$8.5BN lithium producer wants to buy into Brazil’s Lithium Valley - Why this is very good news for our L1M

Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 7,625,612 L1M shares and 3,523,077 L1M Options at the time of publishing this article. The Company has been engaged by L1M to share our commentary on the progress of our Investment in L1M over time.

The $8.5BN lithium producer Pilbara Minerals just announced a proposed takeover of Latin Resources.

Latin Resources (ASX: LRS) was our first Brazilian lithium Investment and at its peak delivered a ~24x uplift from our Initial Entry Price of 1.8c following its lithium discovery.

We still hold LRS shares and think the deal is a great outcome for the company at its current stage of development, valuing LRS at ~$560M.

So, Pilbara Minerals is now proposing to acquire LRS... we also have seen Rio Tinto pegging ground...

This tells us all we need to know about the corporate interest from majors in Brazilian lithium assets, especially in Minas Gerais.

Discoveries in this part of the world seem to be valuable, even in the current “lithium winter”...

In April this year we Invested in micro cap Brazilian lithium explorer Lightning Minerals (ASX:L1M).

L1M has prospective lithium ground sitting on the same type of rocks and in the same region as Latin Resources (and the $1.5BN capped producer Sigma Lithium).

L1M is tiny - it has a market cap of $5.2M, and held $3.12M cash as at June 30th.

We are substantial holders in L1M as we think it has a good chance of making the next big lithium discovery in Brazil’s Lithium Valley.

It’s early days for L1M though - a little similar to LRS back in 2019 before it made its discovery...

(keep reading to find out why)

We Invested in L1M early and in a lithium bear market while sentiment is cyclically low - we are going to be patient with our L1M Investment - we don't expect any drilling events for a while yet - and hopefully the lithium market bounces back in parallel to an L1M lithium drilling “event”.

So while it’s very early days with L1M, as it only just started fieldwork to generate drill targets, and it's still acquiring more ground (while lithium sentiment is low)...

... when an $8.5BN giant wants to enter the exact same region, it suddenly makes little L1M’s assets much more compelling.

We first Invested in L1M in April 2024 - you can read our full initiation note here.

Below is an excerpt from that note - published April 22th, 2024:

Here is an overview of the 11 reasons we Invested in L1M:

• We have had success Investing in Brazilian lithium before - One of our best Investments was Latin Resources, which made a hard rock lithium discovery and was re-rated to a high of ~42c per share — 2,332% above our Initial Entry Price. L1M is following the same exploration playbook, 20km away.
• Two of Brazil’s biggest lithium projects are near L1M - L1M’s ground sits between $545M Latin Resources (20km away) and $2.3BN Sigma Lithium (60km away), both of which are the big pioneers of the lithium industry in Brazil.
• Minas Gerais is Brazil’s “Lithium Valley” - The state aims to be the biggest lithium province in Brazil. The “Lithium Valley” concept was launched in the State of Minas Gerais to promote foreign investment in Brazilian lithium projects.
• Rio Tinto moving into Minas Gerais in a big way - Rio Tinto has started pegging ground to the north of LRS and Sigma. Could Rio Tinto be setting up for a play on the region as a whole? Rio is already active in Argentina so South American assets are definitely not out of their remit.
• L1M’s project sits on similar geology to LRS and Sigma - L1M’s ground sits on top of similar geology to where Latin Resources made its discovery (the Salinas Formation). The projects also sit within similar proximity of the granites in the region & has similar aeromagnetic data running through the ground.
• Exploration “roll of the dice” - Our other Investment SLM was trying to find lithium in Brazil, and it ran from ~13c to ~$1.34 per share. Unfortunately it didn’t deliver a discovery (yet, we still hold). We are betting on L1M as another early stage “the next LRS” exploration bet to hold in our Portfolio.
• Bear market pick up - L1M is picking up ground in a lithium bear market, which means the likelihood of finding higher-quality, well-priced projects is higher.
• There is an existing playbook for success in Brazil - Companies like Sigma have gone from <$100M market cap explorer to a peak market cap >$4BN. Latin Resources has gone from <$20M market cap to a peak of ~$1BN. There is a proven valuation re-rate for companies that manage to make hard rock lithium discoveries in the region.
• Tight capital structure - After acquiring the Brazilian assets, L1M will have ~99M shares, which means there aren't many shares on issue. The top 20 hold ~47%, and the board and management hold ~8.7% of the company’s shares on issue.
• Low market cap leveraged for a re-rate on a discovery - Post acquisition at 7c per share, L1M has a market cap of ~$6.5M leaving plenty of room to re-rate off the back of a discovery, especially given the peer valuations in the region like Sigma and Latin Resources.
• Good deal terms tied to success on the project - Bulk of the consideration being paid for the assets are tied to milestone payments related to defining a JORC resource, NOT the usual “lithium bearing drill intercepts” we see on project acquisitions.

Why we think L1M is now at a similar stage to the LRS of 2019

We are Invested in L1M to hopefully see it replicate Latin Resources’ success and become “LRS 2.0”.

Latin Resources delivered us a >10x return less than two years after its 2022 lithium discovery in Brazil, but we had been holding LRS for years before that.

What the market may have forgotten is that LRS only a few years ago was in a similar position to where L1M is right now...

A quick history lesson:

In December 2017 Sigma Lithium vended its assets into a listed company in Canada, then spent a year or so drilling the project and put out its first foreign 43-101 resource estimate.

In 2018 Sigma’s market cap was under $200M.

In 2017-18, Chris Gale, LRS’s Managing Director picked up the Sigma Lithium investor deck and decided to send his team of geologists out into Brazil to see what all the fuss was about.

