Investment Memo: Latin Resources (ASX: LRS)

Memo Opened: 10th June 2022
LRS Shares Held at memo open: 5,755,000

Archived LRS Memos:

LRS-IM-2022 (17th Feb 2022)

What does this company do?

Latin Resources (ASX: LRS) recently discovered a high grade lithium resource in Brazil. The company is now actively defining the size of the discovery and aiming to become a lithium producer.

What is the macro theme?

Lithium is the key component of EV battery cathodes and has recently experienced strong upwards price momentum after a long period in the doldrums.

We believe battery metals are the most compelling investment theme of this decade. With a lithium supply deficit anticipated in 2024.

We think spodumene resources like LRS’s Brazilian lithium discovery should do well in this environment.

Why do we continue to hold in 2022?

1. Lithium - Following the company’s Brazilian lithium discovery in March 2022, our LRS holdings give us exposure to lithium. We think lithium offtakers will really need new supply as EVs continue to gain market penetration.
2. Potential to re-rate again - LRS has a large retail following and hence has the potential for significant share price re-rates on good news. The opposite also applies if the news is bad. We hope the definition of a JORC resource or offtake deal could see LRS re-rate again with this retail backing.
3. Favourable peer comparison - LRS is at an early stage in its development as a lithium company, meaning its current valuation may have more upside as compared to its peers.
4. Funding risk mitigated - LRS raised $35M in April 2022 and we think it is well funded to advance its Brazilian lithium project over the next 12 months.
5. Billion $ capped neighbour with similar geological setting - US$1.7B capped Sigma Lithium’s project, ~100kms to the south, is a good model for how LRS can progress its project. Sigma’s project is in the construction phase and LRS can take learnings from Sigma.

What do we expect the company to deliver in the next 12 months?

Objective #1: JORC resource at the Brazilian lithium projects.

A JORC resource would allow LRS to engage in more substantive conversations with offtake partners and allow the market to appropriately value LRS versus its peers.

We want to see an overall grade for the resource >1% lithium and have set up our expectations for overall tonnage as follows:

Bullish case (Exceptional) = >15Mt JORC resource

Base case = 5-15Mt JORC resource

Bearish case= <5Mt JORC resource

Milestones:

🔄 25,000 metre infill resource definition drilling
🔲 Assay results (ongoing)

Objective #2: Start feasibility studies

We expect LRS to begin a feasibility study (scoping study or pre feasibility study) at some point over the next 12 months following resource definition.

Milestones:

🔲 Testwork reporting (metallurgy) (Q3-Q4)
🔲 Commencement of feasibility study (Q3-Q1 2023)
🔲 Bonus: completion of feasibility study (Q2 2023?)

Objective #3: Offtake Agreement

While demand for lithium remains strong, we are hoping LRS manages to sign an offtake agreement in the next 12 months. Perhaps around the time that its JORC resource comes out.

Milestones:

🔲 Letter of Intent or Non Binding MoU / Binding Offtake (by end of year)
🔲 Binding Offtake Agreement

Objective #4: Additional exploration at lithium tenements

LRS is looking to do more drilling at a recently acquired lithium prospect and an existing lithium prospect that has previously not been focussed on - this could increase the size of its resource.

🔄 Drilling at recently acquired lithium tenements
🔲 Assays
🔲 Drilling at existing under explored lithium tenements
🔲 Assays

What could go wrong?

Development risk:
After the discovery hole, LRS will face a new set of challenges with regards to developing the project. LRS will have to start thinking about feasibility studies as well as factors like logistics and processing plants.

Exploration risk:
There are no guarantees that LRS continues to find more (or enough) lithium at its newly acquired and under explored lithium tenements. Alternatively, LRS doesn’t find enough lithium in infill and resource definition drilling at its lithium discovery 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/development companies such as LRS.

Geographic risk:
While the region of Brazil that LRS operates in is a mining friendly jurisdiction, political changes could alter that.

What is our Investment plan?

We are now free carried and have taken profit in our LRS Investment.

We currently hold 5,755,000 LRS shares and we intend to hold the majority of these shares while the fully funded LRS executes on its business plan to develop its lithium resource.

If the share price re-rates significantly on major news, likely either to be an offtake agreement, or the JORC resource exceeds expectations, we may look to take a profit once again.

Disclosure: The authors of this article and owners of Catalyst Hunter, S3 Consortium Pty Ltd, and associated entities, own 5,755,000 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.

Investment Milestones for LRS

✅ 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