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V.WML Zacks Initiates Coverage on Wealth Minerals Ltd.

06/08/2017
By Steven Ralston, CFA

TSX:WML.V
OTC:WMLLF

Today, Zacks initiated coverage of Wealth Minerals Ltd. (TSX:WML.V) (OTC:WMLLF) with an indicated target of $2.30. Wealth Minerals is a junior exploration company that is building a portfolio of highly prospective lithium-brine mineral concessions located within the Lithium Triangle, currently targeting properties within salars situated in Chile. However, management’s scope for potential lithium-in-water and brine candidates extends beyond the region in the search for prospective mineral properties.

Summary
-With lithium carbonate prices having risen significantly over the last two years from under $6,000 to above $14,000 per tonne, investors are intently focused on ferreting out opportunities in the lithium industry.
-Consistent news flow from Tesla and other builders of battery gigafactories reinforces the macro-case for lithium.
-The Lithium Triangle, particularly in Chile and Argentina, appears to be the sweet spot for low-cost incremental supply.
-Wealth Minerals is well-positioned to benefit from its highly prospective lithium projects (totaling over 55,000 hectares; 71,800 hectares if counting concessions under LOIs) all located in Chile.

The proliferation of rechargeable electrical energy storage devices (along with impending eruption of increased demand from commercial production of mainstream electric vehicles and grid-level energy storage devices) has supported a 150%+ increase of lithium pricing since 2014. Due to the extensive use of lithium for a variety of applications, this positive macro-trend is expected to continue into the next decade when incremental supply can catch up to the growing demand for lithium compounds. As many investors know, a strong pricing environment is a catalyst (and arguably the best catalyst) for multiple expansion and stock price appreciation.

The development of new supply of lithium is expected to be dominated by projects being initiated in the continental brines of the Lithium Triangle, particularly in Chile and Argentina. These lithium-rich brine deposits situated in salars are the most economically recoverable form of lithium due to their near-surface location and the low cost method of extraction and evaporation method of concentration. We appear to be at the tipping point of when increasing demand will expose a situation of inadequate supply.

Since July 2016, the company has entered into several formal option agreements to acquire interests in certain lithium exploration concessions, namely the Atacama Project (46,200 hectares), Laguna Verde Project (2,438 hectares) and Trinity Project (roughly 6,400 hectares). In addition, the company has entered into Letters of Intent for the rights to acquire the Five Salars Project (10,500 hectares) and approximately 6,262 hectares of exploration concessions surrounding the Laguna Verde Project.

Today, Wealth Minerals controls over 55,000 hectares of mineral concessions (71,800 hectares when the LOIs advance into formal option agreements), having consolidated various concessions in Chile into a portfolio of prospective lithium-brine properties. The company’s salar projects have the potential to produce lithium compounds and other metals from subsurface brines.

Strategic Plan

In late 2015, management recognized the increasing interest in lithium brines located with the Lithium Triangle, especially Chile. Rising prices of the lithium compounds, especially lithium carbonate, appeared to be forerunner of an expected potential future supply shortage of high-grade lithium to feed the demand being generated by Electric Vehicle (EV) manufacturers and builders of battery gigafactories. The market dynamics of lithium portend profound structural issues from which the company is being positioned to benefit.  Management’s business plan is comprised of acquiring greenfield lithium concessions, advancing the properties through exploratory studies (brine sampling, geophysics and drilling) to an extent that they appear technically feasibility and economically viable and then developing these properties into revenue generating operations. Given the growing global demand for lithium and the limited number of low-cost lithium-brine projects, management anticipates that strategic partnerships will be a core part of asset development. The company has identified and approached potential strategic partners, including mining companies, fertilizer companies and industrial concerns. Not only has management positioned the company to benefit from the upcoming expected growth of demand in the lithium space, but also continues to seek the acquisition of additional interests in prospective concessions. The company continues to constantly review and evaluate a number of properties in the region and then aggressively pursues control of the attractive ones that would complement the current portfolio of concessions.

2017 Advancement Plans


During 2017, management anticipates moving its lithium projects forward through exploration programs and ultimately initial or updated NI 43-101-compliant Technical Reports. We expected a high level of news flow announcing the results of brine sampling, geophysical surveys and drilling programs.  The company’s lead lithium project is Atacama, for which management is finalizing plans for a Phase I exploration program slated to begin in the first half of 2017. The program, is expected to begin with geophysical surveys (transient electromagnetic [TEM] and magnetotelluric [MT]), and then continue with an initial drill program of up to 2,000 meters.

