Microcap L1M going for a new discovery… up the road from billion dollar producers

Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 7,625,696 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.

Drilling has started.

Are we just a few weeks away from a new discovery by a fledgling micro cap stock that re-rates the company potentially by hundreds of percent?

New discoveries spiking up share prices is why people bet on microcap explorers.

But new discoveries are coveted and rare.

This is high risk, high reward exploration investing.

We are Invested for a discovery.

Our ~$8M capped exploration Investment Lightning Minerals (ASX:L1M) is drilling now in Brazil’s “Lithium Valley”.

If there is any place you want to make a new lithium discovery it's here.

A few weeks ago PLS acquired LRS in a deal valuing LRS at $560M.

... just 36 months after LRS made its own new lithium discovery to the north of L1M’s ground.

(almost exactly 3 years to the day since the now famous LRS discovery)

And we have Invested in L1M betting they can do the same thing.

So the dice has just been rolled...

L1M’s drilling has started today.

How will the dice land?

We should know if we have a brand new lithium discovery in the coming weeks.

This region is home to multiple giant lithium deposits that are valued in the hundreds of millions of dollars.

L1M has already confirmed 4.04% lithium from outcopping pegmatites.

L1M has already confirmed ‘spodumene hosted mineralisation’ - which is what you want when trying to define an economic lithium deposit.

The only thing left now is to pull out some drill cores which hopefully contain high grade lithium...

(and see if the lithium found today is part of a bigger system/network of pegmatites)

L1M’s 2,000m of drilling is likely to take a few weeks, with assay results expected in the usual few weeks after.

L1M is drilling 20km north of Sigma Lithium (capped at $1.7BN) and another short drive north of $6.4BN capped Pilbara Minerals asset - fresh after buying it from Latin Resources.

Long time readers should be familiar with the story of Latin Resources... and when it made its giant lithium discovery (we tend to bang on about it a lot).

LRS with its first drill program and (almost) last dollar, made a discovery.

The ‘discovery hole’ back in 2022 triggered a permanent re-rate in LRS’s share price:

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 actually visited this ‘sacred site’ on a trip to Brazil last year - it was a bit of a trek down the side of a rock face, and pretty incredible they managed to strike high grade lithium here.

Following the discovery, LRS's share price hit a peak of ~43c per share with a market cap of over $1BN.

Last month LRS was acquired by Pilbara Minerals in a deal valued at over half a billion dollars.

Our Initial Entry Price for LRS was 1.8c per share.

We are Invested in L1M to hopefully see the company follow in the footsteps of LRS’s discovery and value creation.

L1M is at the same stage as Latin was back in 2022... before the discovery hole.

L1M has already confirmed 4.04% lithium from outcopping pegmatites and confirmed spodumene hosted mineralisation.

The last thing left to do is drill to see if these pegmatites are part of a bigger lithium system.

IF L1M can show that the spodumene-bearing pegmatites extend underground then we could see the company’s share price react in a similar way to LRS’s back in 2022.

Confirming visual spodumene in its drilling program was the first announcement from LRS after it had started drilling...

Then a few weeks later assays confirmed the discovery.

L1M’s drilling should take a few weeks and assay results should come in next quarter.

L1M is capped at just $8M and if it is able to make a significant discovery then the company has plenty of room to re-rate, even with the current bearish sentiment for lithium right now.

Brazil’s Lithium Valley attracting corporate interest

A region of Minas Gerais in Brazil is labelled “Lithium Valley” for a reason.

It is home to Sigma Lithium capped at $1.6BN.

It has also attracted the likes of Pilbara Minerals (through the Latin Resources deal) and Rio Tinto who has been picking up ground to the north of Pilbara.

Most recently, it was confirmed that the world’s biggest EV maker BYD has picked up ground in the region.

(Source)

At one stage there were even rumors Elon Musk’s Tesla was interested in the region, potentially looking to acquire Sigma Lithium.

(Source)

We think there is a really easy answer for all this interest from bigger players...

Brazil is a very friendly mining jurisdiction.

Brazil:

• Is the 2nd largest iron ore producer in the world.
• Has a skilled mining workforce and available drilling contractors
• Has low cost energy & available infrastructure
• Has a robust tenure process

Right now Australia is leading the hard rock lithium producing agenda... but Brazil is quickly catching up.

(Evidence of this is the PLS deal to acquire LRS - a WA producer has diversified its future production plans to Brazil)

Based on current commitments, lithium production is expected to increase five fold in Brazil over the next five years:

(Source)

We think Lithium Valley will be the centre of the Brazilian lithium industry (just like the Pilbara region is for iron ore here in Australia).

