Standard lithium: production increases may warrant higher FCF (NYSE: SLI)

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Standard Lithium Ltd (NYSE: SLI) has, in my opinion, many signs of an impending increase in production, and the CEO has recently executed some options. The technical report prepared by the engineers also indicates an increase in production from 2023 to 2027. Using the production figures obtained by SLI, and incorporating the recent increase in the price of lithium, my discounted cash flow (“DCF”) analysis resulted in a fair price higher than the current market price. Even taking into account the risks and the lack of cash to pay 100% of the necessary capital expenditure, SLI is a security to watch very closely.

standard lithium

Standard Lithium is a lithium development company that already has a direct lithium mining demonstration plant in southern Arkansas using LiSTR technology.

I think now is the time to assess the company for two reasons. First, the most recent news clearly indicates that production could accelerate in the coming months. Management recently hired a company to conduct a FEED/DFS study.

The company has completed a competitive FEED/DFS selection process and is pleased to award the contract to OPD LLC, a Koch-owned company based in Katy, Texas. The FEED/DFS study and subsequent EPC contract focuses on the first commercial lithium project developed by Standard Lithium. Source: press release

Standard Lithium also continues to add personnel reporting expertise in delivering projects, which I believe is another indication of optimism about future production.

The company recently added key personnel to the executive and management team in newly created positions to extend project delivery expertise in support of its commercial-scale developments. Source: Update from Standard Lithium Standard Lithium Ltd.

With the previous information in mind, I wonder if the latest option execution by the CEO and CFO means revenue growth is ahead. I believe the following information is worth noting:

The Company also announces that Robert Mintak, the Company’s Chief Executive Officer, Dr. Andy Robinson, the Company’s President, and Kara Norman, the Company’s Chief Financial Officer, exercised a total of 1,400,000 stock options. incentive actions. Source: Update from Standard Lithium Standard Lithium Ltd.

The company may soon need more cash to finance Capex and Opex

As of March 31, 2022, the company had reported $136 million in cash, exploration and evaluation assets worth $34 million, and total assets worth $178 million. The total amount of liabilities looks very small, which is attractive. However, management will have to raise a lot more money to pay for future opex and capex.

10-Q

10-Q

As shown in the image below, I don’t really see any outstanding debt, which seems quite beneficial. In my opinion, management can talk to the banks in order to obtain debt financing.

10-Q

10-Q

Flagship project could tip stock price trend north

According to documents drawn up by the management, the flagship project is expected to last 20 to 25 years and would require a total investment of $437 million. This means that Standard Lithium would operate until around 2045.

Management proposed an economic evaluation a few years ago. Thus, the recent increase in the price of lithium was not included in the company’s reports. Assuming an average sale price of $13.55K per ton and an 8% discount, the NPV would be close to $989 million and the IRR would be 36%.

Source: company website

Company Website

I found the financial model used to get the net present value of the project and got some financial statistics. It helped me understand how it would affect an increase in the price of lithium. Keep in mind the price has gone up to 40k per ton.

Source: AEP

PEAS

The company’s sensitivity analysis didn’t even consider that the price of lithium could rise that much. The maximum expected lithium price increase was no more than 20%.

Source: AEP

PEAS

According to Standard Lithium’s assessment, net cash flow/sales would increase from 28% to almost 50%. I think an increase in the price of lithium would lead to a better cash margin. However, I wanted to remain conservative. Perhaps inflation or salary increases are decreasing the company’s profitability.

author's work

author’s work

The price of battery-grade lithium carbonate EXW China closed at $41,925 per ton at the end of the year, a year-on-year increase of 485.8%. Source: The cost of lithium increases in 2021 and continues to increase in 2022 | S&P Global Market Intelligence

If we assume a production of 20.9k tons from 2026 to 2045 and a price per ton of 27k, at 8%, the net present value would be $2.36 billion. If we add the cash of 103 million dollars or 136 million Canadian dollars, the shareholders’ equity would reach almost 2.4 billion dollars. Finally, the implied price would be $14.9 per share.

author's work

author’s work

My bearish case scenario would include lower than expected production, increased cost of equity and equity dilution

Among management’s worst nightmares, I believe there is a significant drop in expected production. According to company filings, management reports 3.14 million tonnes of Indicated LCE Resources, which would mean 20.9k tonnes per year. If management does not find this level of resources in the future, production would be significantly lower. Therefore, as soon as equity analysts take notice, I think free cash flow expectations will drop, which could drive the stock price down.

