Lithium Americas Corporation (NYSE:LAC)
No of HFs: 12
Total Value of HF Holdings: $33 Million
One of the largest producers of lithium, Lithium Americas Corporation is ranked tenth in our list of 11 best lithium stocks to buy now. The company owns large-scale assets located in Argentina and Nevada. LAC focuses on the development of the Thacker Pass project. LAC was acquired by FMC Corporation in September 1985. During the third quarter of 2020, the company reported a loss of $6.5 million or 7 cents per share.
There were 12 hedge funds that held positions in LAC by the end of December, compared to 3 funds in the third quarter. The biggest stakeholder of the company is Axel Capital Management, with 780 thousand shares, worth $9.7 million.
Massif Capital mentioned LAC in its Q4 2020 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)?”
No of HFs: 12
Total Value of HF Holdings: $33 Million
One of the largest producers of lithium, Lithium Americas Corporation is ranked tenth in our list of 11 best lithium stocks to buy now. The company owns large-scale assets located in Argentina and Nevada. LAC focuses on the development of the Thacker Pass project. LAC was acquired by FMC Corporation in September 1985. During the third quarter of 2020, the company reported a loss of $6.5 million or 7 cents per share.
There were 12 hedge funds that held positions in LAC by the end of December, compared to 3 funds in the third quarter. The biggest stakeholder of the company is Axel Capital Management, with 780 thousand shares, worth $9.7 million.
Massif Capital mentioned LAC in its Q4 2020 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)?”