potential.
Economics 101: We think it is extremely important to think about investing within this space from a supply and demand perspective. As previously noted in our Supply II post and also by many other well respected analysts, supply tightness is a strong possibility for the remainder of 2017 and 2018. We want to take advantage of Lithium pricing increasing, or at least remaining at these historic levels by sifting through the new producers expected to come online next year. With increased pricing, if Altura comes online on schedule, the stock would be a great investment over the next 8-12 months as they take advantage of elevated pricing. As we saw in the above tables, at these elevated prices for spodumene, Altura is severely undervalued. Furthermore, it could make for a longer-term investment as well, but we will have to continue to follow them and the broader industry during the production ramp-up phase.
Flying under the radar: In contrast to many other Lithium Junior Miners, this management is focused purely on mining and their operations at their site. You’ll notice that compared to other Junior miners, they have very low visibility. They do not produce a lot of press releases, update their presentations very often and overall, you won’t find hear a lot about management in general. This is why among other reasons, the stock price is undervalued. Altura is not a well known company and when this changes, you’ll see that their stock price should change along with it. You’ll also notice that management has already started to make a concerted effort – starting to tweet out progress on their construction site several times over the last weeks.
Additionally, Altura lacks research analyst coverage. Esteemed professor Paul Johnson of Nicusa advisors, (disclaimer: he was our professor), often talks about stocks that are underfollowed. Altura is a classic example of this story. When you go to their site, you’ll see that they have coverage by two analysts.
And speaking of their site, until recently, the website for Altura was mediocre and just functioning at the bare minimum. However, the company recently redid the site which will make it much easier for potential new investors to discover and learn more about Altura Mining. In summary, our point is that this lithium stock is flying well under the radar and, until discovered, could be a real value based opportunity.
Company Roadshow: Going along with the last point, we are aware that management is on a road show meeting with other investors in the U.S.. This will give outside investors, specifically hedge funds, a greater understanding of their hidden value.
Stage 2 Expansion: A major upcoming catalyst could be an announcement which might occur in Q1 of 2018. The company noted in an interview with Mastermines that they are looking into potentially doubling production. This would obviously be very significant for future cash flows without having much of an effect on fixed costs. Management noted that the mine wouldn’t need to be expanded, they would just add a night shift of miners to increase output. Some factory expansions would need to occur, but that cost is minimal compared to mine development. Note, we have taken into account this doubling of output via expansion when considering the EBITDA multiple used for valuation.
LIT ETF Catalyst: Global X Funds’ lithium ETF, LIT, already owns a basket of the Junior miners as seen below. Yet, Altura, which again should produce before many of the others in the list below, is not yet currently owned. A sizable purchase of Altura by the ETF could help lift the shares upward and provide further momentum.
China Demand: The world, more specifically, China, needs more Lithium Hydroxide which Altura will help supply. In management’s words “our Chinese partners want to take every bit we produce over the next year.” Furthermore, we also saw this noted in the most recent SQM earnings call which we summarized up here. Altura is a producer of Spodumene which will be shipped off to China where it will be converted to Lithium Hydroxide primarily for the electric car market. It is this particular form of Lithium, more so than Lithium Carbonate, which is growing rapidly in terms of demand.
Current Shareholders: If you’re a current investor or a future investor, you’ll want to make sure that some of the largest key stakeholders will help drive value. One of the key investors who is well recognized and well respected in the mining space is Pala Investments. Pala was one of the first investors to realize and take advantage of the Cobalt boom before it was a “popular trade”. To date, the company has only invested in one Lithium project and it is Altura. For more on them, you can read the most recent article on bloomberg found here.
Other Positive Attributes
Management Endorsement: Management really believes in their company. Most recently, the company raised capital through a debt deal in order to fund their operations through production. This is important as the company could have sought out an equity deal but preferred to maintain their ownership level of the company as is. They did not want to dilute their ownership or the ownership level of their shareholders at all since they see a high amount of value in the company itself. Additionally, as they de-lever the balance sheet, the stock will appreciate to either expand or maintain their EBITDA multiple (for example, if they paydown $100m of debt, the enterprise value, or EV, will be $100m less, but the EBITDA will remain constant, causing the EV/EBITDA multiple to contract. Thus, to maintain a constant multiple, the stock will have to adjust upward to raise the EV)
Shareholder Friendly: Management has stated that they have two objectives which are 1. To become debt free and 2. To eventually pay a dividend to shareholders. This, combined with the aforementioned receptiveness to stakeholder thoughts, shows that this company is very shareholder friendly, which is a crucial attribute to any potential investment opportunity. An investor with Altura could potentially earn significant upside and, down the road, some consistent cash flows as well.
Risks to thesis
There is a fair amount of execution risk as the company is pre-revenue, and pushing for an aggressive timeline. Additionally, in the valuation section we estimate a ramp up for the company. But in reality this can get delayed by a number of factors (just look at Orocobre, who still won’t reach nameplate capacity in 2018, their 3rd full year of operations).
The other major risk to our thesis, which is the same for all miners is a shift in the supply/demand expectations. If ample new supply floods the market, or demand doesn’t live up to expectations, it would not bode well for lithium mining stocks longer term. Such an event would lead to both sales volume and pricing declines as well as profit margin contraction.
Disclaimers and Disclosures:
- All thoughts presented are our own. These views are not investment advice, and investors should do their own research before entering any position.
- We have not received any payment at all for this analysis.
- We do not own stock but we plan on potentially purchasing in the near future.