On today’s TSX Breakouts report, there are 75 stocks on the positive breakouts list (stocks with positive price momentum), and just six stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that appeared on the negative breakouts list at the beginning of the month - Lithium Americas Corp. (LAC-T).
On Jan. 3, the share price closed at its lowest level since mid-2021. However, the share price has since roared back, rising nearly 17 per cent year-to-date. With its share price closing at $29.94 on Friday, it is currently hovering around major resistance at $30 (near its 50-day moving average). Consequently, the positive price momentum may pause, but potential near-term catalysts may soon lift the share price above this ceiling of resistance.
A brief outline on Lithium Americas is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Vancouver-based Lithium Americas is advancing several lithium projects: its 100-per-cent owned Thacker Pass project located in Nevada and its Cauchari-Olaroz and Pastos Grandes projects in Argentina.
In addition, on Dec. 20, the company announced its plan to acquire Arena Minerals Inc. (AN-X), an exploration-stage company with its lithium brine asset, Sal de la Puna (SDLP), located next to Pastos Grandes.
Thacker Pass is a large-scale, low-cost project. Details from a feasibility study are expected to be released this quarter with management targeting production capacity of 40,000 tons per annum with Phase 1 rising to 80,000 tons per annum with Phase 2. A 2018 pre-feasibility study indicated a production capacity of 60,000 tonnes per annum (Phase 1 production capacity of 30,000 tonss per annum increasing to 60,000 with Phase 2), a mine life of 46 years with cash costs of under US$2,600 per tons(open-pit mine).
The Cauchari-Olaroz mine has access to power and water and is 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 has an 51-per-cent interest with Lithium Americans owning the remaining stake. After experiencing delays, Cauchari-Olaroz is nearing production, which is now anticipated to begin in the first half of this year. According to its Definitive Feasibility Study released in Sept. 2019, Cauchari-Olaroz has expected average battery-grade lithium production of 40,000 tons per annum and a mine life of 40 years. Operating costs are expected to be US$3,579 per ton. Later this year, construction of its Stage 2 expansion for Cauchari-Olaroz is expected to begin.
Pastos Grandes is a 100-per-cent owned project in Argentina that the company acquired with the purchase of Millennial Lithium Corp. in January of 2022. This project is roughly 100 kilometers away from its Cauchari-Olaroz project. According to a 2019 feasibility study, this project has a production capacity of 24,000 tons per annum of lithium carbonate and over a 40 year mine life.
On Nov. 3, management announced its plan to create two lithium public companies, subject to approvals. Management believes it can unlock shareholder value by separating its U.S. and Argentina operations.
The stock is dual-listed, trading on the Toronto Stock Exchange as well as the New York Stock Exchange under the same ticker, LAC.
Investment thesis highlights
- Strong consumer demand for electric vehicles (clean energy).
- Future supply/demand imbalances. In the coming years, future lithium demand is anticipated to outstrip supply. Lithium-ion and lithium polymer rechargeable batteries are used in cell phones, laptop devices, and electric vehicles – and demand for these products is rising. Electric vehicles are gaining popularity as infrastructure and convenience increases, affordability improves, and environmental concerns rise. On Tesla’s fourth-quarter earnings call held on Jan. 25, chief executive office Elon Musk noted the record demand for electric vehicles, “Thus far in January, we’ve seen the strongest orders year-to-date than ever in our history. We currently are seeing orders at almost twice the rate of production.”
- Potential catalysts that may drive the share price higher: 1) separation of the company’s U.S. and Argentina operations; 2) production commencing at Cauchari-Olaroz; 3) potential stock re-rating (the stock’s valuation may rise) with production anticipated to begin shortly at Cauchari-Olaroz; 4) results from its feasibility study on the Thacker Pass project are expected to be announced this quarter.
- Key potential risks to consider: 1) rising costs; 2) delays; 3) funding/capital requirements; 4) lithium price volatility; and 5) high share price volatility.
Dividend policy
Management is focused on advancing its lithium projects. so the company does not pay its shareholders a dividend.
Analysts’ recommendations
According to Bloomberg, there are 16 analysts actively covering this mid-cap stock with a market capitalization of $4-billion. The stock has 14 buy-equivalent recommendations, one “hold” recommendation (from TD’s Craig Hutchison), and BMO’s Joel Jackson is currently restricted on the stock as BMO Capital Markets is a financial advisor to Lithium Americas on its plan to acquire Arena Minerals Inc.
Firms that provide research coverage on the company are: B Riley Securities, BMO Nesbitt Burns, Canaccord Genuity, Cormark Securities, Cowen, Deutsche Bank, Eight Capital, Evercore ISI, HSBC, Jefferies, Morningstar, National Bank Financial, Piper Sandler, Scotiabank, Stifel Canada, and TD Securities.
Revised and new recommendations
Thus far in January, two analysts lowered their price targets and one initiated coverage on the company.
- Deutsche Bank’s Corinne Blanchard to US$30 from US$34.
- National Bank’s Lola Aganga to US$38.50 from US$42.50.
- Scotiabank’s Ben Isaacson initiated coverage with a “sector outperform” recommendation and target price of US$36.
Financial forecasts
According to Bloomberg, the Street is forecasting revenue of US$284-million in 2023, ramping up to US$521-million in 2024. The consensus EBITDA (earnings before interest, taxes, depreciation and amortization) estimates are US$155-million in 2023 and US$362-million in 2024. The consensus earnings per share estimates are 80 US cents in 2023, jumping to US$2.02 the following year.
Revenue and EBITDA forecasts have moderated for 2023. Four months ago, the 2023 consensus revenue, EBITDA and earnings per share estimates were US$360-million, US$170-million, and 69 US cents, respectively.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 8.5 times the 2024 consensus estimate and at a price-to-earnings multiple of 11.1 times the 2024 consensus estimate. The average 12-month target price is $51.59, implying there is 72 per cent upside potential in the share price.
Insider transaction activity
Looking back to the start of the second half of 2022, there has not been any trading activity in the public markets reported by insiders.
According to the company’s December investor presentation, ownership by management and directors stood at 5.6 per cent.
Chart watch
Lithium Americas’ share price can be quite volatile.
On Jan. 3, the share price closed at $24.40, its lowest level since Aug. 2021. Since then, the stock price has experienced a sharp reversal, rising nearly 17 per cent year-to-date.
Looking at key technical resistance and support levels, the share price has an initial ceiling of resistance around $30, near its 50-day moving average (at $29.94). If the share price can break and hold above $30, the next major overhead resistance level is around $40. Looking at the downside, there is strong technical support around $25.
ESG Risk Rating
Rating provider Sustainalytics has given Lithium Americas an ESG risk score of 60.3 or “severe risk” rating (defined as a score over 40) as of Dec. 29, 2022.
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 indexes 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.
This report is not an investment recommendation.
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