Are Lake Resources shares going to zero?

Lake Resources N.L. (ASX: LKE) shares continued their horror run on Tuesday.

The lithium developer's shares were down 9% to a multi-year low of 9.5 cents.

This means that its shares are now down 88% since this time last year.

Is the rot over or is this lithium stock going to zero? Let's take a look.

Are Lake Resources shares going to zero?

It is fair to say that things aren't looking good for this lithium developer given recent lithium price weakness.

As I warned here late last year with the release of the company's phase one definitive feasibility study (DFS) for the Kachi lithium brine project in Argentina, this project is only viable with lithium prices materially higher from current levels.

Lake Resources commissioned a bespoke study for its DFS pricing from Wood Mackenzie, which estimated that the average lithium carbonate sales price will be US$33,000 per tonne for the life of the project.

As I covered here yesterday, the current spot lithium carbonate in China is just US$11,867 per tonne.

Furthermore, Goldman Sachs expects its price to stay around these levels until 2027, when a rebound to US$15,646 per tonne is forecast. After which, its analysts estimate an average long term price of US$15,500 per tonne.

This is less than half the price that Lake Resources plugged into its DFS study.

Is this bad? Yes, it's about as bad as it gets. The company even explains why with its DFS:

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.

A lithium carbonate price 15% lower than its US$33,000 per tonne estimate wiped out 28% of its Post-Tax NPV. A 50% change makes the project completely uneconomical.

And with management estimating that its initial capital expenditure for phase one is US$1.38 billion, it is going to have a real battle on its hands to raise these funds from debt or equity.

We have already seen Liontown Resources Ltd (ASX: LTR) stripped of its $760 million debt funding packaging because of low lithium prices. It's hard to imagine anyone willing to risk lending to Lake Resources based on its numbers.

It is also worth noting that Wood Mackenzie has become very bearish on lithium prices since it was commissioned by Lake Resources. In fact, it was reportedly the research company's lithium price downgrades that led to Liontown's lenders pulling the plug on their deal.

All in all, this doesn't bode well for Lake Resources shares and zero seems like it could be a real possibility down the line. Time will tell if that's the case.