Source: company website

Company Website

If the free cash flow estimates go down, in my opinion, the cost of equity will most likely go up. Therefore, I think using a cost of capital above 8% would make a lot of sense. As for the price per ton, I decided to use a price of $27,000 per ton, which is low and conservative enough. Right now the price is over 40,000 a ton.

In my view, Standard Lithium will most likely raise more capital to fund future capital expenditure efforts and operating expenditures. As a result, owners of the Company’s stock warrants may sell or convert their convertible securities, which may result in further stock dilution. In the worst case, an increase in the number of shares could cause the share price to fall. Note that I have assumed, in this scenario, a number of shares of 200 million, which is significantly higher than the current number of shares outstanding.

On February 16, 2018, the Company closed a brokered private placement and issued 10,312,821 units of the Company at a price of $2.10 per unit, for gross proceeds of $21,656,924. Each unit consists of one share and one-half share warrant (each whole warrant, one unit warrant. Each unit warrant could be exercised to acquire one share at an exercise price of $2.60 for a period of two years, a fee of $2,165,692 in cash, issued 309,384 shares and granted 721,897 compensation options exercisable for one unit until February 16 2020 at an exercise price of $2.10.

In the context of very traumatic events, I assumed that Standard Lithium would eventually find two-thirds of the total expected production. I also included a 10% discount and significantly reduced the expected net cash flow/trade margin. From 2024 to 2028, the company would report gross revenue close to $325 million and $375 million, with net cash flow/sales around 20%. Also, from 2039 to 2045, the future gross revenue would be approximately $375 million and the fair price would be $3.5 per share.

author's work

author’s work

Risks include lack of funding, geological model failure and new regulatory models

The company noted very clearly, in one of its documents, that a lack of financing could happen. In my opinion, without proper funding, we can be sure that production will probably be lower than expected. Free cash flow expectations would most likely decline, driving down the stock price.

There can be no assurance that debt or equity financing, or that cash generated from operations will be available or sufficient to meet such requirements or for other corporate purposes or, if debt or equity financing is available, that it will be on terms acceptable to the Company. . In addition, future activities could require the Company to significantly modify its capitalization. Source: Annual Report

Additionally, Standard Lithium advised that the mineral deposits may not be commercially viable due to fluctuations in commodity prices. The size of the Company’s deposit and geological properties could also adversely affect the Company’s free cash flow margin. Finally, changes in environmental regulations can result in higher costs and lower net project cash flow.

The Company’s business strategy is largely dependent on the development of the Arkansas Lithium Project into a commercially viable mine. The commercial viability of a mineral deposit depends on many factors, including: 1) the particular attributes of the deposit, such as size, quality, and proximity to infrastructure; 2) commodity prices, which are very volatile; and 3) government regulations, including regulations relating to prices, taxes, royalties, land tenure, land use, import and export of mineral resources and mineral reserves, environmental protection and capital and operating cost requirements. Source: Annual Report

Conclusion

Considering the documents delivered by the management, recent news and the business activity of the CEO, in my opinion, the production could accelerate soon. In my opinion, the economic report on the company’s flagship project is a bit outdated. Assuming future production is accurate and using a price of 27,000 per ton, I got a valuation significantly above the current stock price. There are risks, and Standard Lithium is a bit speculative as I don’t think management has all the cash to pay for expected investments. With that, in my opinion and given the reserve reports, the stock price is too low.

About Myra R.

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