On January 27, SIGMA Lithium Resources (TSXV: SGMA) announced that metallurgical tests conducted on its Barreiro lithium deposit in Brazil showed 66% – 70% lithium recoveries. These percentages are considered quite solid and support a doubling of its planned capacity to produce battery-grade 6% lithium concentrate to 440,000 tonnes per year (tpy) at its Grota do Cirilo Lithium Project in Brazil.
Phase 1 of the project, the input for which would be sourced from SIGMA’s Xuxa deposit and has the capacity to produce 220,000 tpy of lithium concentrate, could commence commercial operations in 2022. The 220,000 tpy output of Phase 1 is equivalent to 32,000 tonnes of lithium carbonate. Phase 2, which would add a further 220,000 tonnes of processing capacity and be sourced from the Barreiro deposit, could be operational sometime in 2023.
Lithium (Li), which is in high demand as a battery component in the electric vehicle (EV) industry, is refined from lithium carbonate. One hundred kilograms (kg) of lithium carbonate can produce about 19 kg of lithium metal. A Li-ion EV battery contains around 10 kg of lithium metal.
If (when?) EV’s attain a 30% market share of all motor vehicles manufactured on a global basis — and are powered by Li-ion batteries — the annual demand for lithium carbonate would be about 1.6 million tonnes per year. The total amount produced in 2019 was only about one-fifth of that total.
SIGMA’s Discounted Stock Market Valuation Versus Lithium Americas’
The importance of SIGMA’s potential lithium concentrate production levels to investors: Lithium Americas (TSX: LAC), a pre-revenue company which owns substantial lithium deposits in Argentina and Nevada, plans to bring two lithium processing facilities online in 2022 which can produce an aggregate 100,000 tonnes of lithium carbonate per year. Lithium Americas’ share of this production is about 80,000 tpy, or about 1.25 times SIGMA’s planned lithium carbonate equivalent output. Lithium Americas stock market valuation is about $3.1 billion, or ten times SIGMA’s ($312 million).
SIGMA’s Planned Production Facilities
In the first half of 2021, SIGMA expects to complete pre-construction activities for its processing facilities, including the identification of the contractor to handle engineering, procurement and construction (EPC). The company’s Board of Directors would then formally decide whether to proceed with Phase 1. If it decides to move forward, production could begin in the first quarter of 2022.
Phase 1 construction costs are projected to be about US$100 million. Mitsui & Co. has pledged about US$30 million to SIGMA to cover part of this cost. This prepayment is part of a strategic alliance between the companies, which also includes an offtake agreement where Mitsui can take up to 80,000 tpy of the total Phase 1 annual output of 220,000 tonnes of lithium concentrate. The balance of the construction costs should be covered by a US$45 million project finance facility with Societe Generale and funds that SIGMA raised via a private placement in August 2020 (see below).
To continue the comparison with Lithium Americas, the aggregate projected capital expenditures related to that company’s Cauchari-Olaroz and Thacker Pass lithium processing facilities are about US$1.15 billion in aggregate, or 11.5 times SIGMA’s Grota do Cirilo Phase 1 capital expenditures. Lithium Americas’ two facilities are expected to produce about three times the lithium carbonate versus that of SIGMA’s Phase 1 lithium carbonate equivalent output.
Strong Balance Sheet
In August 2020, SIGMA raised $17.8 million of equity in a private placement. As a result, the company’s September 30, 2020 cash balance was $16.1 million, against only $5.2 million of debt. SIGMA’s operating cash flow deficits were fairly modest over the first nine months of 2020, averaging $350,000 per quarter.
|(in thousands of Canadian $, except for shares outstanding)||3Q 2020||2Q 2020||1Q 2020||4Q 2019||3Q 2019|
|Operating Cash Flow||(385)||(250)||(483)||(607)||(1,980)|
|Cash – Period End||16,072||150||61||104||1,503|
|Debt – Period End||5,207||5,152||4,587||4,594||3,635|
|Shares Outstanding (Millions)||77.2||68.9||68.9||68.9||68.9|
It should be stated here that it is possible that EV makers could eventually decide that traditional nickel-manganese-cobalt batteries are preferable to those with a heavy lithium content and no cobalt or nickel (even though cobalt production is decidedly unfriendly to the environment). In that case, a lithium miner and processor like SIGMA would be disadvantaged.
Twelve months from now SIGMA may begin producing substantial quantities of lithium concentrate, a key component in EV batteries. A further step change in production capacity could take place in 2023.
A peer, pre-revenue lithium company, Lithium Americas, has similar plans to build important lithium processing facilities. Its business plan is probably further advanced than SIGMA, as its first lithium processing facility should be operational by year-end 2021 (albeit at a higher construction cost). Lithium Americas trades at ten times the stock market value of SIGMA. As SIGMA’s Phase 1 project moves closer to commercial production, the valuation differential between the two companies could narrow.
Sigma Lithium Resources trades at $4.05 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.