Jun. 18, 2018 2:06 PM ET
Lithium equities have been battered over the past months despite strong market fundamentals. There is potential for a rebound in the second half of 2018.
Exploration from the 1950s confirms lithium deposits in the Georgia Lake region. The region is home to three early stage exploration companies.
A review of these three companies including: Rock Tech Lithium, Infinite Lithium and Ultra Lithium.
Over the past years, I have provided readers with extensive coverage on the emerging lithium market in Argentina and more recently on developments in Quebec. With lithium stocks now trading at the bottom of a down cycle, the timing is perfect to open positions for short- to mid-term profiteering opportunities. Although my lithium stock selections, including Advantage Lithium (OTCQX:AVLIF) and Orocobre (OTCPK:OROCF), delivered handsome returns in 2017 and remain stable into 2018, I missed a significant opportunity in 2017. This opportunity was associated with the movement of hot money into highly speculative early-stage explorers.
This time around, I am attempting to expand my investment holdings through share ownership in additional speculative companies that may perform well in an overall lithium bull market. It is my opinion that the lithium exploration and chemicals market is at the bottom of a down cycle, indicating that capital will begin to flow back into the large producers, followed by high-quality advanced exploration and early stage producers and lastly into highly speculative early-stage exploration companies, specifically in the lithium hard-rock space. Therefore, I continue to review regions around the world with known lithium deposits situated in politically friendly jurisdictions such as Georgia Lake, Ontario.
Georgia Lake – Historical data shows high grade, small deposits
The Thunder Bay Mining Division in Ontario has been known for its history of mining and exploration activities and is considered a stable and favorable mining jurisdiction. The Georgia Lake area is located approximately 150 kilometers from Thunder Bay’s deep water port, offers electrical infrastructure at less than 10 kilometers away and is conveniently located off provincial Highway 11.
An extensive network of gravel and tertiary bush roads provide access to land claims. With a long history of mining and exploration activity within the region, mining personnel and contractors are both widely available. Collectively, the region has the necessary infrastructure and technical expertise to advance host a successful mining community.
Spodumene-bearing pegmatites of the Georgia Lake area were initially discovered in 1955, which led to a staking rush shortly thereafter. The initial discovery led to over 3,000 claims being staked, leading to additional lithium discoveries. Significant exploration work by various operators only began in the late 1950s. Although the initial discovery was made over 60 years ago, the region has not been able to capitalize on favorable trends in the lithium industry.
In fact, the whole of Canada has not been able to produce any significant volumes of spodumene concentrate or lithium chemicals. The only two notable projects in Canada are the Quebec Lithium project (now owned by CATL, one of China’s largest lithium battery manufacturers), and Nemaska (OTCQX:NMKEF) Lithium, which has secured well over $1 billion in capital to advance its vertically-integrated mine and processing facilities. Both of these projects are located in the Province of Quebec.
The opportunity for the region
In the near term, the region is not positioned to contribute to the global lithium supply chain but there is a strong possibility that companies will continue to further define the lithium potential in the area. In the medium term, it is possible that that properties with high-grade deposits in the range of 10 to 20 million tonnes will draw international attention. Rock Tech (OTC:RCKTF), the most advanced operator in the region, has already completed bulk sampling to demonstrate that material produced in the region can be converted into battery grade lithium chemicals.
Looking toward the next few years, spodumene concentrate may be shipped to Thunder Bay for export, and then into the Chinese market for final processing before entering the lithium supply chain, but if so, this would prove to be a short-term business opportunity. Australian explorers have the geographical benefit of being located near China, which offers various advantages regarding supply chain management and costs associated with materials shipment.
It is my opinion that the region would offer great value to a major user of lithium chemicals, such as battery and material manufacturers seeking to reduce their costs by owning a lithium hard-rock deposit in a mining-friendly jurisdiction. Alternatively, there is an opportunity for the establishment of a chemical processing industry located in Ontario or Quebec, but at present it is doubtful whether any current operators will be able to undertake such efforts.
