The stock of Piedmont Lithium (PLL) has skyrocketed on the heels of a supply agreement with Tesla (TSLA). While the deal is certainly a bullish development for the company, investors may be full of irrational exuberance. As can be seen from the chart below, the company’s stock was happily trading around $5-$6 dollar for most of 2020 until a few days before the Tesla deal was announced news must have leaked out and the stock doubled to $11. Then, on the day of the announcement, the stock more than tripled to $37. After a brief pullback, it continued to push higher following a second executive order by Trump aimed at boosting domestic supplies of rare-earth minerals, including lithium:
Highlights of the Tesla agreement:
- It is a 5-year fixed-price deal for Piedmont to supply Tesla with spodumene concentrate.
- There is an optional 5-year extension.
- The agreement covers ~1/3 of Piedmont’s planned SC6 production of 160,000 tons/year.
- The deal is contingent on the two parties agreeing to a start date for deliveries of spodumene concentrate between July 2022 and July 2023.
The fixed-price was not divulged, nor were development costs or expected long-term returns.
No doubt Piedmont has an excellent ~1,500 acre position in North Carolina – smack on top of what may arguably be the best lithium resource base in the country:
Note that North Carolina has no state mining royalties and a storied history of lithium production going back to the 1950’s. The mine is a shallow pit, which helps keep resource development costs low. And there is no doubt the still emerging and fast-growing EV and lithium-ion battery markets will insure steady demand for the element for decades to come. Building the facilities needed to supply Tesla with product will also enable the company to supply the other 2/3 of production to other EV manufacturers.
Note that Tesla has an option to take more product if it wants/needs it. Note also that the Piedmont release said:
The SC6 sales are expected to generate between 10-20% of Piedmont’s total revenues from its proposed integrated mine-to-hydroxide project for the initial five-year term.
That’s an interesting statement … 10-20% of revenue for roughly 1/3 of SC6 production? I take that to mean that Piedmont expects sales to other customers will be a price significantly above the fixed-price Tesla agreed to.
But note the October presentation did offer these projections:
- 25 year project life.
- $218 million EBITDA run-rate.
- $1.1 billion after-tax NPV.
- 26% after-tax IRR.
For more details on how these numbers were arrived at, consider viewing the May 2020 Feasibility Study.
However, looking at Piedmont’s recent earnings report may give investors more reason to be cautious.
I say that because, according to the Q2 EPS report, the company apparently has no current revenue and burned $1.4 million of cash in Q2. While the company does have $18.9 million in cash, note that development costs are likely to be substantial, with the PFS Chemical plant alone requiring an estimated $377 million in “initial capital costs”:
An article in the Charlotte Business Journal cited PLL VP of Project Management Patrick Brindle (shown below) as saying the mining operation will involve capital investment of between $500-$600 million and that “the company is still working on funding for the project.” No doubt obtaining funding will be easier with a Tesla supply agreement in Piedmont’s back pocket, but it will be very interesting to see the terms under which funding is obtained. Certainly the company will need to grow from the 10 employees in its office at the time of the Charlotte Business Journal interview.
While lithium demand is expected to double over the next four years, there are many competitive suppliers in the space. In addition to Piedmont, A recent article in Barron’s highlighted lithium miners such as Albemarle (ALB), SQM (SQM) and Livent (LTHM). The point is, lithium is a commodity with multiple producers that will all be vying for a slice of the pie. And as opposed to Piedmont’s North Caroline mine – which is not in operation yet and will a couple years and take hundreds of millions of dollars to go in-service, many of its competitors have lithium mines that are already in operation.
Summary & Conclusions
As I write this, the market-cap of PLL is currently $403 million. That for a company with no revenue and facing hundreds of million in cap-ex to build the necessary infrastructure required to meet its delivery obligations under the agreement with Tesla. According to my calculations, the 49.4 million shares traded on the day of the Tesla supply announcement (see chart above) equates to over 8x the total number of shares outstanding. Can you say “churn”?
Lastly, note the midpoint of the expected delivery start date is January 2023. My guess is that over the next two years investors can expect lots of debt and equity issuance announcements in order to fund the construction and start-up costs of the facilities needed to supply Tesla with the agreed upon quantities of spodumene concentrate. And, of course, the initial agreement is only for five years. Meantime, other lithium producers are not standing still and are likely to provide long-term competition that will provide a check on the commodity’s price.
To the best of my knowledge, as I am writing this Piedmont has yet to release to the investment community a detailed development plan. I think investors should be cautious before diving into this high-flyer solely on the basis of a very high profile supply agreement. Telsa was surely negotiating from a position of strength given its market weight and global reach. As a result, I am bearish on PLL’s stock at this price and market valuation.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am an engineer, not a CFA. The information and data presented in this article were obtained from company documents and/or sources believed to be reliable, but have not been independently verified. Therefore, the author cannot guarantee their accuracy. Please do your own research and contact a qualified investment advisor. I am not responsible for the investment decisions you make.
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