The Salar de Atacama is highly prospective, since commercial production continues by Sociedad Quimca Y Minera De Chile (NYSE: SQM) and Albemarle (NYSE: ALB) from properties adjacent to the concessions of Wealth Minerals. The environment at the Salar de Atacama is highly conducive for the harvesting of lithium brines. Over the past 25 million years, mineral brine deposits were formed geologically by evaporation under hot and dry conditions creating an endorheic basin, a closed drainage basin that retains water and over long periods of time produces a salt lake/pan (aka salar) system through evaporation and seepage. Many of these salt lakes contain potentially economic brines through a very cost-effective extraction process of pumping up brines to a series of large, shallow ponds in which the brine solution is concentrated by solar evaporation and wind. Salar de Atacama is the largest salt lake (approximately 300,000 hectares) in Chile and not only contains high levels of lithium concentration (1,840 mg/l), but also affords high rates of evaporation (3,500 mm per year).  Therefore, commercially-viable lithium concentrations from solar evaporation can be obtained faster and at a lower cost than elsewhere in the world, generally at a cost of production in the range of US$2,500 and US$ 3,000 per tonne.

At the Laguna Verde Project, management initially is focused on upgrading the project’s historical inferred resource. In March 2017, a project evaluation program was initiated beginning with a bathymetric (water depth) survey, a gravity geophysical and a TEM survey. A brine sampling program and water column survey are in progress, and a drilling program is anticipated to begin in the third quarter of 2017. Ultimately, after the additional exploratory work listed above is completed, the company is expected to commission a NI 43-101-compliant Technical Report.

During 2017, management plans to undertake surface brine sampling program at the Trinity Project (Aguas Calientes Norte, Pujsa and Quisquiro).

Management has been very successful in obtaining capital through equity offerings. Since the company’s projects are still in the early exploration stage and management continues to pursue acquiring control over additional properties, Wealth Minerals will continue to need to raise capital in order to fund the advancement of its lithium brine projects.

Lithium Market


As the lithium market undergoes a structural shift as a result of increasing demand and limited capacity, the macro investment case for lithium is becoming more widely-known. With increasing demand for portable electronic consumer products (smartphones, tablets, notebooks, power tools, etc.), the rise of battery-building gigafactories and the step-up to mass production of hybrid and electric vehicles, more lithium is needed for the manufacture of lithium-ion batteries. Though non-battery, lithium-related markets (particularly as an additive in the manufacture of heat-resistant ceramics, specialty glass and lubricants/greases) have grown, the dominate catalyst for future growth of the overall lithium market is anticipated to be the increasing demand for rechargeable lithium-ion batteries.  Between 2010 and 2015, demand for lithium grew at a compound annual rate of 11%; we expect the annual growth rate to exceed 15% between 2017 and 2025. We expect that the demand for lithium will continue to increase, stimulated by the growing consumer electronics sector, an expanding energy storage business and the construction of battery gigafactories. Tesla is at the forefront with plans to supply both lithium-ion batteries for 500,000 cars annually within five years and Powerwall lithium battery packs to store electricity produced by solar panels at residential homes. In addition, grid energy storage systems are being deployed by electric utilities. Numerous other companies (LG Chem, BYD, Contemporary Amperex Technology, Foxconn and Boston Power) are building or planning to build facilities to manufacture EV (Electric Vehicle) lithium-ion batteries, further supporting the anticipated buoyant future demand for lithium compounds.

Beginning in 2015, the supply-demand imbalance of lithium became manifest. The LCE market tightened and culminated in a price spike starting in late-2015 and lasting through the first quarter of 2016, which may be a forerunner of price expectations that are expected to result from a potential future supply shortage of high-grade lithium. As demand for rechargeable batteries has increased, the supply of lithium compounds tightened, primarily lithium concentrate (spodumene) feedstock, but also high-grade lithium carbonate. As demand from the battery factories in China increased (particularly from EV manufacturers), the supply of spodumene concentrate from Australia, the world’s largest producer of lithium, came into question. Also, companies in need of lithium compounds as a raw material but without contracts scrambled to acquire supply in the spot market.  The price of high-grade lithium carbonate entered a period of significant price increase. Spot prices almost doubled to $13,000 per tonne by the end of December 2015 and then surged during the first quarter of 2016, peaking above $22,000 per tonne in mid-March 2016. There were even some reports of transactions as high as $26,000 per tonne, even though we estimate that the average price during the first quarter of 2016 was approximately $17,000.

After the steep run-up during the first half of 2016, lithium product pricing corrected slightly during the third quarter of 2016 despite continued demand for lithium concentrate and lithium carbonate. However, pricing appeared to firm once again in the fourth quarter.

The lithium mining industry is expected to expand production through the development of new projects in order to accommodate increasing demand. Over the medium-term, the supply of lithium will be dominated by projects being initiated in Argentina, Chile, China and Australia, but particularly from the Lithium Triangle. Typically, the cost of production from brines is much lower than from hard rock, and therefore, it is expected that continental brine resources will be preferred over hard-rock ore for new capacity.

Comparable emerging junior exploration companies engaged in acquiring and/or advancing lithium-brine projects are the applicable comparables to Wealth Minerals. Though lithium-brine companies may trade as a group based on the fundamentals of lithium in general, peak valuations of individual stocks are largely determined by company specific developments (reaching a particular project development milestone or announcing a property/company transaction). To determine our target, we observed the peak valuation levels of the comparable companies, which range from 6.4-to-15.7 times book value. We believe that Wealth Minerals can attain a mid-first quartile peak price-to-book valuation of 14.4 times book; therefore, our initial target is $2.30 per share.

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