Rock Tech has already produced an NI 43-101 for a smaller deposit and has undertaken additional exploration efforts to expand its resource base. Infinite Lithium is a more recent entrant into the lithium exploration market that has successfully raised a considerable amount of capital to undertake its maiden exploration efforts at Georgia Lake.
For now, the investment opportunity is to purchase shares of operators in the region with the expectation that they will continue to define and update their resources. As hot money returns to the lithium exploration market, share prices may be lifted. This possibility offers attractive gains for investors.
Three operators in the region
Rock Tech Lithium – The company is best known as the only explorer to have completed an NI 43-101 resource estimate in the Georgia Lake region. Based on information presented on the company’s website, the indicated resource estimate is 3.19 million tonnes grading at 1.10% lithium oxide, and an inferred resource estimate of 6.31 million tonnes grading at 1.00%.
The company has also undertaken a bulk sampling program, which has confirmed that the ore can be processed into high-grade spodumene concentrate and battery-grade lithium. However, the company expects the size of the natural resource estimate to increase, given that the company has invested in additional exploration activities in the past 18 months. Shareholders should expect an upgraded NI 43-101 resource estimate, which will allow for the preparation of a Preliminary Economic Assessment.
In December 2017, the company announced that its warrant exercise proceeds totaled $1.7 million (all figures in Canadian dollars), which increased the total issued and outstanding number of shares to a mere 33 million. Financial statements filed for the period ending December 31, 2017 show a total of nearly $3 million in cash.
The company announced that it will expand its exploration assets to include a lithium brine project located in Sonora, Mexico. It is in my opinion that this project could be a distraction for the company, and also a potential drain on its financial resources. Considering the advanced stage of its Georgia Lake project, ideally the company will focus on that single effort and prepare for activities beyond the updated resource estimate.
The company has an extremely tight share structure with cash in the bank to move the Georgia Lake asset forward. As noted above, the company already has firm resource estimates that will be increased in the near term. Based on the company’s current market capitalization of around 40 million with a combined resource of around 10 million tonnes, the market values one million tons of resource at $4 million.
Infinite Lithium (OTCQB:ARXRF) (ILI on the TSXV) – In 1956, the Ontario Lithium Company Limited calculated 2 million tonnes at 1.09 Li20 at the Jackpot property. Infinite Lithium has already started its exploration efforts to confirm and expand the historical resource. In March 2018, the company reported results concerning the first 5 of its Phase One drill holes, a phase which commenced in December 2017. The initial feedback supports the historical drill results, which will be further defined as additional results are released.
In December 2017, the company completed a private placement of 34 million shares at $.12/share and 5 million shares at $.15/share, for total aggregated gross proceeds exceeding $4.8 million. The company was quick to deploy the capital by drilling 12 holes totaling approximately 1,700 meters. Phase One of the exploration campaign has been designed to support historic drilling results and to assist in further understanding the potential of the Jackpot property.
Comprehensively, the company has cash in the bank and historical data on the property, coupled with an ongoing exploration campaign and with a relatively light market capitalization of around $13 million, based on 100 million sharesissued and outstanding.
In a base-case scenario, the company will need to define a resource of around 10 million tonnes, placing it in parallel with Rock Tech. This will allow the market to readjust the venture’s enterprise value. Calculating from Rock Tech’s current market valuation coupled with Infinite’s share structure, a valuation of $40 million would place the share price at over $.40/share, significantly higher than the current trading price of $.12/share.
Although the company’s exploration efforts will be the catalyst for share-price appreciation in 2018 and into 2019, it is also important to note that the company has issued a significant number of shares at current trading levels. These may be a future obstacle to share price appreciation. On a positive note, the company attached the share purchase warrant with an exercise price of $.20/per share for 36 months, which is higher than the placement level.
