27/07/2023

A Question Of Valuation

The stock market equivalent of a cliché, that if you ask the CEO of a company whether their share price is undervalued or overvalued, they will always say the market is treating them unfairly. Of equal interest these days when we have multiple channels, website and social media commentary, is that one can access a multitude of views regarding a company. Of interest just a week ago as far as CleanTech Lithium is concerned, the explorer and developer in Chile, is that at 40p a share, and with a market cap of just over £40m, one would have to search high and low for an opinion which suggests that the company is currently over-valued.

Indeed, we were looking at a situation where all and sundry were trying to explain the significant undervaluation. This existed on several fronts, but most notably relative to the company’s peers, in the run up to the latest Laguna Verde JORC resource upgrade. This was up some from 1.5Mt to 1.8Mt, a chunky jump, something one would expect to boost the share price. The fact that the shares were up nearly 50% on this upgrade reveals something of a conundrum regarding why the stock has been underperforming since it peaked at 90p plus in February. The conventional explanation was that it has been uncertainties regarding the position of the Chilean government with regard to “reforming” the lithium sector, with the word reform taken to mean that it would look to claw back the share mining companies take of the profits, and / or impose draconian ESG rules on them.

JORC Resource Upgrade

What is interesting as far as CTL is concerned, is the way that the shares have risen sharply on the resource upgrade alone, something which would not have been expected if the market was really concerned about the position regarding jurisdiction fears. In fact, it has already been the case that Chilean officials have been moving to reassure regarding their position, especially in not wishing to kill the golden goose of mining in their country. But the good news would appear to be that investors now appear to be much more confident as far as CleanTech’s position, It is almost as if what they were waiting for was confirmation on Laguna Verde as being a mega project. This makes the risk / reward of holding the stock currently rather better than it was prior to the Laguna Verde upgrade, with the company far better leveraged to positive news after a February – July decline in the stock of nearly two / thirds.

The CleanTech Clue Is In The Name

One of the strange aspects of how and why CTL shares fell back this spring was the alleged reason for the share price decline. This was rather at odds with the way that the company was presented when it came to market in March 2022 at 30p. The highlights then were that it would produce low or zero emissions lithium in the second half of 2024, a critical advantage in the fast-growing EU market, by employing renewable energy. It was to vastly reduce the environmental impact of lithium production in Chile by utilising direct lithium extraction technology (DLE). This gave CTL a significant advantage as compared to its peers. Indeed, it could and can be said that if there were any lithium miners set to be at the front of the queue in Chile, CTL was made to be in pole position. Add in the way that the DLE pilot plant and the PFS for Laguna Verde are moving the company to the next stage currently via an experience board, and this looks like a compelling situation.

Next Steps

One of the rather frustrating aspects for many listed companies is that their hands are tied in terms of being able to be forward looking. In fact, they can be so tied up, that the market can be left with a rather more negative assessment of prospects than is the case. Indeed, an information vacuum can occur. As well as the pleasant surprise of the JORC update, investors in CTL can now feel that they have line of sight on the company being a significant producer, and one that can negotiate the slings and arrows of its jurisdiction. It also has another upgrade, one that many of its peers will have over the next couple of years, as Western countries look to wean themselves off China dependency in commodities, and develop their own commodities security especially in critical metals. The urgency in doing so has of course been underlined in the way of the Russian invasion of Ukraine, and all the supply chain issues this threw up.

ASX Listing

That said, it is perhaps company specific aspects that are really going to drive CTL for the rest of the year. We are already in the run up to an ASX listing likely during the autumn. This follows the company’s commencement of OTCQX Best Market in the U.S., something which opened up a fresh pool of liquidity for CleanTech. However, one would suggest that it is Australian investors who are really likely to get firmly embedded into the CleanTech proposition. This in turn should goad UK investors to ratchet up their enthusiasm for the strong, something which we may have already been seeing of late.

Cannacord 295p Share Price Target

This process could actually be something which surprises on the upside, with a taster coming from the Investors Chronicle honing in on the shares trading at 40p versus the Cannacord 295p share price target. It cited not only the upgraded Laguna Verde resource estimate, but also the Francisco Basis JORC resource estimate being due shortly. It also looked forward to the PFS on LV later in the year, hinting that the current expectations of annual production at 20,000 tonnes and a mine life of 30-40 years could be raised. When one adds in the CTL projected cost of production being less that 10% of the spot LCE price, this means we are looking at a DLE process which ticks all the ESG boxes as well as simply being quicker to market, days rather than up to 18 months.

Expectations

Like the position in many of the critical metals, with lithium we have a situation for the rest of the decade where demand and supply are simply out of kilter. The deficit will have to be filled, and companies like CTL will be amongst the best placed. In the meantime, with the shares well off peer valuations, and with a near 5 fold uplift in the Cannacord share price target even after recent gains, H2 2023 should mark an acceleration in the CTL journey from several angles.