By Peter Epstein
LOS ANGELES, Nov. 12, 2015 - In prior articles, like the here and here, I put forth a more bullish lithium demand scenario than industry experts, sell-side analysts, and company management teams. Since then, demand appears to be moving up strongly, making my forecast less controversial.
I'm no smarter than other lithium sector participants, I simply employed the Peter Lynch approach of paying close attention to news and my own observations. I envisioned steady increases in end-users, many of which are on the sidelines waiting for security and scale of supply before jumping in. The EV and grid-scale Energy Storage Systems appear to be growing more rapidly than many believed just a few months ago.
Investing in lithium Majors will Not do the trick
If I'm right, investing in Majors FMC, ALB, SQM & China's Ganfeng Lithium will not ensure meaningful capital appreciation. Clearly there's more risk and potential reward in the juniors. Especially so because, unlike the Majors, juniors offer pure-play exposure. Juniors are the possible means to a spectacular end, but one needs to be patient, waiting for animal spirits to return. Lithium juniors need a believable path to production, even if it is to be traversed by a successor.
Besides robust demand, I feel confident that M&A activity will flourish next year. Specialty chemicals / fertilizer companies are ideally placed to takeout lithium juniors. Target market caps of roughly C$ 5 million to C$ 50 million would be a drop in the bucket. Suitors also include battery makers and lithium companies like Orocobre. Suitors would gain valuable geographic, operating and processing diversification, in the form of hard rock mining, brine harvesting and prospective new technologies.
Dajin Resources Corp Ticks Off a Lot of Boxes as a Lithium Junior worth Investing In
It seems reasonable that juniors with the most upside would be acquired first. Companies like Dajin Resources Corp. (DJI:CA) (DJIFF) (Frankfurt: A1XF20) check off a number of boxes. Stable jurisdiction? Nevada, check. Blue-sky potential and diversification from Nevada? Argentina, check. Eighteen-month lead time over early entrants? Check. Critical early-stage, on the ground, experience working in Nevada & Argentina? Check. Strong management, Board & Technical teams? Check. Tremendous upside from current market cap of C$ 11 million = US$ 9.0 million? Check.
Importantly, if lithium demand takes off as I envision, new entrants might have to pay up for Dajin's meaningful head start. Time is money, and managerial resources are important as well. Why squander them by starting at square one? And, the best prospective properties are presumably controlled by early entrants anyway.
Over time, a takeout of Nevada's small cap lithium juniors could come to pass. In addition to the above-mentioned factors, larger companies have lower costs of capital, better access to potential joint venture partners and the ability to advance projects more rapidly. I'm on record as saying that demand for lithium will be strong, strong enough for a number of viable juniors.
The clear trend is that early entry attempts are taking longer to permit, test, fund, and study (environmental, legal, compliance, aboriginals, social license, baseline studies, etc). Once a lithium boom becomes more apparent, owners sitting on property that's suddenly deemed a lot more valuable would be harder to deal with and demand better economics. All this is par for the course in metals/minerals and oil/gas basins globally.
Valuations of Natural Resource Plays Can Move Rapidly and Substantially Higher Under the Right Circumstances
As mentioned, Dajin Resources ticks a lot of boxes. It's a 100% owner of two containing nearly 7,000 acres in the middle of the fairway in Nevada. These two deposits (targets) are the more advanced. The Company has another asset in Argentina, in the heart of the, "Lithium Triangle." Dajin controls a large stake in the Jujuy province of Argentina, ~95,000 hectares (234,750 acres). An expert Technical team staked the property and the Company is already moving forward there. That's three significant assets, each of which could be worth considerably more if lithium demand shakes out as I believe it will.
We've seen this movie before. For example, one could have acquired acreage in emerging shale oil & gas properties in (now) well known basins for $100 to $200/acre. Not fringe property, right in the center of the (then) prospective targets. Fast forward just a few years and the same holdings were trading hands (via takeouts by Majors) at 20x-50x prior valuations.
Assuming that Dajin's Nevada property becomes, "worth," US$ 3,500/acre, then (7,000 acres x US$ 3,500) = US$ 24.5 million for Nevada alone. These calculations and possible outcomes are entirely my own, and to be clear, this wouldn't happen overnight. Still, in just a few years, properties in Nevada's lithium hub could be trading on a per acre basis.
This assertion is predicated on strong lithium demand and M&A activity over time. Is this a giant leap of faith? Not really, it happens all the time. Not just relatively recently in the U.S. shale oil & gas boom, (now bust, but not pertinent) but also in the property surrounding precious metal discoveries the world over. Land values soar in near proximity to uranium finds in the Athabasca region of northwest Canada, for instance. It even happens on property containing subsurface rights to giant fresh water aquifers.
If bullish demand in virtually any commodity prevails, early entrants win. There's no way around it. If Dajin were to mature in the midst of the next global natural resources boom, shareholders would benefit all the more. In terms of pure-play lithium juniors, Dajin is an early entrant in both Nevada and Argentina. Not the only early entrant, but one of the few. With few juniors to choose from, Dajin Resources should be near the top of the list of those looking to articulate a position in a lithium market that could become significantly more robust, perhaps sooner, than anyone imagines.
Disclosure: Dajin Resources has a small market cap. Stocks with small market caps are highly speculative, not suitable for all investors. I, Peter Epstein, own shares of DJI.V. Mr. Epstein is not a licensed financial advisor. Readers should take that fact into careful consideration before buying or selling any stock mentioned. Readers are encouraged to consult with their own investment advisors before buying or selling any stock, especially speculative ones. At the time that this article was posted, Dajin Resources was a sponsor of: http://EpsteinResearch.com. Please consider visiting: http://EpsteinResearch.com for free updates on Dajin Resources and others across a range of industry sectors. While at http://EpsteinResearch.com, please enter an email for instant delivery of my work. Thank you for supporting my articles & interviews.
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