On today’s TSX Breakouts report, there are eight stocks on the positive breakouts list (stocks with positive price momentum), and 63 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock whose share price has skyrocketed, rising over 200 per cent year-to-date. The stock appeared on the positive breakouts list last month with its share price closing at a record high on Oct. 5. However, since then the share price has plunged 39 per cent. The recent price weakness may soon represent a buying opportunity for long-term investors. The average 12-month target price suggests there is 28 per cent upside potential over the next year. The company discussed today is Lithium Americas Corp. (LAC-T).
A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
Vancouver-based Lithium Americas is advancing its two flagship lithium projects, Cauchari-Olaroz located in Argentina and its 100-per-cent owned Thacker Pass project located in Nevada, U.S.A.
Cauchari-Olaroz has the largest known lithium brine resource in South America. The mine has access to power and water and is conveniently located on an international highway. The company is in a joint venture on this project with Ganfeng Lithium Co. Ltd. (China’s largest lithium producer with a 51-per-cent interest). The Cauchari-Olaroz lithium project (Lithium Americas has a 49-per-cent interest) experienced delays with construction now anticipated to be completed at the end of 2021 (approximately 50-per-cent complete at the end of Aug. 2020) with production expected to begin in early 2022. According to its DFS (Definitive Feasibility Study) released in Sept. 2019, Cauchari-Olaroz has expected average battery-grade lithium production of 40,000 tonnes per annum and a mine life of 40 years. Operating costs are expected to be U.S. $3,579 per tonne. The project is fully-funded. As of Sept. 30, the company had U.S. $54-million of cash on its balance sheet and U.S. $202-million in capital available from undrawn credit and loan facilities.
Thacker Pass, its 100-per-cent owned project in Nevada, is a large-scale, low-cost project. A pre-feasibility study completed in 2018 indicated a production capacity of 60,000 tonnes per annum (two phases: 30,000 tonnes per annum beginning in 2022 with phase one rising to 60,000 tonnes per annum by 2026 with phase two), a mine life of 46 years with cash costs of under U.S. $2,600 per tonne (open-pit mine). The president and chief executive officer Jon Evans provided an update in a news release issued on Oct. 20, “In Nevada, the permitting process continues to progress as planned with the public comment period complete on the Draft EIS (Environmental Impact Statement) and local support with the recently approved tax abatements from the Governor’s Office of Economic Development. Finally, the company has decided to implement an ATM Program (at-the-money equity program that will allow the company to issue up to U.S. $100 million of shares from its treasury) to strengthen our position as we advance discussions with potential partners and customers at Thacker Pass”. All major permits are anticipated to be received by the end of March 2021.
The stock is dual-listed, trading on the Toronto Stock Exchange and the New York Stock under the same ticker, LAC.
Investment thesis highlights
- Industry leader. Its 100-per cent owned Thacker Pass project located in Nevada is the largest known lithium project in the U.S. While, Cauchari-Olaroz has the largest known lithium brine resource in South America.
- Company milestones that may drive the share price higher. 1) Permitting is completed at the Thacker Pass project in Nevada 2) A deal or partnership is secured to help finance its Thacker Pass lithium project 3) A DFS on the Thacker Pass project is announced. 4) Once construction of its Cauchari-Olaroz project in Argentina nears completion, the stock may be rerated (the stock’s valuation may rise) as investors look ahead to production beginning.
- Bullish investor sentiment. Lithium-ion and lithium polymer rechargeable batteries are used in cell phones, laptop devices, and electric vehicles – and demand for these products will grow. In the years ahead, electric vehicles will gain momentum as infrastructure and convenience increases, affordability improves, and environmental concerns grow. In Sept., chief executive officer Elon Musk of Tesla said the company will produce an affordable electric vehicle costing U.S. $25,000 in roughly three years.
- A Biden win. If Joe Biden wins the upcoming U.S. Presidential election, this will shine a spotlight on clean energy. He has proposed a $2-tillion climate plan, pledging money that will accelerate electric vehicle adoption.
