Pure Energy Minerals (TSX-V:PE) (FRANKFURT:A111EG) (OTCQB:HMGLF) trades at an 87% discount to Orocobre. Make no mistake, I don’t suggest the Company’s EV should be close to Orocobre’s, but closer than it is. Each is trading well below its respective 52-week high. Western Lithium is ~ 70% below its 52-week high, Pure Energy nearly 50% and Orocobre ~ 45%. Hypothetically, assume that the EVs of Orocobre, Bacanora and Western Lithium were to rebound by 50%. That assumption would put the respective EVs at:
Pro forma EVs upon a hypothetical 50% increase in valuations
++ Oracobre, EV ~ $413 million
++ Bacanora, EV ~ $203 million
++ WLC/LAC, EV ~$108 million
Next, assume that Pure Energy’s EV doubles, (I’m not forecasting that)
++ Pure Energy Minerals, EV ~ $72 million
Under these assumptions, entirely my own, Pure Energy Minerals’ EV would still trade at roughly a 60% discount. The Company’s stock has considerably more fundamental upside. To reiterate, even upon an increase of 50% for the, “comps,” Pure Energy could double and remain at a meaningful valuation discount. Therefore, leverage to the upside is A Lot Stronger. That should be somewhat intuitive given that the Company has the lowest EV to being with. However, that’s the point! Interestingly, Pure Energy would have to trade at an EV of ~ $105 million to achieve a 50% discount to the others, in this scenario.
An important story not yet touched upon is that while Pure Energy trades at an unwarranted discount, it has had a string of positive catalysts and is expected to potentially make additional de-risking. No, I’m not dwelling on Tesla Motors Inc (NASDAQ:TSLA), there’s other news in the works as well. For example, the Company is working closely with technology partners Tenova Bateman and South Korea’s giant POSCO. Pure Energy Minerals is about to embark on another exploration program to firm up the conservative assumptions used to calculate its Inferred resource estimate. The Company is also working on a Preliminary Economic Assessment, expected to be released in the first half of 2016. Not only is Pure Energy Minerals trading cheap to the other 3 companies mentioned, it’s not trading cheap on any rationale fundamental basis.
Any investment in a small cap natural resource stock, even in the lithium sector is highly speculative. Despite strong fundamentals, lithium remains a contrarian wager. For taking on the crowd, the conventional wisdom on what I believe are oversold stocks, all 4 of them, one requires as much bang for one’s buck as possible. Trying to poke holes in the stories of others is not necessary. I believe demand for lithium will be so surprisingly strong that Orocobre, Bacanora and Western Lithium are indeed cheap, but not nearly as cheap as Pure Energy Minerals.
Lithium prices one of the few metals or minerals to move higher
Lithium supply/demand fundamentals paint a rosy picture. Still, while fundamentals are strong, valuations are down significantly. An astute reader might ask, how can that be? Lithium companies are being thrown out with the bath water. Virtually every natural resource company is oversold, unloved, ready to be dumped on any increased trading volume. Good news is not receiving appropriate attention. This is equally true with, for example, gold and silver stocks… great drill results, no reaction in the stock price. I imagine this goes without saying for most of us.