NRG Metals, Cheapest #Lithium Brine Play?

Progress Report:  NRG Metals Inc.

Peter Epstein, CFA, MBA   http://EpsteinResearch.com

In my first article on NRG Metals Inc. (TSX-V: NGZ) (OTCQB: NRGMF) (Frankfurt: OGPN), I advanced a thesis about Argentina-focused Lithium (“Li”) exploration juniors; i) competition for (resources, labor, infrastructure & managerial talent) will be fierce ii) access to capital is paramount and iii) boots on the ground plus a strong Technical team with direct Li-brine experience in South America is critical, in fact it’s a pre-requisite for success.

Since my initial piece, 2 things have happened.  First, obtaining drill permits for the Company’s 29,000+ hectare Carachi Pampa project is taking longer than expected.  Second, NRG announced that it has entered into an option agreement to purchase the Hombre Muerto North project located in Salta & Catamarca Provinces.  Regarding the delay at Carachi Pampa, it’s frustrating, but falls well short of disaster.  If doing business in South America for small, Canadian-domiciled companies was easy, the pipeline of lithium projects would look a hell of a lot better than it does.  Permitting challenges are currently a burden, but also a barrier to entry for those who follow.  

The newly acquired option on the Hombre Muerto North project is a very important development.  A key takeaway is that NRG, controlling 2 promising properties, has a seat at the grown-ups table.  It has the cheapest valuation alongside lithium-brine companies with market caps reaching above C$100 M.  It takes many months to negotiate transactions and establish a presence in South America.  NRG is a C$ 6.3 M company with 2 potential company-making assets and a 12-month head start on new entrants.  Both properties are controlled through options for optimal capital efficiency.  

Since there’s a large number of juniors to choose from in Argentina, not to mention Australia, Canada, Chile and the western U.S., picking companies with attractive valuations is crucial.  But valuation cannot be separated from risk, some companies are “cheap for a reason.”  I break companies into 4 risk buckets (data as of June 13th).  While one could argue the relative placements of the juniors in the chart, the point is that each company in buckets #1,#2 & #3 is trying to advance one or more notches.  Notice the largest potential uplift comes from jumping to bucket #2, (especially for NRG with a modest C$ 6.3 M valuation), but to reiterate, bucket #1 juniors harbor the most risk.

Ultimate Size of the Prize?

In looking closer at Orocobre Ltd. and Lithium Americas, it’s important to recognize that they do not own 100% of their flagship assets.  Orocobre owns 66.5% of the (producing) Salar de Olaroz Lithium facility and Lithium Americas owns 45.75% (with partner SQM also at 45.75%) of the Cauchari-Olaroz project.  All else equal, that implies 100% of the Orocobre’s operation is valued by the market at ~C$ 1.16 billion and 100% of Cauchari-Olaroz at ~C$ 880 M.  

Further, Galaxy Resources’  Sal de Vida project (situated in the same salar as NRG’s Hombre Muerto North), has a Definitive Feasibility Study (“DFS”)-derived, post-tax NPV(10%) of C$ 1.35 billion.  I believe the market values Sal de Vida (1 of the 3 main projects held by Galaxy) at roughly 20% of that NPV figure, call it C$ 270 M.  These are pretty big numbers.  Even though NRG’s properties are probably 3-4 years behind the Sal de Vida project and may never reach DFS-stage, they could propel the Company valuation meaningfully higher upon favorable drill results, which could spark takeover interest from larger players.  

This analysis is subjective, each company has pros and cons that are not captured by market cap alone, and other companies could have made it on to the chart.  Still, while picking the next Lithium Americas success story is difficult, the universe of existing Argentine-focused juniors worthy of serious consideration is not unfathomable.  The probability of NRG climbing the ladder is quite reasonable.  Compare NRG’s chances to that of the horrendous odds stacked up against dozens of Nevada-focused lithium juniors, some of which have larger market caps than NRG. 

Highlights of Hombre Muerto North

The property package of 3,287 hectares is contained in 6 concessions (see map below) within the Salar del Hombre Muerto in northwestern Argentina.  Twenty (20) surface samples collected in late 2016-2017 range from 48 to 1,064 mg/L Li, averaging 587 mg/L Li, with 7 samples over 800 mg/L Li, of which 5 were also above 7,000 mg/L Potassium (“k”).  [see all samples results in press release].  The surface sample’s Magnesium (“Mg”)/Li ratios average 4.6 to 1.  A ratio below 6 to 1 is widely considered to be favorable.  Too much Mg in a brine’s chemistry increases overall Li extraction/processing costs due to the need to separate and remove the excess.

