Lithium has become a hot commodity, with the rise in electric vehicles pushing demand well beyond near-term supply. While major lithium producers have already seen their prices soar, many investors are taking a look at junior miners focused on lithium properties. But, assessing these opportunities can be challenging without P/E ratios or other metrics.
In this article, we’ll take a look at how public company valuations work at a high level, how that applies to junior miners, and why lithium juniors could be an attractive opportunity in today’s market.
A Brief Lesson on Valuation
Most public companies are valued based on discounted future cash flows and peer valuation multiples.
Discounted cash flow analysis (DCF) takes estimated future cash flows and discounts them to today’s dollars based on a discount rate. While the discount rate fluctuates based on interest rates, most of a business’s value comes down to how much cash it will generate and how long it will take to generate that cash.
While DCF helps determine a business’s intrinsic value, many investors look at peer multiples to set its public value. For example, investors may be willing to pay 10x earnings for a financial services business but 80x for a tech company. That’s because they expect the tech company to grow faster and deliver more value in the distant future.
How to Value Junior Miners
Junior miners don’t generate any current cash flow but develop resources capable of producing future cash flow.
The certainty of future cash flows develops as a junior miner works towards proving resource estimates and partnering with a major. After producing a NI 43-101 estimate, junior miners will typically progress through a preliminary economic assessment (PEA), a preliminary feasibility study (PFS), and, ultimately, a feasibility study (FS).
Investors typically value junior miners using a combination of discounted cash flow analysis and relative valuation metrics, like enterprise value divided by total resources (e.g., EV/OZ). But, of course, when comparing junior miners, it’s essential to ensure you’re looking at companies at a similar stage of development, geography, and other factors.
Example: Lithium Junior Miners
The most attractive junior miners are actively advancing projects targeting commodities projected to increase in value.
For example, lithium prices have more than doubled over the past year and are up more than nine-fold over the past three years. Albemarle Corp. (ALB) – a large lithium producer – expects prices to surge another 40% in 2023 over 2022 levels as demand from electric vehicles continues to outpace any increase in supplies.
Junior miners targeting lithium could benefit from greater potential future cash flows and a higher relative valuation. Companies like FE Battery Metals Corp. (CSE: FE) (OTCQB: FEMFF), with early-stage lithium pegmatite projects in Canada, are prime examples. FE Battery Metals owns mining claims directly adjacent to the North American Lithium Mine, a very recently producing open pit mine currently being restarted in a joint venture between Sayona Mining Limited and Piedmont Lithium Inc.
FE’s property exhibits the very same geological units as the NAL mine as well as an array of untested pegmatite bodies. In areas tested to date, the lithium mineralization is very similar in grade to the NAL mine. FE is continuing its drill program this year in order to define the lithium resource with an NI 43-101 report. Properties like this – with historical mineralization confirmed by modern exploration; adjacent and similar to producing mines; in areas with excellent mining infrastructure; and in locations already amenable to lithium mining – are poised to create value in the near term for the junior and its investors, and far into the future should they make it into production.
Looking Ahead
The provincial government of Quebec has a plan to enhance its strategic and critical minerals development, as does the federal government of Canada. Lithium is prominent among those minerals as it is crucial to the energy storage needs of both the electric vehicle and the renewable energy industries. So governments are encouraging and supporting lithium discovery and exploration, while lithium prices are expected to continue to move higher over the coming year as electric vehicle demand outstrips supply.
While many investors are familiar with lithium majors, junior miners present a lesser-known opportunity to profit from the growth. Junior lithium miners have never been in a better position to advance projects, so keep an eye on the sector for developments.