As we noted above, it also explains why Pilbara Minerals, whose main project is in the Pilbara in WA, is diversifying into Brazil’s Lithium Valley.

(Source)

What does this mean for L1M?

We think that if L1M is able to make a discovery (and that is a big if), then the company will be able to move quickly to develop a project here.

It took Latin Resources just TWO YEARS to build up its project from “Discovery” through to 77Mt Resource and eventual $560M takeover.

(it was some of the quickest realisation of value we have ever seen)

Being in Brazil was a big part of Latin’s ability to move quickly.

We are hoping that if L1M finds something of interest, it will be able to move quickly too, given the genuine interest in the region’s lithium potential.

Exploration stocks are (finally) being rewarded right now

Something is happening now that has been extremely rare over the past 18 months.

Exploration companies share prices are going UP on a discovery.

...And staying there.

Right now L1M is drilling in at a time where companies are being “rewarded” with share price spikes off the back of good drill results.

In the last few weeks we have seen some exploration companies move 500-700%+

(KAL - Gold in WA)

(AQD - Copper in Peru)

Although these two examples are from gold and copper explorers, we think that the market could still be interested in L1M’s project given its coveted location in Brazil’s “Lithium Valley”.

And L1M’s tiny market cap.

Ultimately, the drill bit will decide what happens to L1M over the coming weeks.

Our fingers are crossed that L1M has a bit of exploration luck and can deliver our Big Bet over the next few years, 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

And another thing - the person who led Liontown’s Kathleen Valley discovery is on the L1M board...

In November of last year, L1M was able to appoint a highly experienced geologist and lithium executive, Jamie Day, as a Non-Executive Director.

Day is best known for leading the team at Liontown Resources that discovered the world-class Kathleen Valley lithium deposit in WA.

With over 25 years of experience in mineral exploration, he was instrumental in multiple major discoveries during his career, including the 156Mt Kathleen Valley lithium deposit at 1.4% lithium for Liontown.

An excellent hire for a micro cap stock like L1M.

Initially, Hancock Prospecting (one of Gina Rinehart’s Investment vehicles) acquired a 7.7% interest in Liontown in September 2023, quickly raising its stake to 19.9% over several transactions.

Then lithium heavyweight Albemarle walked away from a potential acquisition in October 2023, as the lithium winter set in, with lithium prices depressed.

Intriguingly, during the lithium winter (which may be now thawing slowly) was also the time that L1M made its move on its ground in Brazil in April of this year.

Now Jamie Day is on L1M's board and hopefully can assist L1M in finding a new major lithium deposit.

Wonder why he joined L1M at this stage?

Welcome to L1M Jamie Day.

We went to site, and liked what we saw

Given our material shareholding in the company, we had one of our team members go on a site visit a few months back while in Brazil with the L1M team.

That's where we got to see the LRS discovery hole you can see above.

At the time, the historic artisanal mine that yielded the high grade lithium bearing pegmatite was not known.

But we did hike up some pretty interesting looking outcrops:

Check out the write up from our Brazil site visit here

What’s next for L1M?

Exploration drilling across Brazilian lithium projects 🔄

Now it's all about seeing what comes from L1M’s first drill program.

Objective #2: Drill high priority targets

Milestones

✅ Drilling permits
✅ Drilling starts
🔲 Drilling completed
🔲 Assay results

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

What are the risks?

In the short term there are two key risks to be aware of that may negatively impact L1M’s share price.

First is the obvious one - “exploration risk”.

There is no guarantee that L1M’s drilling delivers anything of economic value and in that case we would expect to see L1M’s share price re-rate lower.

Exploration risk

L1M’s project is an early stage exploration asset. There is always a risk that L1M finds no targets worthy of drilling or that, even after drilling, the company fails to find any economic lithium mineralisation. As a result, exploration risk is one of the primary risks for L1M.

Source: What could go wrong? - L1M Investment Memo 22 April 2024

The second risk is “funding risk”.

L1M ended the 2024 December quarter with $1.9M cash in the bank.

The 2,000m diamond drilling program is likely to cost a fair bit to complete (diamond drilling is usually the most expensive type of drilling) and so L1M could be cutting it close with its cash balance.

Given L1M isn't generating any revenue, we think there is a chance L1M will look to top up its cash balance with a capital raise over the coming weeks.

A capital raise may put some short term pressure on L1M’s share price as more shares are issued to the market at whatever price L1M looks to raise cash.

Financing risk

L1M does not generate revenues and relies on raising capital to fund its exploration programs. If the market is unwilling to fund the company, it risks being unable to drill its project or offering large discounts to its share price when raising capital.

Source: What could go wrong? - L1M Investment Memo 22 April 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