One of our best Investments was Latin Resources, which made a hard rock lithium discovery and was re-rated to a high of ~42c per share—2,332% above our Initial Entry Price. L1M is following the same exploration playbook, 20km away.
Opened: 02-May-2024
Shares Held at Open: 6,360,712
What does do?
Lightning Minerals (ASX:L1M) is a hard rock lithium explorer with projects in Brazil (and also Western Australia, which are quite interesting too).
What is the macro theme?
Lithium is a critical material used in Electric Vehicle (EV) battery cathodes.
We believe battery metals are the most compelling investment theme of this decade with lithium supply deficits anticipated through to the end of 2030.
L1M will be looking to replicate the success of other Brazilian lithium companies like Sigma Lithium and Latin Resources.
Why did we invest in ?
We have had success Investing in Brazilian lithium before
One of our best Investments was Latin Resources, which made a hard rock lithium discovery and was re-rated to a high of ~42c per share—2,332% above our Initial Entry Price. L1M is following the same exploration playbook, 20km away.
Two of Brazil’s biggest lithium projects are near L1M
L1M’s ground sits between $545M Latin Resources (20km away) and $2.3BN Sigma Lithium (60km away), both of which are the big pioneers of the lithium industry in Brazil.
Minas Gerais is Brazil’s “Lithium Valley”
The state aims to be the biggest lithium province in Brazil. The “Lithium Valley” concept was launched in the State of Minas Gerais to promote foreign investment in Brazilian lithium projects.
Rio Tinto moving into Minas Gerais in a big way
Rio Tinto has started pegging ground to the north of LRS and Sigma. Could Rio Tinto be setting up for a play on the region as a whole? Rio is already active in Argentina so South American assets are definitely not out of their remit.
L1M’s project sits on similar geology to LRS and Sigma
L1M’s ground sits on top of similar geology to where Latin Resources made its discovery (the Salinas Formation). The projects also sit within similar proximity of the granites in the region & has similar aeromagnetic data running through the ground.
Exploration “roll of the dice”
Our other Investment SLM was trying to find lithium in Brazil, and it ran from ~13c to ~$1.34 per share. Unfortunately it didn’t deliver a discovery (yet, we still hold). We are betting on L1M as another early stage “the next LRS” exploration bet to hold in our Portfolio.
Bear market pick up
L1M is picking up ground in a lithium bear market, which means the likelihood of finding higher-quality, well-priced projects is higher.
There is an existing playbook for success in Brazil
Companies like Sigma have gone from <$100M market cap explorer to a peak market cap >$4BN. Latin Resources has gone from <$20M market cap to a peak of ~$1BN. There is a proven valuation re-rate for companies that manage to make hard rock lithium discoveries in the region.
Tight capital structure
After acquiring the Brazilian assets, L1M will have ~99M shares, which means there aren't many shares on issue. The top 20 hold ~47%, and the board and management hold ~8.7% of the company’s shares on issue.
Low market cap leveraged for a re-rate on a discovery
Post acquisition at 7c per share, L1M has a market cap of ~$6.5M leaving plenty of room to re-rate off the back of a discovery, especially given the peer valuations in the region like Sigma and Latin Resources.
Good deal terms tied to success on the project
Bulk of the consideration being paid for the assets are tied to milestone payments related to defining a JORC resource, NOT the usual “lithium bearing drill intercepts” we see on project acquisitions.
What do we expect to deliver?
Objective #1: Find high priority drill targets
We want to see L1M conduct geochemical and geophysical surveys and determine the best drilling spots at its Brazilian lithium project.
Milestones
Geological mapping
Rock chip sampling
Soil sampling
Define high-priority drill targets
Objective #2: Drill high priority targets
We want to see L1M drill its best targets.
Milestones
Drilling permits
Drilling starts
Drilling completed
Assay results
Objective #3: Exercise option to acquire Brazilian lithium project
After de-risking the project, we want to see L1M exercise its option and acquire the project
Milestones
Exercise the option to acquire the project
Objective #4: Drilling at WA lithium project
We want to see L1M do some more sampling work before drilling one of the priority targets at its WA lithium asset (Dundas)
Milestones
Geochemical/Geophysical surveys
Drilling starts
Drilling completed
Assay results
What could go wrong?
Exploration risk
L1M’s project is an early stage exploration asset. There is always a risk that L1M finds no targets worthy of drilling or that, even after drilling, the company fails to find any economic lithium mineralisation. As a result, exploration risk is one of the primary risks for L1M.
Deal completion risk
L1M’s Brazilian assets are yet to be acquired and will still need to have the “option to acquire” exercised. L1M will also need to get shareholder approvals for the transaction which is never guaranteed to proceed. There is always a risk that the deal isn’t completed and L1M ends up with no asset ownership. In that scenario, L1M’s share price would likely be impacted negatively, and it will likely seek other assets to complement its existing ones, which could take time.
Financing risk
L1M does not generate revenues and relies on raising capital to fund its exploration programs. If the market is unwilling to fund the company, it risks being unable to drill its project or offering large discounts to its share price when raising capital.
Commodity price risk
The lithium price is very volatile, given that the market is still in its infancy. There is a risk the lithium price fails to recover, and the valuations for greenfields explorers or new discoveries aren't as high as they would have been in a stronger price environment. Low lithium prices will impact L1M’s share price in the long run.
Market risk
Investors may shy away from high-risk investment opportunities like junior explorers if the broader market sells off. During market downturns, investors will look to pull capital away from high-risk investments. L1M is a junior explorer and may be impacted by these market-wide sell-offs.
What is our investment plan?
Exploration is high risk and share prices often can swing up and down before, during and after the drilling event.
Our plan is to hold the majority of the position into the drill results (in case L1M can deliver a “Latin Resources style” result), if the drill results are excellent or the price runs in the lead up to drilling we may Top Slice 20% of the position in line with our trading policies which you can read here.
If the drill results do not deliver, we are happy with the cap structure and back the management team to further test the West Australian assets or acquire a new project.
Disclosure: Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 6,360,712 L1M Shares, 3,180,357 L1M options, and 1,400,000 Bengal Mining shares. The Company has been engaged by L1M to share our commentary on the progress of our Investment in L1M over time.
