Rodinia shares jump on PEA findings

Shares of Rodinia Lithium (RM-V) surged 42% to close at 30.5¢ on Nov. 8 after the junior exploration and development company released results of a preliminary economic assessment (PEA) of its lithium brine project in northern Argentina’s Salta province.

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

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 36% pre-tax IRR. 

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, at -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 three thousand five hundred U.S. dollars per tonne of lithium carbonate, more than covering our total anticipated production costs,” William Randall, the junior’s president and chief executive, noted 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, explaining 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 one-and-a-half years. 

The Salar de Diablillos project, which Rodinia bought from Rio Tinto (RIO-N, RIO-L), 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’s Shanshan Enterprise, 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. Raymond Goldie, senior mining analyst at Salman Partners, described the partnership in an August research note as an “unusual and creditable move for a potential producer of a commodity that does not trade on terminal markets.” Shanshan owns 7% of Rodinia.

Total capital expenditures including contingencies but excluding closure costs and sustaining capital are estimated to be 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 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 reaches the 25,000-
tonne-per-year level.

The operation would use conventional evaporation processing in which brine is pumped from 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 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.

“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 to clients. “In-situ clay on site 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.”

Randall also believes Rodinia will keep costs down 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 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 holding lithium projects in Argentina, Randall told investors and analysts on the conference call. To back up his claim, 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) was US$90 million. 

Yet in terms of the company’s two lithium projects, he says, Rodinia’s Salar de Diablillos compares favourably. Rodinia’s base-case scenario at 15,000 tonnes per year yields a 34% pre-tax IRR, 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 the Olaroz project.

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

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

Rodinia is part of the Forbes and Manhattan group of companies. The private merchant bank is based in Toronto and chaired by Stan Bharti.

In addition to its properties in Argentina, Rodinia has a lithium brine project in Nevada called Clayton Valley. Clayton Valley is close to Chemetall’s Clayton Valley evaporite mine, which has been producing lithium since the 1960s. Chemetall is a unit of Rockwood Holdings.