Patriot Battery Metals Inc delivered a world class lithium inferred resource on July 31, 2023 in the form of 109.2 million tonnes of 1.42% Li2O at a 0.4% cut-off grade. This contains 3,835,000 tonnes of lithium carbonate, which is roughly what the IEA projects will be needed annually by 2030 to meet EV deployment goals as part of the net zero emission target for 2050 which limits global temperature change to 1.5 degrees Celsius. It is roughly equal to Rio Tinto's stalled Jadar deposit in Serbia of which Rio Tinto has predicted the world will need 60 by 2035. The resource confirms that the James Bay region of Quebec is a world class lithium district. And the CV5 deposit occupies less than a tenth of the 50 km trend of the Corvette property on which we know there are multiple additional LCT type pegmatite outcrops. By the time PMET is finished exploring the rest of the property there may be four more such open-pittable deposits. But even that does not come close to guaranteeing the supply the world will need as electric vehicles gradually replace internal combustion engine cars. And that doesn't even take into account the possibility that Toyota has indeed solved the problem of a cost effective solid state electrolyte that allows lithium metal to substitute for graphite in the anode of the lithium ion battery.
This news should kickstart Lithium Mania 2.0, in particular in the James Bay region where there is evidence that a much bigger area is fertile for similar pegmatites. Investors should be buying juniors like Brunswick Exploration Inc and Dios Exploration Inc as speculative bets on similar discoveries, which would deliver a ten-fold price gain for Brunswick and a hundred-fold gain for Dios. Almost everybody missed the PMET boat, but there are plenty of boats still idling at the dock, and unlike for metals such as rare earths for which there is room only for a couple more world class deposits, there is room for dozens more such discoveries. Canada has the potential to rival Australia as a supplier of hardrock sourced lithium. But Canadian investors are asleep at the switch. They blew their brains out on bitcoin and cannabis, and what money they have left is now parked in 4%+ yielding bank deposits. In fact, a Financial Times article on August 2 pointed out that American investors have USD $3.5 trillion parked in money market accounts yielding 5%+.
At the moment the junior resource sector looks hopelessly stuck in a rut, and people like myself are starting to be overwhelmed by dark thoughts that the resource junior eco-system may finally be down for the count, as it started to feel in 2015. Back then it was not clear what would trigger a major inflow of risk capital; the old apocalyptic standby of gold going to the moon thanks to fiat currency debasement and hyper-inflation was not getting much traction. And it still is not today even though gold bumbles between $1,900 and its apparent $2,000 ceiling. But this time around the trigger is staring us right in the face, and the apocalyptic theme is that if we do not roll up our sleeves on all fronts to move the energy transition along, we are toast. It isn't despair that it is going to revive the resource juniors; it will be an awakening of determination that, yes, we can do this!
So far, however, Canadian investors were not impressed by the maiden resource estimate. But one of the world's biggest lithium producers, Albemarle Corp, which earlier this year made a conditional offer for Liontown at AUD $2.50 which valued Kathleen Valley at AUD $5 billion (see KW Episode March 29, 2023), and is in a position to understand very deeply what is going on with the energy transition, was very impressed. Kathleen Valley has a M+I+I resource of 156 million tonnes at 1.4% Li2O, which makes it comparable to Corvette whose CV5 zone itself has room for expansion, not to mention multiple repetition within the 50 km Corvette trend which near surface potential Liontown does not have at Kathleen Valley. Four months after Liontown rejected Albemarle's offer the company has a market cap of AUD $6 billion.
PMET's maiden resource still has 3-5 years of feasibility demonstration, permitting and construction to go before it is at the stage of Kathleen Valley, so it cannot command a similar valuation. But Albemarle did not flinch at the current CAD $2 billion valuation (fully diluted). The same day the maiden resource came out it agreed to invest CAD $109 million by purchasing 7,128,341 shares at $15.29, a 7% premium to Monday's close. This gives it a 4.9% fully diluted stake (142,043,367 shares), which is below the US 5% insider reporting threshold. It comes with a 12 month standstill agreement whereby Albemarle cannot increase its fully diluted stake nor sell stock, but it can participate in any financings to maintain its 4.9% stake. There is also a 9 month exclusive period to explore a partnership for developing a lithium hydroxide refinery in Quebec or the United States linked to concentrate supply from Corvette. With the $50 million working capital as of March 31, PMET now has over $150 million to take Corvette through the next stages of additional exploration and feasibility demonstration. There is no need to rely on Bay Street or Wall Street for bought deal financings at deep discounts to the market, nor does this dual listed Canadian company have to rely on Australian brokerage firms. This Albemarle financing takes Patriot Battery Metals back from the Australians and makes it a North American lithium hardrock play.
Does this mean the stock can't go down? Night Market Research's short attack (see KW Episode July 14, 2023) predicted a resource of 73 million tonnes at 1.28% Li2O, which I thought would be quite an accomplishment, but this number was chosen to make all the analyst predictions look excessive when the actual resource came out. In fact, the base case resource is superior to any of the other estimates. PMET published resources at different cutoff grades. At 1% the resource is 77.6 million tonnes at 1.69% and at 1.1% it is 69.3 million tonnes at 1.77% Li2O. NMR's prediction falls within this tonnage range, but the PMET resource grade is 30%-40% higher. The resource is open-pit constrained and only included spodumene mineralization. The size of the resource is definitely not a reason for the stock to decline.
To put the base case resource into a gold context, at $10/lb lithium carbonate the rock value is $763/t which is the same as 0.38 opt gold or 11.9 g/t. At the current $17/lb price it is 0.65 opt or 20.2 g/t. The latter is the same as a 71 million oz gold deposit at $2,000/oz gold. At the more conservative $10/lb lithium carbonate price it is equivalent to 41 million ounces gold in situ. Open-pittable! Are Canadian investors ignoring this outcome because they are having a bad flashback to 1997 when John Felderhof waved his arms to describe a fake 80 million ounce Busang deposit? Are they thinking of Rare Earth Mania 2.0 when China's export controls sent rare earth prices to the moon and on paper deposits like Quest's Strange Lake had a similar gold equivalent in situ value? These are bad comparisons. When the IEA predicts a 600% lithium supply expansion by 2030 as necessary for the energy transition, it implies a future annual value of $100-$200 billion for global lithium supply, in the same league as gold and copper. Canadian investors need to wake up to this unprecedented opportunity in their own backyard.
Where NMR may still have a point about interim downside is that there are 24.3 million warrants between $0.35-$0.75 that are heavily in the money which would raise about $17.4 million if exercised but require $355 million worth of stock sales at the Albemarle private placement price. This overhang is still present, but no longer as a big a threat as last week. By validating the valuation through its $109 million investment and sparing PMET the headache of dealing with the brokerage sector to continue advancing Corvette, Albemarle has significantly reduced the anxiety of those warrant holders which otherwise could translate into a cascade of panic selling.
Ironically, the biggest threat now is that these warrant holders will short the stock in the hope of buying back in the market a few dollars lower while keeping their warrants alive, stripping out incoming capital while they wait for a major liquidity event such as another major lithium producer making a hostile bid for the entire company. But with about 73% of those warrants expiring at the end of 2023, this sort of market abuse will be short-lived. In the absence of a pre-emptive buyout offer there is not much left to expect on the upside for PMET during the rest of the year, but it will start to serve as an ATM machine for risk capital deployed into other lithium exploration juniors, especially ones active in the James Bay region, assuming forest fires subside and the access closures are lifted. |
