Lithium Argentina: Initiating Coverage With $30 (CAD 41) FVE and Narrow Moat Rating

We are initiating coverage of Lithium Argentina LAAC with a $30 (CAD 41) per share fair value estimate. Lithium Argentina was created in the Lithium Americas separation that divided the company’s Argentina and North America assets.

We award Lithium Argentina a narrow moat rating. Our rating is underpinned by our view that the company’s first project, Cauchari-Olaroz, which entered production earlier in the year, will become one of the lowest cost lithium projects globally on an all-in sustaining cost basis, our preferred cost measurement. Our capital allocation rating is standard, and our Uncertainty Rating is Very High.

At current prices, we view Lithium Argentina shares as materially undervalued, with shares trading at a little more than 20% of our fair value estimate. We see two drivers behind our thesis. First, we forecast lithium prices will rebound and begin to rise by 2024 as strong demand growth outpaces increased supply.

Second, we think the market is undervaluing the long-term volume growth potential for Lithium Argentina. At Cauchari-Olaroz, the project is ramping up production volumes closer to its phase-one annual capacity of 40,000 metric tons, with plans to build at least another 20,000 metric tons. However, given the size and quality of the resource, we forecast long-term annual capacity of 120,000 metric tons. Additionally, we think the Pastos Grandes basin project will successfully move through development and construction, and into production by the end of the decade, leading to a second resource for Lithium Argentina. Accordingly, for long-term investors who can withstand the share price volatility, we view Lithium Argentina as a strong opportunity with a large margin of safety as it is the most undervalued lithium producer under our coverage.

While we initiated coverage of only Lithium Argentina today, we plan to initiate coverage of Lithium Americas (the North American part of the separation which retained the name) in the near future.