Prairie Lithium: The acquisition significantly increases the size of Arizona Lithium’s lithium resource (from 0.3 Mt LCE to 4.4 Mt LCE) and diversifies the type of resource (brine added to sedimentary hosted) and geographical location (Canada added to USA). Post close the combined entity will have a resource in Arizona, a resource in Saskatchewan and a prospective resource in New Mexico. The acquisition also brings with it a North American based technical management team, which includes geologists, engineers, chemists, drilling managers and other technical roles. The Prairie management team will be able to assist in the development of the Big Sandy project, and the Arizona Lithium management team can assist in the development of the Prairie Lithium resource, particularly through the use of the Lithium Research Centre. The Prairie Lithium DLE technology has been tested on the Big Sandy resource with promising results, and the acquisition will allow Arizona Lithium to have access to the technology, and for testing at the Lithium Research Centre for both Prairie Lithium and Arizona Lithium’s resources.
Prairie Lithium Development: the company has developed a Direct Lithium Extraction (DLE) technology that selectively extracts lithium from brine, using equipment anticipated to be readily available at commercial scale. The Prairie Lithium Ion Exchange (PLIX) is also currently tested on other lithium resources around the world including the Big Sandy resource.
Prairie Lithium Peers and Valuation: the companies using DLE technology: Standard Lithium (TSXV: SLV), Lake Resources (ASX: LKE), Anson Resources (ASX: ASN) and E3 Lithium (TSXV: ETL) have released development studies (PEA to DFS) with similar results: capex ranging from US$437m to US$602m with after tax NPVs ranging from US$748m to US$989m over life of mine of 20 to 25 years. We can reasonably assume that Prairie Lithium can generate similar financial returns. From the market value of those peers and subject to the release of positive development studies, Prairie Lithium could be valued between $170 and $800 million.
Big Sandy: firstly, one should note that the current mineral resource estimate (modest compared to peers) represents only 4% of the landholding. The companies with sediment-hosted lithium deposits: Lithium Americas (TSX: LAC), American Lithium (TSXV: LI), Ioneer (ASX: INR), Bacanora Lithium (now Gangfeng) and Century Lithium Corp (TSXV: LCE) have released development studies (PEA to DFS) with NPV all in excess of US$1 billion for capex in the range of US$493 to US$819m (except Thacker Pass with capex of US$2,268m). Subject to resource increase and development studies, AZL should derive similar project economics for the Big Sandy project. Subject to further positive development studies released to market, we can reasonably assume that the Big Sandy project should generate a NPV of at least US$1 billion and using Market Cap to NPV ratios ranging from 0.1 to 0.2 would give a value range for the Big Sandy project between US$100m and US$200m or between A$140m and A$285m.
Lithium market outlook: the sector has experienced a tremendous uplift in lithium product prices over the last couple of years. The sustained demand for lithium products over the next decades should support high lithium prices. At this time, lithium prices remain well above the assumptions used in the development studies considered in our analysis.
News flow: Beyond the confirmation of the Prairie Lithium acquisition, the key catalysts in the short and medium terms are the releases of further drilling results and development studies for both Big Sandy and Prairie Lithium confirming the economics of the projects.
AZL valuation: our sum of the parts valuation is supported by the current market valuation of lithium brine peers and sediment-hosted deposit peers listed above with a focus on those at an early development study stage. With the addition of shares issued for the Prairie Lithium acquisition and some additional development capital, our company valuation amounts to A$375 million or $0.10 per share. Beyond this medium- term valuation, the analysis of the Market Capitalisation to NPV ratio across peers show significantly value uplift as the project development studies reach DFS stage. As the company progresses its projects towards that stage, AZL should approach a price target of $0.20 per share.