Investment Memo: Latin Resources (ASX: LRS)
What we want to see from our investment in LRS during 2022
17th Feb 2022
This investment memo is a short, high level summary of why we continue to hold LRS and what we expect the company to deliver in 2022. The purpose is to record our current thinking as a benchmark to assess the company's performance against our expectations 12 months from now.
What does LRS do?
Latin Resources (ASX: LRS) is a multi-commodity exploration and development company focussed primarily on lithium in Brazil and halloysite and kaolin in WA.
What is the macro theme behind LRS?
Lithium is the key component of EV battery cathodes and has experienced strong upwards price momentum recently after a long period in the doldrums. We believe battery metals are the most compelling investment theme of this decade.
Halloysite is a carbon nanostructure clay with a range of high-tech and emerging use cases. With current use cases in the medical industry, ceramics and coatings. Due to its unique composition scientists are exploring further use cases for halloysite. This includes using it for carbon emission mitigation and advanced materials.
Why do we continue to hold in 2022?
- Lithium - The tenements that LRS holds in Brazil have been underexplored for lithium and early stage work has looked promising to date. We believe given market dynamics, a lithium discovery could generate significant upside and become a company making event..
- Halloysite - LRS has a significant high grade halloysite deposit in WA with an existing JORC Mineral Resource Estimate. We believe this is the most likely near-term source of revenue for the company.
- Potential to re-rate - LRS has a large retail following and hence has the potential for significant share price re-rates on good news. This is a double edged sword however as the share price can drop too on average news or long periods without news.
What do we expect LRS to deliver in 2022?
Objective #1: JORC resource at the Brazilian lithium projects.
Complete at least two or three rounds of drilling to try and delineate a JORC lithium resource. We want to see LRS deliver lithium grades > 1% across the drilling programs which would make it more likely that a high grade JORC resource can be established.
Objective #2: Offtake agreement for Halloysite project.
We want to see an offtake agreement for the LRS halloysite project, following product qualification. This would firm up the prospect of LRS making near-term revenue from this project.
Objective #3: Progress cattle rumen methane emissions reduction project
Methane makes up only 10% of greenhouse gas emissions - but over a 20-year period, it is 80 times more potent at warming the world than carbon dioxide.
Agriculture, and cattle in particular, compose a big part of these methane emissions. LRS has committed $3.2M in funding to a research organisation and engaged a former CSIRO Chief Research Scientist to explore the possibility for their high grade halloysite to reduce methane emissions from livestock, in particular cattle.
This project could help establish an additional end use for their resource and we want to see preliminary results from the research in 2022.
What could go wrong?
- Exploration risk: There are no guarantees that LRS finds more lithium. Alternatively, LRS doesn’t find enough lithium to justify a mine.
- Market risk: Lithium prices have cratered before and its possible supply/demand dynamics change and in turn impact market sentiment to lithium exploration companies such as LRS.
- Production risk: The halloysite that LRS has may not be of sufficient quality for offtake partners or they may not be able to produce enough of it to make the deposit economic.
- Geographic risk: While the region of Brazil that LRS operates in is a mining friendly jurisdiction, political changes could alter that.
- Funding risk - LRS had $643k in cash at the bank as of 31 December 2021. As a result, we believe LRS will need to find sources of funding to continue its exploration and development activities. These may come through the exercise of options or a capital raise.
What is our investment plan?
We added more LRS to our position in early 2022 - we are holding to see what comes from the initial lithium drilling campaign and assays. If the share price runs we will look to sell down about 20% of our current position.
Disclosure: The authors of this article and owners of Catalyst Hunter, S3 Consortium Pty Ltd, and associated entities, own 12,475,000 LRS shares at the time of writing this memo. S3 Consortium Pty Ltd has been engaged by LRS to share our commentary on the progress of our investment in LRS over time.
Catalyst Hunter Investment Milestones
✅ Initial Investment @ 1.765c
✅ Top Slice
✅ Free Carry
✅ Increase Investment @ 4.49c
✅ Free Carry
✅ Increase Investment @ 3.00c
✅ Free Carry
✅ Take Profit
✅ Price increases 250% from initial entry
✅ Price increases 500% from initial entry
✅ Price increases 1,000% from initial entry
✅ 12 months capital gains tax discount
🔄 Hold remaining for 2 years