A key takeaway from the press release is the following, 

“In a 43-101 Technical Report dated March 7, 2012, Lithium One provided a detailed log of diamond drill hole SVH11-21 with assay values that ranged from a low of 564 mg/L Li to a high of 895 mg/L Li over the 95 m length of the hole.  That hole is located 750 m south of the optioned Tramo concession.”

Both José Gustavo de Castro and José Louis Martin have direct experience in the salar del Hombre Muerto.  Castro held senior positions with Minera de Altiplano, the Argentine subsidiary of FMC Lithium, and Martin participated in the development of the first Feasibility Study for Galaxy’s Sal De Vida project.

In the chart below I show representative Argentine Li projects.  NRG Metals’ projects seem well within the bounds of several others.  Notice the average [sample] grade of Hombre Muerto North, 587 mg/L Li.  While sample results are not as robust as drill results, that grade compares favorably with other early-stage projects.  Regarding Carachi Pampa, its size (dominating the salar it’s in), also fits in nicely with peer projects.  NRG appears to be comparable to companies that have market caps much larger than C$ 6.3 M.  Is a company like Advantage Lithium so much less risky (to warrant the large difference in market cap) than NRG Metals?  That valuation gap should narrow as NRG advances its projects.      

Don’t forget Carachi Pampa!

NRG has optioned 29,182 hectares (~72,100 acres) in the Carachi Pampa basin (in Catamarca Province), a position considered to be district-scale.  Based on a recent geophysical survey, there’s a zone of very low resistivity / high conductivity that looks like it could be a zone of saturated brines.  It begins at about 70 m in depth, dips to 300 m, is about 150 m thick, and is open at depth and in all directions.  At low cost, NRG can drill a few holes and see what’s there.  The drill targets have been selected and the team is ready to go upon receipt of drill permits. 

Conclusion

When investing in junior mining/metals/minerals companies, the risk is very high and largely unavoidable.  Cheap valuation does not mitigate risk, but a compelling risk/reward proposition has to start with a low-priced asset.  NRG Metals Inc. fits the bill, but is the Company overly risky compared to peers?  I don’t think so, I believe it’s undervalued.  NRG has three shots at greatness, a tremendous Technical team, prospective assets and solid access to capital.  Even though it’s clear that most companies will not reach production in their current form, several Argentina-focused Li juniors will likely move up at least 1 notch in my risk bucket chart. 

As attention continues to shift away from ill-fated lithium hot spots like Nevada, existing and new investors are focusing more and more on Argentina.  While less than 10% of the 150+ global Li juniors will ever reach production, the success rate from among Argentina-focused players could be much higher.  It would not take a lot of fundamental de-risking to move NRG firmly in the direction of bucket #2.   

 

Disclosures:  

Disclosures:  The content of this article is for illustrative and informational purposes only.  Readers fully understand and agree that nothing contained herein, written by Peter Epstein of Epstein Research[ER] including but not limited to, commentary, opinions, views, assumptions, reported facts, estimates, calculations, etc. is to be considered implicit or explicit, investment advice. Further, nothing contained herein is a recommendation or solicitation to buy or sell any security.  Mr. Epstein and [ER] are not responsible for investment actions taken by the reader.  Mr. Epstein and [ER] have never been, and are not currently, a registered or licensed financial advisor or broker/dealer, investment advisor, stockbroker, trader, money manager, compliance or legal officer, and they do not perform market making activities. Mr. Epstein and [ER] are not directly employed by any company, group, organization, party or person. Shares of NRG Metals are highly speculative, not suitable for all investors. Readers understand and agree that investments in small cap stocks can result in a 100% loss of invested funds. It is assumed and agreed upon by readers that they consult with their own licensed or registered financial advisors before making investment decisions.

At the time this article was posted, Peter Epstein owned shares in NRG Metals and the Company was an advertiser on [ER].  By virtue of ownership of the Company’s shares and it being an advertiser on [ER], Peter Epstein is biased in his views on the Company.  Readers understand and agree that they must conduct their own research, above and beyond reading this article. While the author believes he’s diligent in screening out companies that are unattractive investment opportunities, he cannot guarantee that his efforts will (or have been) successful. Mr. Epstein & [ER] are not responsible for any perceived, or actual, errors including, but not limited to, commentary, opinions, views, assumptions, reported facts & financial calculations, or for the completeness of this article. Mr. Epstein & [ER] are not expected or required to subsequently follow or cover events & news, or write about any particular company or topic. Mr. Epstein and [ER] are not experts in any company, industry sector or investment topic.