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Earlier today, Lithium Americas Corp. (NYSE:LAC) announced that it is moving forward with plans to separate the company’s North American and South American operations into two separate companies. This idea was first floated in February, alongside the company’s announcement that it had submitted a draft application to receive a loan through the Advanced Technologies Vehicle Manufacturing Loan (“ATVM”) Program. This article will provide my thoughts on this significant move from Lithium Americas.
Timing
Regarding timing, there are a few things that make this announcement a bit interesting. First of all, this split won’t transpire in the immediate future. According to the company, “The execution plan currently provides for completion of the Separation by the end of 2023.” So, we’re probably looking at another year or so before this transaction closes.
Another very interesting component of the timing of this announcement has to do with the company’s aforementioned application to receive funding through the ATVM. The purpose of utilizing the ATVM to help finance the domestic battery supply chain is, primarily, to limit dependence on China. Sure, there’s the additional benefit of encouraging more domestic industrialization, but this is primarily an effort to limit the control of Chinese interests in the electric vehicle (“EV”) supply chain.
With Ganfeng (OTCPK:GNENF, OTCPK:GNENY) as the majority owner of the company’s Cauchari-Olaroz project, and a spot on Lithium Americas’ Board due to its 11% equity interest in the company, Lithium Americas has some undeniable Chinese influence. By separating the South American business from the North American business, Lithium Americas will also be able to substantially reduce the Chinese interest in its business. By doing so, I suspect that the company may be strengthening its application to the ATVM.
When I talked with the company’s Virginia Morgan several months ago, she assured me that the potential to split the North and South American businesses had nothing to do with the ATVM application. And I believe her, it would be quite a drastic measure to take if the only payoff would be to slightly improve the company’s application strength. However, she did also acknowledge that the split may be viewed favorably by the committee overseeing the distribution of funds from the program.
The final thing I want to note regarding timing is that, in a year from now, the company will look very different than it does today. Assuming things go to plan, Cauchari-Olaroz will be producing battery-grade lithium carbonate at a rate of 40,000 tonnes per year. Staying in Argentina, the company expects to complete its mining plan and construction decision for the Pastos Grandes project by the second half of 2023.
In the company’s recent Q3 update, it mentioned that recent developments from Arena Minerals have caused the company to alter its exploration plan for Pastos Grandes. As such, I continue to expect Lithium Americas to positively revise the parameters outlined by the DFS completed for the project when it was under ownership of Millennial Lithium. Speaking of Arena Minerals, Lithium Americas’ 17% stake in the company may be worth significantly more in a year’s time, following continuous developments made by the company.
My Plans
For now, my plan is to sit tight. This announcement really doesn’t tell us much, beyond that the company is splitting its businesses by location. We don’t know what value the company will assign to each business and what it would be today could be drastically different from what it would be a year from now.
However, what I can say with confidence, is that I will be a shareholder in both entities after the split. The company’s assets, both in Argentina and in North America, are incredibly strong and Lithium Americas has a team that is capable of executing on their potential. More importantly, at its current price, Lithium Americas remains extraordinarily attractive.
It is also worth noting that the new shares to be attributed to current shareholders will be awarded on a tax-deferred basis. As such, don’t be deterred by the prospect of having to pay short-term capital gains taxes on the company should you wish to make an investment within the next 12 months, before the separation.
Investor Takeaway
The lithium industry has historically suffered from a lack of funding and experience, contributing to a long-standing supply deficit. Of course, the extreme rise of EVs is largely to blame for the ongoing supply deficit, but a lack of investment and operational experience is also to blame. These elements, in addition to how attractive the lithium market currently is, have contributed to significant consolidation in the industry.
Last year, big-name acquisitions included the $737 million acquisition of Neo Lithium by China’s Zijin Mining and Lithium Americas’ $400 million acquisition of Millennial Lithium. This was significantly higher than CATL’s original offer of ~$300 million and Ganfeng Lithium’s subsequent offer of $353 million, indicating the level of interest in the sector. The big-name merger of Galaxy Lithium and Orocobre into the entity now known as Allkem (AKE:CA), really put a stamp on the year and marked a massive consolidation of lithium assets.
But the lithium industry still isn’t out of its silly season. Earlier this year, Rio Tinto (RIO) paid $825 million for an Argentinian lithium project, while Ganfeng bought Lithea, whose project is in the same salar as Millennial Lithium, for $962 million. More recently, Bloomberg reported that Rio Tinto had asked investment banks to pitch lithium projects ripe for acquisition, while Tesla (TSLA) reportedly considered taking a 10% – 20% stake in Glencore (OTCPK:GLCNF) in a bid to enter the mining business.
I could go on, but I believe the point is clear. Money is pouring into the sector, and the most promising projects are getting consolidated under leading names in the space. This is a trend that I believe all investors, especially those in the lithium space, should be aware of. But, as it applies to this article, it is certainly interesting to watch Lithium Americas divide its business at a point when consolidation is king.
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