Lake Resources shares jump 15% on DFS, but should investors be wary?

Is this lithium developer too optimistic with the assumptions backing up its project valuation?

| More on:
A man pulls a shocked expression with mouth wide open as he holds up his laptop.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Lake Resources N.L. (ASX: LKE) shares are on form on Tuesday.

In morning trade, the lithium developer's shares are up 15% to 15 cents.

Why are Lake Resources shares jumping?

Investors have been buying this ASX lithium stock today after the company released the phase one definitive feasibility study (DFS) for the Kachi lithium brine project in Argentina.

According to the release, the DFS found that the project has a post-tax net present value of US$2.3 billion and an internal rate of return (IRR) of 21%.

This is based on battery grade lithium carbonate revenue of US$21 billion and US$16 billion EBITDA over the 25-year life of mine (LoM). The latter implies annual average EBITDA of US$635 million and an EBITDA margin of 76% from its estimated 25,000 tonnes per annum production.

Though, the company is going to need a significant cash injection if it is to successfully develop the project. Management estimates that its initial capital expenditure for phase one is US$1.38 billion.

As a comparison, Lake Resources shares were last trading at a level that implied a market capitalisation of A$185 million.

Management advised that it has engaged Goldman Sachs to act as advisers and support the equity component of the project financing activity. This process will focus primarily on identification of a strategic partner to take an interest in the Kachi Project at the asset level. It may also include offtake rights for the contemplated product.

This process typically takes 6-9 months from completion of the DFS but actual timelines may vary according to the company.

Is this DFS too good to be true?

On paper, the DFS looks good at first glance. But could it be too good to be true?

It is worth highlighting that the company's estimates are based on the assumption that it will command an average lithium carbonate sales price of US$33,000 per tonne for the life of the project.

However, as I covered here yesterday, Goldman Sachs, its funding adviser, believes the long-term lithium carbonate price will be just US$15,000 per tonne.

That's ~55% lower than the company's estimate. This could mean that Lake Resources' earnings estimates and project valuation are seriously out of whack with reality.

In fact, its sensitivity chart shows that an average lithium carbonate sales price of US$28,100 per tonne would reduce its project net present value by 28%. It explains:

Project cash flows are most sensitive to changes in lithium carbonate selling price, where a 15% change in price resulted in a 28% change to the Post-Tax NPV. Lithium price impact can be limited/mitigated by the pricing mechanisms to be put in place with potential offtakers. Production volume fluctuations are expected to have similar effect as price fluctuations on NPV.

The question for investors is what would that mean for an average price of US$15,000 per tonne? Would it make the project a non-starter at those levels? Time will tell.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs Group. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Materials Shares

smiling worker stands before power generator technology
Materials Shares

Fortescue shares jump 5% on record performance

This mining giant was in fine form during the quarter.

Read more »

A man casually dressed looks to the side in a pensive, thoughtful manner with one hand under his chin, holding a mobile phone in his hand while thinking about something.
Materials Shares

Should you buy Pilbara Minerals shares today?

Let's see if analysts think investors should be buying the lithium giant's shares.

Read more »

Image of young successful engineer, with blueprints, notepad and digital tablet, observing the project implementation on construction site and in mine.
Materials Shares

Expert says this ASX mining stock could rise almost 30%

Let's see which miner is being tipped as a buy for investors right now.

Read more »

a mine worker holds his phone in one hand and a tablet in the other as he stands in front of heavy machinery at a mine site.
Materials Shares

BHP shares charge higher on record copper and iron ore production

Let's see how the miner performed during the fourth quarter.

Read more »

A man stands with hands on hips surveying construction of three high-rise buildings.
Materials Shares

Building activity on the rise – will ASX materials shares benefit?

New data from the March quarter shows a sharp rise in building activity. 

Read more »

Man smiling at a laptop because of a rising share price.
Materials Shares

Macquarie predicts 11% upside for this ASX materials stock

Here's why the broker is positive on the stock.

Read more »

Miner and company person analysing results of a mining company.
Materials Shares

Rio Tinto share price falls on Q2 update

Let's see what the mining giant reported for the second quarter.

Read more »

a man in a hard hat and high visibility vest smiles as he stands in the foreground of heavy mining equipment on a mine site.
Materials Shares

Could these 3 ASX materials shares be set to double?

This broker has buy ratings and aggressive price targets for these holdings. 

Read more »