Anyone following the lithium sector and Pure Energy Minerals (TSX-V:PE) (FRANKFURT:A111EG) (OTCQB:HMGLF) knows that on September 16th the Company announced the signing of a conditional supply agreement with Tesla Motors Inc (NASDAQ:TSLA). Now that the dust has settled, it’s time to take a closer look at Pure Energy Minerals. Herein, is a rough comparison of valuations, including of a newly producing company, Orocobre Ltd. Recall that Pure Energy’s conditional supply agreement is only the second announced by Tesla, both for lithium. The other is with Bacanora Minerals. The merged Western Lithium & Lithium Americas, is also a useful comparison.
A simple valuation exercise
Orocobre reached initial production this year. Its Enterprise Value, “EV” [all figures in C$] is ~ $275 million (Note: Orocobre owns 66.5% of the equity in the producing lithium asset, with Toyota and the local government owning the remainder). Bacanora has an Enterprise value of ~ $135 million. Western Lithium’s EV (post Lithium Americas merger) is ~ $72 million and Pure Energy Minerals’ EV is ~ $36 million. How does one compare these 4, each at different stages, each with company specific challenges and attributes?
First off, including the Major lithium producers in the valuation exercise, FMC Corporation (NYSE:FMC), Albemarle Corporation (NYSE:ALB) and Chemical & Mining Co. of Chile (SQM) is an impossible task. Each derives substantial revenue from non-lithium activities, i.e. they’re not pure-play lithium companies, not even close from an investment perspective.
Pure Energy Minerals trades at a large valuation discount, warranted?
Pure Energy Minerals trades at an 87% discount EV to Orocobre, a 73% discount EV to Bacanora and a 50% discount EV to Western Lithium. Are these substantial discounts warranted? On average, that’s a 70% discount to the other 3 pure-play lithium companies. In my opinion, Pure Energy is trading cheap vs. these select lithium entities.
Clearly, I like Pure Energy Minerals. I like Western Lithium and a smaller company with property in both Nevada & Argentina, Dajin Resources. I’m on record proclaiming that lithium demand could double every 3 years. These particular juniors have very strong upside potential over the next 6-18 months. A rising tide lifts all boats. Other lithium juniors could be home runs, however it would take several years for these out-of-the-money junior’s ships to come in.
That’s why Pure Energy’s 8,000 + acre lithium brine project, containing 816,000 metric tonnes of Lithium Carbonate Equivalent, (NI 43-101 compliant Inferred resource, July 2015) is special. Located next to the only producing lithium mine in North America in Clayton Valley, Esmeralda County, Nevada, halfway between Las Vegas and Reno. Infrastructure, labor, power, roads and equipment are available. This is Nevada, one of the safest and most prized jurisdictions on the planet.
On a relative basis, Pure Energy appears quite undervalued, [NOTE: this is entirely my own analysis]. Data as of Sept. 30th: EVs include in-the-money options & warrants, the pro forma shares outstanding and cash proceeds received, as applicable.
++ Orocobre, market cap, $286mm, EV ~ $275 million
++ Bacanora, market cap, $140mm, EV ~ $135 million
++ Combined WLC/LAC, market cap, $77mm, EV ~ $72 million
++ Pure Energy Minerals, market cap, $48mm, EV ~ $36 million