The company’s website has three additional lithium properties located in Quebec, Mexico and Manitoba. However, all of its recent news releases have focused on the Jackpot property. Based on this information, I assume that the company will deploy its capital to support the exploration efforts at the Jackpot property that it has already announced.
Ultra Lithium (OTCQB:ULTXF) – Based on the company’s financial documentsfiled for the period ending January 31, 2018, it has current assets of over $2 million, with the bulk being held in cash. The company’s website list at least six early-stage lithium exploration projects located in Argentina, Canada and the USA. The Argentine projects include: Laguna Verde Brine, LaBorita Brine, Amelia Brine and Archibarca Brine. The American project is listed as South Big Smoky Valley Brine; the Canadian project is listed as Georgia Lake. The company’s Georgia Lake project includes 100% ownership of 16 mineral claims, covering over 2,400 hectares of land.
Based on the 5 years that I have been invested in lithium exploration and development companies such as Orocobre, it is hard to understand the logic of a junior exploration company maintaining exploration assets in 3 different countries. Further, it is difficult to understand the investment value of a company that is undertaking both hard-rock and brine exploration activities, as these are two wildly different undertakings. My investment approach in the lithium exploration business has always been to focus on companies that are dedicated to the development of one project.
An immense amount of resources is required to move a single project forward. This is why I would never invest in a company that is scattered over multiple continents, exploring both brine and hard-rock assets, with a limited amount of capital in the treasury. However, it is not to say that the company does not have high-quality assets, it simply does not fit my investment criteria.
Rock Tech and Infinite Lithium – Potential for a second half of 2018
In Q2 2018, I took a position in Infinite Lithium at the $.13/share price level, and as a purely speculative investment, because the company’s current exploration activities provide exposure to a blue-sky exploration campaign in a region that has proven lithium deposits. The company has also raised the necessary capital to move forward with the exploration efforts, while warrants present an opportunity for the company to generate future capital.
At C$.13/share, there appears to be a minimal amount of downside in the share price, with the potential for the company’s market capital to increase as drill results are delivered. My expectation is for the company to deliver a resource estimate in the same range as Rock Tech, which would be the catalyst for significant share price appreciation. If the company has success with its exploration efforts within the second half of 2018 and Rock Tech continues to expand its own resource, coupled with the flow of hot capital back into lithium exploration industry, there is potential for the market valuation to increase to approximately $40 million.
Rock Tech might also prove to be a good short-term opportunity, because the stock has been battered alongside the entire lithium exploration market. The 52-week high was $2.16/ share, with a recent low of $1.24, representing a decrease of over 40%. I view the tight share structure as a positive factor for investors who are now entering the stock, as it could allow for share price to retrace its previous highs, especially if there is a significant increase in the resource estimate.
Outside of the company’s activities in Mexico, which I view as a distraction, the company may be really well-positioned to benefit from an influx of investor interest in the second half of 2018. Based on insider filings from Q4 2017 through Q1 2018, there were a series of small purchases from insiders in the range of $1.50/share.
Rock Tech may also prove to be an interesting short- to mid-term investment opportunity as the company moves to increase the size of their deposit. Once the resource is further defined, the company has four core options to maximize shareholder value, including: 1) the sale of the company or sale of the deposit, 2) selling concentrates into the Quebec domestic market, 3) exporting concentrates to China or other global markets through Thunder Bay or a Quebec port, 3) processing and producing a lithium chemical, such as a carbonate or hydroxide product, through an integrated downstream processing facility.
Looking forward, I will continue to monitor the developments at Georgia Lake, especially Rock Tech’s forward-looking corporate strategy and updated resource estimates, as well as monitor Infinite Lithium’s drill results.
If you enjoyed this article, then be sure to receive future material by clicking on the “Follow” tab at the top of this page or on my profile here.
Disclosure: I am/we are long ARXRF, OROCF, AVLIF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.