Lithium Power International Ltd (ASX:LPI) is expected to see a clearer path to production for its Maricunga Project following the announcement of the Chilean government's national lithium strategy (NLS) in April 2023, according to Edison Investment Research.
The NLS is a set of general guidelines and principles that define state efforts and activities aimed at developing the domestic lithium industry.
Edison believes that the NLS lowers the political risk and should be viewed as a positive driver for LPI’s shares.
The following is an extract from Edison’s valuation update for LPI:
After a sharp correction in H222 and H123, lithium prices have recently enjoyed a healthy bounce back, providing support to lithium equities. However, Lithium Power International’s (LPI’s) shares continue to be held back by the political uncertainty in Chile. Acknowledging the initial market scepticism, we believe that the recent introduction of a Chilean national lithium policy establishes a clearer path to production for new projects. Based on our model, LPI’s share price implies a net present value (NPV) discount rate of more than 40%, which we believe is an overly conservative risking for the Maricunga project, which is at a final investment decision stage, even allowing for the Chilean regulatory uncertainty.
Chilean lithium policy: Breaking the stalemate
In April 2023, the Chilean government unveiled its national lithium strategy (NLS): a set of general guidelines and principles that define state efforts and activities aimed at developing the domestic lithium industry. The key elements of the strategy include public-private partnerships, participation of local communities and creation of a national lithium company. The strategy is a de facto confirmation of the dominating role played by the state in the sector. Acknowledging market concerns regarding the private ownership risks, we nevertheless believe that the new policy could be an important step towards breaking the current industry stalemate and establishing a clearer path to production for new projects. This bodes well for LPI as Maricunga is one of the most advanced pre-production lithium assets in Chile.
Lithium M&A continues apace
While the recent weakness in lithium prices brought a new wave of industry consolidation, in contrast to earlier M&A, the improved sector outlook saw a higher number of unsuccessful bids despite a visible increase in valuation premiums. Lithium remains a solid long-term structural growth story, reflecting its use in electric vehicle batteries and other energy storage applications. We see global lithium demand growing at a 20% CAGR from 2022 to 2030, which is exceptionally high in commodity and chemical markets. As such we believe that the sector is likely to continue experiencing high levels of M&A activity and expect large-scale, low-cost, advanced assets to attract visible takeout valuation premiums.
Valuation: An improving risk profile
We have updated our undiluted valuation of LPI for the lower US$/A$ exchange rate and the latest cash position. Our project driven valuation has increased from A$1,813m to A$1,845m using a standard 10% discount rate. Assuming 40% of the project capital is raised via equity at the current price, our revised equity valuation translates into a per share value of A$1.16 (from A$1.42). We believe that the NLS lowers the political risk and should be viewed as a positive driver for LPI’s shares.