Strong sales of electric vehicles (EV) this year, optimism for an even steeper future trajectory of sales, and the meteoric rise in Tesla’s share price in 2020 have all fueled the stock prices of lithium miners of late. Shares in Albemarle for example, the world’s largest lithium producer, have rallied nearly 70% since early September. Alpha Lithium Corp. (TSXV: ALLI), a much smaller prospective lithium miner with a 27,500-hectare land package in Argentina, has appreciated about 25% over the same period.
The concern about these share price moves is the conflicting price signal being sent by the lithium commodity. Lithium carbonate prices have declined in almost a straight-line fashion for the last three years and show no real signs of breaking that trend. The stock market is forward looking in nature, so perhaps lithium equities are focused only on the fairly distant future. But upward movements in the stocks of commodity-linked companies are rarely maintained if the price of the underlying commodity does not move in a similar direction.
Alpha Lithium owns 100% of the Tolillar Project, a large, undeveloped salar (or seasonally flooded dry lake) in Argentina’s Lithium Triangle. The lithium brine project is surrounded by a number of other valuable lithium assets, some of which have been sold in recent M&A transactions.
In July 2020, the company announced that the analysis of a sensitive geophysics program performed on the property suggested the presence of potentially significant brine deposits. Based on that data, Alpha mobilized a drilling rig in early December 2020 to collect lithium brine samples at depth. This project pacing does highlight a potential valuation issue for Alpha Lithium shareholders: there are many more steps that must be surmounted before a formal exploratory drilling program could begin, and even a longer period until cash flows could potentially start.
Substantial Share Dilution Has Occurred; More is Likely to Come
Alpha Lithium is a pre-revenue company, so it by definition will generate operating losses and negative operating cash flow. Its operating cash flow deficit is running at about $1.25 million per quarter. Alpha Lithium has about $10 million of cash, so no additional equity issuances seem to be required in the short run.
However, any significant drilling program would likely necessitate an offering. Previous offerings resulted in substantial dilution, causing shares outstanding to increase by about 130% from 1Q 2020 to 3Q 2020. Shares outstanding overall however remains manageable, while being low in comparison to most other small cap equities, with 67.2 million shares being outstanding as of the third quarter.
|(in thousands CAD)||3Q 2020||2Q 2020||1Q 2020|
|Operating Cash Flow||($1,251)||($1,194)||($998)|
|Debt – Period End||$1,258||$1,918||$2,247|
|Shares Outstanding (Millions)||67.2||49.9||28.0|
It is possible that the Tolillar Project proves to be a significant and high-quality source of lithium brine. Furthermore, investors may continue to focus almost exclusively on the very long term when valuing lithium miners.
Alpha Lithium owns a highly prospective lithium resource in a fertile lithium region in Argentina. However, any potential cash flow from the Tolillar Project seems to be years away, and the required development spending to put the company in position to realize that cash flow would likely necessitate substantial share issuances and dilution for shareholders. The stock has rallied noticeably over the last three months, and this move seems to be primarily momentum-based while the underlying lithium commodity price continues to languish.
Alpha Lithium is trading at $0.67 on the TSX Venture Exchange.
Information for this briefing was found via Sedar and the companies mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.