- Lithium prices. Lithium prices peaked in 2018 and have drifted lower since then due to an oversupplied market. Supply/demand fundamentals are anticipated to improve by 2022.
- Insider ownership. Management and directors own 12 per cent of the shares outstanding, aligning interests of the company’s leaders with its shareholders.
Management is focused on advancing its lithium projects, and as a result, the company currently does not pay its shareholders a dividend.
There are five analysts actively covering this small cap stock with a market capitalization of $1.17-billion. Since August, five analysts have issued research reports, of which three analysts have buy recommendations and two analysts have neutral recommendations.
The five firms that providing recent research coverage on the company are as follows in alphabetical order: BMO Capital Markets, Cormark Securities, Jefferies, National Bank Financial, and Roth Capital Partners.
In Oct. four analysts revised their expectations – three analysts lifted their target prices and one analyst reduced his forecast.
- Jefferies' Laurence Alexander increased his target price to U.S. $17 (the high on the Street) from U.S. $11.
- National Bank Financial’s Rupert Merer raised his target price to U.S. $12.50 from U.S. $10.
- BMO Capital Markets' Joel Jackson lifted his target price to Cdn $10 (the low on the Street) from Cdn $8.
- Roth Capital Partners' Joseph Reagor trimmed his target price by U.S. $1.50 to U.S. $13.50.
All financial figures are expressed in U.S. dollars.
The Street is forecasting revenue of $58-million in 2020, $77-million in 2021, and $289-million in 2022. The company is anticipated to be profitable in 2023.
The company is in the development phase of its projects and as such a meaningful ramp-up in revenue in several years away. Consequently, the stock can be valued using a discounted cash flow analysis.
According to Bloomberg, the one-year average target price is Cdn. $16.49, suggesting there is over 28-per-cent upside in the share price over the next 12 months. Individual target prices are as follows in numerical order: Cdn $10 (from Joel Jackson, the analyst at BMO Capital Markets), Cdn $16, U.S. $12.50, U.S. $13.50, and U.S. $17 (from Laurence Alexander, the analyst at Jefferies).
Insider transaction activity
Most recently, on Sept. 22 and Sept. 23, Alex Shulga, vice-president – finance, sold a total of 9,702 shares at an average price per share of approximately $11.01. Proceeds from the sales exceeded $106,000, excluding commission charges.
On Sept. 18, Alec Meikle, vice-president of corporate development, exercised his options and rights, and sold 124,512 shares in the public market at a price per share of $13.75. The previous month, on Aug. 17, Mr. Meikle exercised his options and rights and sold 200,000 shares in the public market at a price per share of $11.0951.
On Sept. 15, chief financial officer Eduard Epshtein exercised his options, receiving 65,000 shares at a cost per share of $1.50, and sold 65,000 shares at a price per share of $11.33. Net proceeds totaled over $638,000, not including any associated transaction fees.
Prior to that, no trading activity was reported by insiders unless you look back to April 2020.
Year-to-date, this materials stock has seen its share price rally over 200 per cent. While the price return is impressive, the stock price can be quite volatile with sharp moves higher and lower. This volatility may provide investors with a future buying opportunity.
Since closing at a record high of $21.05 on Oct. 5, the share price has declined 39 per cent. However, the selling action has been on relatively average volume. For instance, on Fri. Oct. 30, the share price dropped 4.5 per cent with over 965,000 traded on the Toronto Stock Exchange according to Bloomberg, just slightly below the three-month historical daily average trading volume of 1.05-million shares.
Despite the price correction, the stock is not in oversold territory. The relative strength index (RSI) is at 43. Generally, a reading at or below 30 suggests an oversold condition.
In terms of key support and resistance levels, the stock is trading near support of $13, close to its 50-day moving average (at $13.12). Failing that, there is major support around $10. Looking at the upside, there is initial overhead resistance around $15. After that, there is a major ceiling of resistance around $20.
The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts' recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indices that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
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