Rodinia’s shares jump on PEA

Shares of Rodinia Lithium (RM-V, RDNAF-O) surged 41.86% to close at 30.5¢ yesterday after the junior exploration and development company released the results of a preliminary economic assessment of its lithium brine project in northern Argentina’s Salta province.

The PEA outlined a pre-tax net present value at an 8% discount rate of US$561 million for a base case 15,000 tonne per year lithium carbonate operation and about 51,000 tonnes of potash and a pre-tax internal rate of return of 34%.

For a 25,000 tonne per year lithium carbonate operation the pre-tax NPV jumps to US$964 million and 85,000 tonnes of potash, with a pre-tax IRR of 36%.

In addition, credits for potash and boric acid exceed the cost to produce lithium carbonate, which brings the combined operating costs per tonne of lithium carbonate to below zero and negative (US$703).

“Due to the favourable geochemistry of the brines, Rodinia’s potash and boric acid production is such that revenue from the sale of these products will result in credits in excess of US$3,500 per tonne of lithium carbonate, more than covering our total anticipated production costs,” William Randall, the junior’s president and chief executive, asserted in a prepared statement. “As long as prices for potash and boric acid remain at today’s levels or higher, Diablillos has the potential to remain price competitive down to historic lows for lithium carbonate pricing.”

In a conference call Randall went further, noting that the company could be stockpiling all of its lithium carbonate, not selling any of it, “and still make money just on the potash and boric acid.”

The PEA envisions initial production by 2015, a mine life of 20 years, and a payback period of about one and a half years.

The Salar de Diablillos project is expected to produce high-purity battery grade lithium carbonate for as low as US$1,486 per tonne lithium carbonate, the company says. Late last year Hong Kong Shanshan, one of China’s leading lithium-ion battery materials providers and a significant end user of battery grade lithium carbonate, took a strategic stake in Rodinia.

Total capital expenditures including contingencies but excluding closure costs and sustaining capital are estimated to be about US$144 million to produce 15,000 tonnes per year of lithium carbonate and US$220 million to produce 25,000 tonnes. The estimate for sustaining capital for the full 20-year mine life is about US$80 million. Average annual cash flow for the 15,000 tonne per year operation would be US$89 million and would increase to US$150 million if the plant increased to the 25,000 tonne per year level.

The operation would use conventional evaporation processing in which brine is pumped from subterranean aquifers by a series of production wells to an evaporation pond. Lithium recovery would involve a combination of solar evaporation steps, in-field brine treatment, by-product potash and boric acid recovery and chemical processing to produce lithium carbonate. Lithium recoveries are estimated to be 65% once the brine is saturated, producing 131,200 tonnes of potash sylvinite and 10,250 tonnes of boric acid for every 10,000 tonnes of lithium carbonate.

Under the 15,000 tonne per year scenario, Rodinia will have to install 23 production wells, and about 7 sq km of evaporation ponds. At the optional production scenario of 25,000 tonnes per year, 53 production wells and 11.5 sq km of evaporation ponds will be necessary.

Randall emphasized that one of the main reasons why project costs are relatively low is that the company does not need to line its largest evaporation pond, which will result in significant cost savings.

“Traditionally brine ponds are lined with plastic and the cost of the liners contribute a significant portion to capital costs,” Jonathan Lee, an analyst who covers Rodinia at Byron Capital Markets in Toronto, wrote in a note to clients. “In-situ clay onsite would be the cheapest method because of reduced earthwork movement. If nearby clay can be used in replacement of the plastic liners, there are opportunities to save some capital on pond construction.”

Another reason why Randall believes Rodinia can keep its costs down is by building its boric acid and lithium carbonate plants off-site at an industrial park in Pocitos, where natural gas and power are readily available. Pocitos is about 100 km from the evaporation ponds.

“We did a complete trade-off between putting the plant on the salar and in the industrial plant,” Randall says. “The security of having an industrial plant in a designated industrial park within Puna will give us security in the environmentally permitting sense, social sense and so forth.”

Salar de Diablillos contains a recoverable resource of 2.82 million tonnes lithium carbonate equivalent and 11.27 million tonnes potassium chloride equivalent.  

Rodinia is undervalued compared with its peers with lithium projects in Argentina, Randall told investors and analysts on the conference call. To back up his argument, he noted that at the close of trading on Nov. 7, Rodinia had a market cap of US$18.3 million while the market cap of Lithium Americas (LAC-T, LHMAF-O) stood at US$90 million.

Yet in terms of the companies two lithium projects, he says, Rodinia’s Salar de Diablillos compares favourably. Rodinia’s base-case scenario (15,000 tonnes per year) yields a pre-tax IRR of 34%, for example, compared to Lithium Americas’ 30% for its Cauchari project, while Rodinia’s pre-tax NPV for its 25,000 tonne per year operation is US$964 million compared with Lithium Americas’ US$983 million.

“Our market cap is less than a third of Lithium Ones’ and less than one seventh of Orocobre‘s (ORL-T, ORE-A) so there’s a long way to go and a lot of upside for investors.” Orocobre is developing its Olaroz project.

“Compared to other brine exploration projects that showed similar economics, Rodinia is trading at a steep discount,” Lee of Byron Capital Markets writes in a note to clients.

Lee has a speculative buy on the stock and a target price of 95¢. At presstime in Toronto Rodinia was trading at 26.5¢.