A lithium stock with a potential sevenfold return

CleanTech Lithium (CTL:40p), an lithium company in Chile, has announced positive newsflow on its key projects.

Following a successful drill programme, the JORC-standard resource estimate at its flagship project, Laguna Verde, has been upgraded by 17 per cent to 1.8mn tonnes of lithium carbonate equivalent (LCE) at an average grade of 200mg/L lithium. It includes a 39 per cent upgrade to 1.1mn tonnes classified in the all-important JORC Measured and Indicated categories. This bodes well for the pre-feasibility and definitive feasibility studies (PFS and DFS) when mining reserves are calculated, thus further de-risking the project after this year’s extensive work programme. The project would extract a brine containing lithium from an "immature salt basin".  

The PFS is currently underway and is likely to be released in the final quarter this year. It is expected to reaffirm the economic potential for a 20,000 tonne a year LCE project that requires $384mn (£293mn) capital investment, a fraction of the $6.3bn operational cash flow it could generate over 20 years. Moreover, the latest JORC resource upgrade suggests that the project could operate for 30 to 40 years at a base case annual production of 20,000 tonnes, so there is clear potential for it to be scaled up when the PFS or DFS is released.

There is a huge margin of safety, too. That’s because even though the LCE price has fallen by a third this year, Laguna Verde’s projected operating costs of $3,875 per tonne are still less than 10 per cent of the spot LCE price of $41,500 per tonne. CleanTech’s scoping study embeds an even lower long-term LCE price of $22,500 per tonne, which underpins the project’s post-tax net present value (NPV) of $1.83bn using a discount rate of 8 per cent. On this basis, the payback period is only 20 months and CleanTech’s directors believe that 75 per cent of the capital investment required to first production could be debt-funded, thus enabling more of the economic value in the project to be retained by shareholders.

Importantly, Laguna Verde’s environmental, social and governance (ESG) credentials are attractive, too. By using direct lithium extraction (DLE) technology, which returns spent brine to the basin aquifers, and renewable energy for processing power, the project offers key advantages over salar (salt flat) operations. Namely, it requires neither extensive site construction nor development of evaporation ponds, thus lowering upfront capital expenditure. Furthermore, the saleable product is produced in days rather than the 12 to 18-month period required for evaporative enrichment to occur in salar and hard rock spodumene sources.

De-risking the investment case

CleanTech is not a one-trick pony as the 2023 drilling programme on its Francisco Basin project has now completed. In the coming weeks, the directors expect to report a JORC resource upgrade on the maiden JORC inferred resource estimate (0.53mn LCE at an average grade of 305mg/Li), which was based on the first of four drilling wells completed before the Chilean winter break.

The scoping study is also nearing completion, having commenced in the fourth quarter of 2022, and will follow the release of the JORC resource upgrade. Bearing this in mind, Francisco Basin’s base-case production rate is likely to be similar to Laguna Verde, thus highlighting the strong fundamentals.

Despite the positive newsflow, CleanTech’s share price has traded sideways since the country’s government announced its National Lithium Strategy three months ago (‘State intervention has made this lithium company a bargain’, 24 April 2023). However, President Gabriel Boric and Minister of Mining, Marcela Hernando, have both pointed out that the government will only seek control of the operation in projects that are considered ‘strategic’. Currently, the only strategic lithium area is in Salar de Atacama.

CleanTech’s board has confirmed that the company’s projects are not subject to majority state participation requirements. However, as the company works towards licensing it may opt to invite the state to take a minority stake in its projects, thus aligning interests and allaying investor concerns.

Material undervaluation

So, although CleanTech’s share price remains the laggard in my 2023 Bargain Share Portfolio, I firmly believe that the potential for unlocking the value embedded in its key projects is being materially undervalued in the company’s £42.5mn market capitalisation. I am not the only one thinking this way as Canaccord Genuity’s 295p target price is more than seven times the current share price.

That target may seem punchy until you note that Arkansas-based Standard Lithium’s (US:SLI) has an enterprise valuation of C$945mn (£550mn) even though its lithium reserves are only twice as large as CleanTech’s. Buy.

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