Massif Capital On Lithium Americas Corp (LAC)

Massif Capital, an investment management firm, published its fourth-quarter 2020 Investor Letter – a copy of which can be downloaded here. A net return of 15.8% was recorded by the fund for the Q4 of 2020, above its MSCI ACWI benchmark that returned 14.68%. You can view the fund’s top 10 holdings to have a peek at their top bets for 2021.

Massif Capital, in their Q4 2020 Investor Letter said that they used covered calls to trim their positions in Lithium Americas Corp. (NYSE: LAC) since a covered call is a neutral strategy, the fund can only expect a minor increase or decrease in the short term for the company. Lithium Americas Corp. is the biggest lithium resource development-stage company that currently has a $2.5 billion market cap. For the past 3 months, LAC delivered a massive 125.51% return and settled at $22.38 per share at the closing of January 26th.

Here is what Massif Capital has to say about Lithium Americas Corp. in their investor letter:

“Selling covered calls on Lithium America (LAC) contributed roughly 0.75% to the portfolio’s quarterly return. The covered calls we sold were laddered and had increasing strike prices at points at which we would have trimmed the position for portfolio management purposes. The volatility of Lithium America’s equity made the calls a remunerative opportunity. We believe LAC may have a long way to go before it is appropriately valued, but we will continue to use covered calls to trim the position size should the opportunity present itself.

We first evaluated LAC in April of 2019 and invested in February 2020. At the time of our investment, a discounted cash flow analysis of the firm’s projects produced a $6.5 valuation versus the share price of roughly $2.8. Today, a year later, we think LAC is worth $18 per share. What changed over the last 12 months such that we revised our estimate up by 170+%?

1. The risk associated with project development, and  2. Time to production

LAC’s South American brine operation secured sufficient funding to bring the project to commercial production (financial de-risking). Their North American clay project received critical environmental permits and made substantial progress on the firm’s processing technology to turn lithium-sulfur into lithium salts (operational de-risking). These developments allowed us to lower the discount rate used on future cash flows to reflect where LAC sits in their development cycle. LAC is also one year closer to production, which means cash flows are accretive to the firm sooner.

In either scenario, a shared thread among most growing businesses is elevated volatility. Perhaps obvious, but again, consider the valuation ramifications. Discounted cash flow analysis treats volatility as risk, and value is subtracted from the business. Option analysis treats volatility as an opportunity and rewards the potential asymmetry. Growth investors frequently think in terms of options, traditional value more in terms of cashflows. Tangible asset businesses, which are historically the value investor’s domain, now need to be evaluated with greater attention being paid to both aspects of the companies future, with investors’ judgment determining where the majority of the weight lies in the final intrinsic value calculation.

We want to poise an open question: how comfortable are you valuing a capital-intensive, pre-revenue R&D operation, selling a compelling product into a market that does not yet exist (hydrogen producer, electric vehicle charging company) or an incumbent that fundamentally changed their business model without changing their product (green aluminum, or steel, a coal-burning utility that is now a fast-growing renewable utility)?”

Mark Agnor/

Last November 2020, we published an article telling that Lithium Americas Corp. (NYSE: LAC) was in 3 hedge fund portfolios. Its all time high statistics is 4. LAC delivered a spectacular 464.65% return in the past 12 months alone.

However, our calculations show that Lithium Americas Corp. (NYSE: LAC) does not belong in our list of the 30 most popular stocks among hedge funds.

The top 10 stocks among hedge funds returned 216% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 121 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

Video: Top 5 Stocks Among Hedge Funds

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Disclosure: None. This article is originally published at Insider Monkey.