Risk Capital Poised to Pour Into Argentina, Benefiting Select Lithium Juniors

Peter Epstein  |

In an upset over the incumbent party, Mauricio Macri, former Mayor of Buenos Aires, won the November 22nd runoff election, heralding a new era in Argentina’s politics, future and standing on the world stage. Coinciding with Macri’s assent in the polls from September, Argentina’s benchmark Merval stock index soared 58% through the November 20th market close. Many believe that his victory represents an inflection point in Argentina’s long suffering economy. Yet, ramifications could extend well beyond the economy. It’s hoped that fresh political and financial transparency will rebuild relationships with leaders in South America and beyond. Caveat emptor, Macri needs to execute his plans, not a certainty in this volatile, but always promising country.

Macri takes the helm from Cristina Fernández de Kirchner, “CFK,” who together with late husband Néstor Kirchner, governed for 12 years. Unsurprisingly, the former party’s platform was unashamedly populist. This article does not endeavor to debate the political construct of populism. So much ink has been spilled on this topic, that ink imports are likely at record highs. For the first time in over a decade, the country has a leader that could make a meaningful difference… things could hardly get worse. In the past 4 years, foreign reserves are down by half, from US$ 50 billion to roughly US$25 billion and government debt up by 50%, [See Graphs from the Federal Reserve Economic Data, “FRED“]

Under the recently unseated incumbent party, the economy slumped. Inflation ravaged the country, reserves were depleted, currency controls and onerous taxation / regulation undermined growth. Widespread misallocation of resources was the final nail in the coffin. As measured by trusted sources including; the IMF, Red Cross, Fraser Institute, Economist magazine andTransparency International, rankings of stability, transparency, rule of law, graft, growth and other metrics have been shrinking for years. A Change was needed. Change is at hand.

A key takeaway from Macri’s mandate is that its unquestionably pro-business, pro-investment. By all accounts, investment capital has been on the sidelines waiting for this. Martin Dedeu, the President of the Argentine Mining Chamber, estimates there’s at least $5 billion worth of mining projects sitting on the fence. CFK created investment unfriendly currency controls, including a requirement to repatriate foreign revenue, leading to Brazil’s Vale to cancel a $6 billion potash project. Macri’s job is to win back important mining companies like Vale.

New investment could come from Glencore which plans to invest about $3 billion over three years at El Pachón, a copper-molybdenum project, and Yamana Gold’s gold / silver mine Cerro Moro is thought to be on tap upon evidence of the easing of capital restrictions. If Macri sticks to his pledges, it appears that natural resource sectors will be prime beneficiaries. Hallmarks of a reinvigorated Argentina would include hard a return of foreign investment (hard currency), significant employment opportunities and the build out of valuable infrastructure. A win-win for all interested parties. If these outcomes are realized, inflation and capital flight should diminish.

Few natural resource sectors are better suited to ride this ground swell than Lithium. Reserves and production from the, “Lithium Triangle” of Chile, Argentina & Bolivia dominate, but continued growth from Majors, Chemical & Mining Co. of Chile Inc. (SQM), FMC Corp, & Albemarle Corp. could be difficult. Political challenges, actual & alleged frauds, inclement weather and government imposed capacity constraints, have damaged relationships with government agencies, local communities and regional politicians.

As a result, there’s a growing opportunity for junior lithium explorers to pick up the slack. It won’t be easy, but lessons learned from stalled Majors could enable juniors to make meaningful inroads, albeit over the longer-term. With reduced country risk, access to investment capital could become easier to come by. Existing shareholders and new investors alike should be more willing to take on the asymmetric risk / reward inherent in the junior space.

If one wants lithium exposure through a pure-play junior in Argentina, there are few to choose from. I believe that Dajin Resources (TSX-V: DJI) (OTC: DJIFF) (Frankfurt: A1XF20) offers the most bang for one’s buck. Dajin is quite interesting. Its wholly-owned subsidiary has 100% control of a series of mineral concessions in Jujuy province, covering regions known or believed to contain brines rich in lithium, potassium & boron. The concessions total approximately 100,000 hectares (247,105 acres) in various drainage basins including roughly 95,000 hectares (234,750 acres) in the Salinas Grandes/Guayatayoc salt lakes basin.

Salinas Grandes is approximately 70 km east of Ococobre’s Ltd.’s lithium brine operation, that sits atop 63,000 hectares, (155,676 acres). Importantly, Dajin is not new to Argentina, it’s been working on permits and early stage exploration targets for the past 6-7 years. Dajin’s management & Board is optimistic that Macri’s win will move permitting and subsequent steps ahead more rapidly.

Dajin’s property could be of interest to potential joint venture partners. The company’s land position is large and proximal to Orocobre’s. As mentioned, Gangfeng Lithium is in the basin and Toyota Tsusho Corp. has a 25% stake, (at the project level), of Orocobre’s Salar de Olaroz. A larger entity would benefit from the head start gained by Dajin and could follow in the footsteps of Orocobre. In addition to Toyota Tsusho, Korean giant POSCO is aligned with Western Lithium. To the extent that Japanese and Korean battery makers like Panasonic, Mitsubishi, Samsung, AESC and LG Chem are interested in getting a foothold, Dajin would be a logical place to start.

If Orocobre, also in Argentina’s Jujuy province, can reach production, working with the country’s prior government bureaucracy, those that follow may be better able to advance under Macri’s mining friendly mandate. To be clear, Dajin Resources is highly speculative. Still, highly speculative suggests the possibility of very substantial gains. If one believes as I do that:

++ Lithium demand will grow faster than most pundits are calling for, stronger than forecasts from the beginning of the year

++ Supply growth from the Lithium Triangle will be challenged, or at the very least, highly uncertain

++ Argentina’s new government will lead to improved sentiment (it already has), a perquisite for the return of risk capital,

Then, one of the best ways to participate is through lithium juniors, most notably Dajin Resources. Arguably, ALL natural resource juniors have been painted with the same brush. However, lithium pricing is the ONLY bright spot of the entire natural resource space. Simon Moores of Benchmark Mineral Intelligence stated that the lithium carbonate price is up 15%-20% this year and lithium hydroxide 20%-25%. Despite this tremendous out performance compared other commodities, lithium juniors are in dumps and remain a contrarian call. When one takes a contrarian stance, one should require superior risk-adjusted return. I believe that Dajin Resources offers a compelling risk-adjusted opportunity in this regard.

Disclosure: Some of the companies mentioned herein have small market caps, including Dajin Resources, small market cap stocks are highly speculative, not suitable for all investors. I, Peter Epstein, own shares of DJI.V. Mr. Epstein, CFA, MBA is not a licensed financial advisor. Readers should take that fact into careful consideration before buying or selling any stocks mentioned.

Readers are encouraged to consult with their own investment advisors before making investment decisions. At the time 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. While at http://EpsteinResearch.com, enter an email for instant delivery of my work. Thank you for your support.

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