Ioneer: Striving to Reduce Risk (NASDAQ:IONR)
US Lithium Miner Risk Mitigation
The battle continues in the battery supply chain. Exacerbated by geopolitical tensions, growing demand and limited supply, Toyota (TM, OTCPK:TOYOF) and Panasonic (OTCPK:PCRFY, OTCPK:PCRFF) formed a joint venture seeking to secure lithium supplies for battery production. In comes ioneer Ltd (NASDAQ:IONR), an Australian company that recently secured the rights to the sedimentary lithium-boron deposits of Rhyolite Ridge. Although operations have yet to begin, the company expects full production in 2025, and support from multinational customers can provide the funding and bureaucratic expertise needed to succeed.
The ioneer assets are unique in that Rhyolite Ridge has the potential to be quite profitable due to local reserves containing both boron and lithium. Both are increasingly used and needed, especially since the United States lacks true self-sufficiency in many areas of raw material supply. ioneer has a few additional enablers that support a positive outlook, including sharing 50% of the Rhyolite Ridge project with Sibanye Stillwater (SBSW, OTCPK: SBYSF) experience and a strong technical and advisory support team, highlighted below.
The western Nevada location also benefits from close access to Panasonic’s joint Gigafactory with Tesla (TSLA), and the final contracted supply is expected to be sufficient to produce up to approximately 150,000 electric vehicles per year. . This reinforces other contracts ioneer has with Ford (F) and EcoPro (listed in South Korea). Unfortunately, we still have to wait for the necessary authorization process to be completed before any sales can take place, which always increases the risk.
Up to the hardest permit sequence
As usual, a major impact that has led to a longer authorization process is the avoidance of a rare species: Tiehm buckwheat. While an initial plan was to relocate a few factories that might have been affected by operations, the company must now leave all the factories intact and actively cultivate others to plant. The parties on both sides of the coin, whether pro-conservation Where pro-lithium mining, must concede that neither is entirely clear. As greenhouse repopulation has been a significant means of increasing population size, more and more agencies have agreed that as long as populations are not directly disturbed, the plant should co-exist with sustainable mining nearby. .
For investors, this means being mindful of mine operations and being prepared to spend less than 1% of expected profits to be as environmentally friendly as possible. Unfortunately, the delays are only the fault of management, as these risks should have been considered before submitting plans. At the same time, I hope environmentalists are loosening up now that the final plan of operation is being thoroughly reviewed and revised. Since the United States has much stricter environmental standards than other countries, I would prefer mining operations to be based here rather than pushed overseas.
Based on the current progress of the investigation and reviews of operations, I expect approval to be obtained by the end of 2023. However, there will be another round of public comment, and that can be a point of risk to be considered critical to pass unhindered. Based on recent progress at Rio Tinto and BHP’s much larger Resolution copper mine in Arizona, I expect public sentiment to be generally supportive of additional raw material production to support the US economy, when done taking into account the region. look to the new Plan of operations to be submitted during the next quarter.
Other highlights of the Rhyolite Ridge project include the following risks and innovations:
Due to the surface location of the deposit, initial mining will be with traditional surface mining techniques, but ioneer has in partnership with Caterpillar (CAT) to provide significant automation infrastructure to increase efficiency and reduce risk.
The lithium-boron deposit is easily mined with dilute sulfuric acid, which will be produced on-site, and co-generated power generation will support all site operations.
The unique mineralogy and processing systems available will ensure that the project does not require evaporation or tailings ponds, both of which are environmentally harmful processes.
Other factors such as low emission and low water consumption technologies are also in place to improve the environmental footprint. It’s unclear if these mitigations are enough to persuade an approval, but I remain optimistic for now. Now we need to determine if the finances are reaching a point that allows development if the project is allowed to proceed.
Rhyolite Ridge Financial Summary
The project’s current quarterly losses are less than $10 million, with cash available at US$94 million. The current estimated capex for the project is US$785 million, although the current after-tax NPV is expected to be US$1.265 billion. With ioneer ready to recoup its money after just five years, the project would be a fairly profitable venture compared to other lithium mines. Additionally, 50% partner SBSW has pledged over US$400 million to the project, which will limit the amount of additional funding that will be required over the next few years.
Direct debit partners
To secure cash flow in the future, ioneer has already done extensive work to find suitable long-term customers. First came EcoPro, a Korean renewable energy company, which secured the first allocation of 7,000 tpy (tons per year) of lithium. Then in July, Ford was announced as the other beneficiary of 7,000 tpa. Finally, with an announcement at the end of July, a press release noted that a joint venture between Toyota and Panasonic had been awarded the final 4,000 tpy levy slot.
Excess production may remain unallocated, but it’s good to know that the majority of annual production already has financially viable businesses for sale. This is important because if production were awarded to a start-up company, the possibility of that entity not being able to meet contractual purchases. Moreover, as lithium prices remain much higher than expected, hovering around $70,000 per tonthese customers have the capital to continue paying high prices rather than smaller entities trying to make ends meet.
For the most part, ioneer seems to be doing well in building a low-risk business. While it’s always risky to put all your eggs in one basket, with Rhyolite Ridge being their only project, the risk-reward profile is worth considering. The only problem now will be watching the headwinds when it comes to the final licensing process. At this time, I believe it will be important to reassess ioneer and determine fair value based on lithium price trends and capital generation. Also, remember that ioneer will also have boron sales, but these may be lower due to the more commoditized industry.
After an IPO on the Nasdaq in July, ioneer’s share price soared, driven mainly by customer announcements. This means that a market cap below $200 million, which was seen as recently as late 2020, may be unattainable. However, based on management’s expectation of a net present value of US$1.27 billion, there is room for positive sentiment to keep the stock price high.
Due to the lack of opportunity for future development and the lack of diversification, I should see a very compelling entry point to be optimistic about. Instead, I think 50% partner Sibanye-Stillwater has a better investment profile at the moment, as short-term headwinds are dragging the stock price down. Overall, I think there will be more time to wait for an entry point below the current market cap of $800 million, as well as clarity on the future of the project.
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