Over the next 4 years LRS kept looking for ground, picking up projects that had “Sigma 2.0” potential.

Most had moved on from the lithium space during those “lithium winter” years (much like now) but LRS kept its geologists in Brazil, scouring for ground to acquire/peg.

By early 2022 LRS had a decent ground holding to the north of Sigma and in March made its discovery.

We covered the early days of LRS’ exciting discovery pretty extensively in these notes:

• 17th Feb 2022 - Spodumene alert: Has LRS just made a new lithium discovery?
• 17th March 2022 - Large fresh green crystals everywhere - is this a new lithium discovery?

Since then LRS has been busy drilling out the resource to show the scale of it and rapidly moving through the development stages (at one point LRS was capped at $1BN) - and now the $8.2BN Pilbara Minerals is proposing to take it over.

The past performance is not and should not be taken as an indication of future performance. Caution should be exercised in assessing past performance. This product, like all other financial products, is subject to market forces and unpredictable events that may adversely affect future performance.

We think L1M is where LRS was back in 2019...

L1M already has a foothold of prospective ground near LRS in Minas Gerais, and is scouring for more (it just picked up more ground this week - more on that below).

This is at a time when most other ASX small caps have moved on to focus on other regions and other commodities... a little like LRS’s moves back in 2019 when lithium was out of favour.

All of L1M’s ground sits between the two biggest hard rock assets in Brazil on similar geology to Sigma Lithium and Latin Resources.

AND almost identically to LRS, L1M is picking up its ground at the depths of a lithium bear market when no one is really paying attention...

We are backing L1M’s counter cyclical approach to building up its land position in Brazil’s Lithium Valley and as the majors (like Pilbara Minerals and Rio Tinto) move into the region, we think the look through value in L1M’s assets will continue to get stronger.

In the meantime, L1M will be undertaking low cost field work to define drill targets worthy of drilling...

AND hopefully, as the lithium market turns, L1M can have a few shots at making a discovery of its own.

This would be a major share price catalyst and a key driver of our Investment Thesis.

More on L1M’s new lithium ground in “Lithium Valley”

Just a few days ago, L1M picked up a relatively cheap option (it's a lithium bear market remember - we like that vendor expectations have dramatically lowered lately...) to acquire some more ground on the “Salinas Formation” - which is the type of rocks that hosts Latin Resources’ lithium deposit.

Here is where the new project sits relative to L1M’s existing projects and Latin Resources ground:

One of our team actually got to visit that block a few months back whilst in Brazil with the L1M team in June 2024.

Check out the write up from our Brazil site visit here

Clearly the on site geologists liked what they were seeing given L1M has picked up the project.

It's still early days on the new ground, but we think L1M is picking up the asset for a relatively small upfront cost - L1M is only paying AU$13k upfront with no other payments due for at least another 12 months.

The option also has a 24 month exercise right which means L1M can run the ruler over the project before having to proceed with the deal.

The next stage of work on the project will be rock chip and soil sampling to try and locate drill targets - L1M expects those works to cost ~$100k over the next 12 months.

We visited the Brazilian Lithium conference earlier this year:

At the same time as the L1M site visit, we attended the “Brazil Lithium Summit” in Belo Horizonte, the capital of Minas Gerais, Brazil - which was a valuable exercise for re-establishing the “Why we are Invested” reasons in companies like L1M.

You can read that note here:

There was a bit of a buzz around, despite all the doom and gloom around markets for lithium.

There is no doubt the government of Minas Gerais wants to attract foreign investment and talent into the lithium industry into the state.

Most of the companies working up projects in Brazil were excited about the lithium potential of the region as a whole.

We think that it's still very early days for the Brazilian lithium industry and just like WA spawned several new major discoveries in the latest lithium bull market we think there will be more to come from Brazil.

Hopefully one of them is made by L1M and the company is able to achieve our Big Bet which is as follows:

Our L1M Big Bet:

“L1M returns 1,000%+ by making a discovery significant enough to move into development studies, or attract a takeover offer.”

NOTE: our “Big Bet” is what we HOPE the ultimate success scenario looks like for this particular Investment over the long term (3+ years). There is a lot of work to be done, many risks involved - just some of which we list in our L1M Investment Memo. Success will require a significant amount of luck. There is no guarantee that our Big Bet will ever come true

What’s next for L1M?

As we have pointed out, it's still relatively early days for L1M’s lithium assets, most of the work being done right now is to rank drill targets, which is a relatively low cost exercise.

During a lithium bear market, rushing to spend lots of money drilling lithium targets without doing all of the work needed to pick out the best ones wouldn’t make much sense.

We are patient and like that L1M is taking its time, methodically making sure it's got as much data as possible so that when the lithium market turns - L1M is in a position where it has the best shots at making a new discovery.

Over the next ~6 months L1M will be focussed on ranking drill targets.

Objective #1: Find high priority drill targets

We want to see L1M conduct geochemical and geophysical surveys and determine the best drilling spots at its Brazilian lithium project.

Milestones

🔄 Geological mapping

🔄 Rock chip sampling

🔄 Soil sampling

🔄 Define high-priority drill targets

Source: “What do we expect L1M to deliver” section - L1M Investment Memo 2 May 2024

Our L1M Investment Memo

Our Investment Memo provides a short, high-level summary of our reasons for Investing. We use this memo to track the progress of all our Investments over time.

Below is our L1M Investment Memo, where you can find the following:

• What does L1M do?
• The macro theme for L1M
• Our L1M Big Bet
• What we want to see L1M achieve
• Why we are Invested in L1M
• The key risks to our Investment Thesis
• Our Investment Plan