Lake Resources N.L. (ASX: LKE) shares are on form on Tuesday.
In morning trade, the lithium developer's shares are up 15% to 15 cents.
Why are Lake Resources shares jumping?
Investors have been buying this ASX lithium stock today after the company released the phase one definitive feasibility study (DFS) for the Kachi lithium brine project in Argentina.
According to the release, the DFS found that the project has a post-tax net present value of US$2.3 billion and an internal rate of return (IRR) of 21%.
This is based on battery grade lithium carbonate revenue of US$21 billion and US$16 billion EBITDA over the 25-year life of mine (LoM). The latter implies annual average EBITDA of US$635 million and an EBITDA margin of 76% from its estimated 25,000 tonnes per annum production.
Though, the company is going to need a significant cash injection if it is to successfully develop the project. Management estimates that its initial capital expenditure for phase one is US$1.38 billion.
As a comparison, Lake Resources shares were last trading at a level that implied a market capitalisation of A$185 million.
Management advised that it has engaged Goldman Sachs to act as advisers and support the equity component of the project financing activity. This process will focus primarily on identification of a strategic partner to take an interest in the Kachi Project at the asset level. It may also include offtake rights for the contemplated product.
This process typically takes 6-9 months from completion of the DFS but actual timelines may vary according to the company.
Is this DFS too good to be true?
On paper, the DFS looks good at first glance. But could it be too good to be true?
It is worth highlighting that the company's estimates are based on the assumption that it will command an average lithium carbonate sales price of US$33,000 per tonne for the life of the project.
However, as I covered here yesterday, Goldman Sachs, its funding adviser, believes the long-term lithium carbonate price will be just US$15,000 per tonne.
That's ~55% lower than the company's estimate. This could mean that Lake Resources' earnings estimates and project valuation are seriously out of whack with reality.
In fact, its sensitivity chart shows that an average lithium carbonate sales price of US$28,100 per tonne would reduce its project net present value by 28%. It explains:
Project cash flows are most sensitive to changes in lithium carbonate selling price, where a 15% change in price resulted in a 28% change to the Post-Tax NPV. Lithium price impact can be limited/mitigated by the pricing mechanisms to be put in place with potential offtakers. Production volume fluctuations are expected to have similar effect as price fluctuations on NPV.
The question for investors is what would that mean for an average price of US$15,000 per tonne? Would it make the project a non-starter at those levels? Time will tell.
