Frontier Lithium Inc. (FL:TSX.V; LITOF:OTCQX; HL2:FRA) (Frontier) is a Canada domiciled and multiple listed company evaluating and developing its 100% owned PAK Lithium Project located in NW Ontario, Canada. Since its relatively recent discovery by the Ontario Geological Survey in 1999, Frontier has defined North America's highest-grade pegmatite hosted lithium deposits at PAK.
The PAK lithium deposits, comprising two separate pegmatites (PAK and Spark), are located within a highly prospective structural corridor nicknamed "Electric Avenue". Frontier has acquired a significant tenement package. Since acquiring the project in 1999, Frontier has completed detailed geochemical and geophysical programs over PAK, with drilling and channel sampling of the pegmatites only being initiated in 2012. Since then, a relative continuous surface and drilling program, supported by metallurgical test work, has enabled Frontier to complete a Preliminary Economic Assessment (PEA) over the PAK Lithium Project.
Frontier share price (Source: Stockwatch.com)
Frontier's positive PEA (NPV8% US$975M) supports an integrated mine/mill/concentrator producing 23,174t of battery-grade hydroxide and 20,000t of technical grade spodumene concentrate annually from the PAK Project. Greenbushes (Talison) has a monopoly on the technical grade market, and high-end glass buyers such as Corning, Asahi, and Saint Gobain would gladly welcome a new entrant based in North America.
Frontier is currently carrying out additional drilling and metallurgical test work, pilot plant optimization work, and additional engineering studies to support the Pre-Feasibility Study (PFS) due for completion later in 2021.
Australian spodumene concentrate producers are consolidating and confirming downstream ambitions:
- Albemarle / Mineral Resources (Wodgina/Kemerton)
- Pilbara Minerals take-over of Altura with POSCO JV and Calix
- Tianqi Lithium / IGO Limited (Greenbushes and Kwinana stake)
The available pool of spodumene concentrate projects in Tier One jurisdictions is shrinking. We view North Carolina and Quebec/Ontario hard rock assets as future strategic suppliers of both lithium chemicals (hydroxide), and spodumene concentrate 6% (SC6) to the North American and possibly European battery supply chains.
Our forecasts show passenger EV battery demand growth in the USA at 30x between 2020 and 2030. Translated, this equates to 600 GWh of battery cell demand and approximately 500KT LCE of battery-grade lithium demand (85%-90% hydroxide). In addition, energy storage and commercial vehicles will add further battery demand. The USA currently has ~15KT LCE of lithium chemical production capacity. If the USA/North America looks to follow Europe and become largely self-sufficient, then there is a narrow window to create a regional lithium supply chain that is both scalable and sustainable/low carbon footprint. The quickest route to scaling greenfield lithium production in North America is hard rock to hydroxide. Tesla's planned Texas chemical conversion plant using spodumene from North Carolina is a validation of that thesis. We see them scaling that operation substantially over time while potentially trying to overcome the challenges around clay.
Electricity generation mix (Source: IEA)
According to the IEA, Canada's electricity generation is >80% renewables and nuclear, while China and Australia electricity generation are >75% coal, oil and natural gas. Therefore, with a reduced production and transport carbon footprint and no need for customers to hold higher inventory levels, we believe domestic North American hydroxide supply will trade at a $1,000/t+ premium to China.
The investment case for Frontier:
➢ Top 3 resource globally from a high grade, low impurity and consistency perspective (very similar to Greenbushes); having consistently high grades and low impurities across a deposit are the key characteristics that maximize the probability of a project achieving battery-grade chemicals
➢ Potential to grow the mineral resource estimate (MRE) to 50MT-60MT in the future
➢ Robust PEA with a ~US$1B after-tax NPV as an integrated battery-grade hydroxide producer
➢ Hydroxide will likely represent 85%-90% of USA/North American cathode demand by 2025/2026 (start of production)
➢ After expanding the MRE to 50MT-60MT, Frontier could either expand its hydroxide production to 45,000tpa or sell 250ktpa of SC6 to third parties – this would increase the company's NPV to ~US$1.45B – US$2B
➢ Partnered with XPS (Glencore subsidiary) – operating hydroxide pilot plant
➢ Potential to produce a high value (US$1,500/t) technical grade spodumene concentrate for the glass/ceramics market to compete with Greenbushes (Talison) monopoly
➢ High permitting probability and local First Nation support (board member)
Frontier currently trades at a significant discount to its NPV and its developing peer group due to two main reasons:
- The company is only at the PEA development stage (targeting first production in 2025/2026) and needs to complete an infill drilling program to move more of the resource from the inferred category to the measured and indicated category
- 2. The PAK project is remote and will not develop to full scale until the necessary power and road infrastructure has been completed
Regarding point 1, we see Frontier progressing through the PFS later in 2021/early 2022 and the DFS stage by H2 2023. Further, we see Frontier not only converting the existing resource from inferred to measured and indicated but expanding and potentially doubling the resource.
Regarding point 2, the phase 2 government-funded power line development targets completion by 2023/2024; phase 1 is already completed. The final crucial piece of infrastructure is all-weather road access to the project. Currently, the project can only use the winter road for three months of the year. Either the winter road can be upgraded to all-weather, or the access road used for the power lines can be upgraded. The completion of the power line access road upgrade would only be possible in 2023/2024. The nearby First Nation settlements are supportive of the road upgrade and are collaborating with Frontier. Depending on the level of infrastructure put in place for the current power line construction and level of road specifications, the desktop cost of an all-weather road is estimated at between CAD$50M-CAD$100M. Frontier is effectively 18-24 months behind its more advanced developing peers from a timeline perspective. We believe Frontier's first battery-grade hydroxide production is potentially in 2026 and aligns with a substantial supply shortfall from a market timing perspective.
Battery-grade hydroxide demand/supply to 2030 (Source: RK Equity)
When the market begins to understand the quality and resource size potential of Frontier (50MT–60MT) and its long-term strategic importance to the North American (European) battery supply chain plus the diversity of its revenue streams (battery-grade hydroxide, technical grade and chemical grade spodumene) the share is likely to re-rate.
We believe the challenge of securing an all-weather road to the project is far smaller than the technical and permitting challenges facing competing North American projects. As a result, we would argue that Frontier could trade at a premium to its peers once it secures year-round road access and ticks off key milestones, including a demonstration plant producing concentrates and battery-grade chemicals.
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Rodney Hooper is an independent analyst and investor based in Cape Town, South Africa.
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Information in this document has been obtained from sources believed to be true, including Frontier's CEO, President, CFO and chief geologist, and various Frontier public filings. In connection with this Frontier Report, Rodney also employed an independent external consulting geologist to assist with some of the geological/metallurgical sections.
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