Special Report: Resources analyst Dr Chris Baker, from Sydney-based equities advisory firm Bridge Street Capital Partners, says he liked what he saw at a site visit to Liontown Resources’ Kathleen Valley lithium-tantalum project in WA.

“Liontown’s work at its 100 per cent-owned Kathleen Valley project is delivering a much higher value project than originally thought,” Baker wrote in a new research note released late last week.

Baker, a former top fund manager who used to be a leading stock-picker for major global resources funds like Colonial First State, says the resource drill-out at Kathleen Valley is well advanced and on schedule for completion in 4 to 6 weeks.

Liontown (ASX:LTR) unveiled an impressive high-grade resource for Kathleen Valley of 21.2 million tonnes at 1.4 per cent Li2O, providing the foundation for a positive Scoping Study on a $230 million, 2mtpa development earlier this year (a similar scale to Pilbara Minerals’ Pilgangoora Stage 1 lithium project).

Miners undertake up to four different types of studies to determine whether or not a resource can be mined economically. These are — in order of importance — scoping, preliminary feasibility (PFS), definitive feasibility (DFS) and bankable feasibility (BFS).

Now, with a resource drill-out well advanced and highlighting significant project upside, Bridge Street believes the stock could be set for a significant re-rating as the market wakes up to Kathleen Valley’s potential.

He says the “impressive” results being generated by the resource drill-out (and upgraded exploration target) suggest that it is on track to double the current Resource to over 40 million tonnes.

“Inexpensive” exposure to battery metals space

After visiting site with a bevy of analysts, brokers and investors last month, Dr Baker says Liontown is “inexpensive” relative to its pre-development peers, trading on an enterprise value of just $36 per resource tonne.

Other pre-development companies like Kidman Resources (ASX: KDR) trade at well north of A$100 per resource tonne using equivalent metrics.

“A recent scoping study shows that Kathleen Valley (KV) can become a high-margin, mid-tier producer and an attractive investment in the battery raw material sector,” Baker says, citing his estimated project NPV of $400 million for Kathleen Valley and post-tax IRR of 36 per cent.

IRR and NPV are used to estimate the profitability of a potential operation.

“Results from the KV drill-out announced on 4 April were particularly impressive, and have resulted in an increase in its exploration target to 15-22.5Mt, which is on top of an existing 21.2Mt resource,” Baker wrote.

That equates to a resource target of over 40Mt as the drill-out advances, with drilling at the company’s second lithium project, Buldania, to commence in May.

“From late 2016, Liontown has moved KV into what might become a +15-year mine life, high-margin lithium concentrate producer,” he says.

“The PFS project manager stated that he saw no ‘red flags’ for the KV project and commented that this is unusual for an early-stage evaluation.”

He adds: “A well-qualified technical management team is focused on a tight schedule to deliver the completion of the resource drill-out, a rigorous approach to metallurgical testing and the finalisation of a process design flowsheet.

“A completion target for the Pre-Feasibility Study is set for 4Q 2019.”

A look at Liontown’s Kathleen Valley Project. (Supplied)

Looking ahead

Baker’s valuation of Liontown at 11c per share assumes a 50 per cent project sell-down to fund the project’s estimated $232 million capital cost at what he assumes to be a >50 per cent discount to NPV.

“This we believe is a conservative assumption. Recent transactions in the lithium space suggest this is a defendable asset price.

“Based on comparisons with LTR’s pre-development peers, we see no reason why LTR shouldn’t trade at a resource valuation of somewhere between that shown by Core Lithium (well located, good grade, modest resource life but high strip and as yet unfunded) and Kidman Resources (well located, good grade, long mine life and funded by partner SQM).

“That mid-point is an enterprise value of around A$100-120/LCE resource tonne of around 6-7c/LTR share.

“This we see as a credible short-term price target for LTR. And this does not account for the likelihood of a mid-year resource upgrade.

“Nor does it account for the potential of significant value from the newly-discovered Buldania lithium project.”

This story was developed in collaboration with Liontown Resources, a Stockhead advertiser at the time of publishing.
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