Orocobre to acquire Advantage Lithium in all-share deal

Orocobre (TSX: ORL; ASX: ORL) owns 34.7% of Advantage Lithium’s (TSXV: AAL; US-OTC: AVLIF) common shares and the two companies are joint-venture partners on the Cauchari lithium project in northern Argentina’s Jujuy province.

Orocobre owns 25% of the Cauchari project and Advantage Lithium 75%, and the lithium project is just 20 km south of Orocobre’s Olaroz lithium facility, which entered production in 2015.

So it’s not surprising that Orocobre and Advantage Lithium have signed an agreement under which Orocobre will acquire all of the shares in Advantage Lithium it doesn’t already own.

Under the all-share deal, Advantage Lithium’s shareholders will receive 0.142 common share of Orocobre for each share in Advantage Lithium they own. The offer represents a 24% premium to Advantage Lithium’s closing share price on Feb. 14 and a 35% premium based on the trailing 20-day volume weighted average price.

“With Advantage/Cauchari being acquired by Orocobre, the likely path to production is through the Olaroz plant at some time in the future when the lithium market can support more production,” Matthew O’Keefe, a mining analyst at Cantor Fitzgerald commented in a research note to clients, adding that he does not expect a competing bid. “With this deal Advantage Lithium shareholders are receiving quality paper from an established lithium producer at a time when lithium prices appear to have bottomed, allowing them to maintain exposure to an expected improvement in lithium prices.”

Advantage Lithium’s Cauchari lithium property in Argentina. Credit: Advantage Lithium

Orocobre’s Olaroz — the newest brine-based global lithium carbonate supplier in more than two decades — has a mine life of more than 40 years based on measured and indicated resources of 6.4 million tonnes of lithium carbonate equivalent contained in the Salar de Olaroz brine, which contains high concentrations of lithium and potash brine.

A prefeasibility study on Cauchari in October 2019 outlined an operation producing 25,000 tonnes per year of battery-grade lithium carbonate over a 30-year mine life.

Preproduction capital was estimated at US$446 million, including a 20% contingency. Steady-state operating costs are forecast at US$3,560 per tonne battery-grade lithium carbonate.

Based on a weighted average price of US$12,166 per tonne battery-grade lithium carbonate over the life of the operation, the study estimated a US$671-million base case, after-tax net present value at an 8% discount rate, with a 20.9% internal rate of return.

The study was prepared by Worley, Chile S.A., and outlined proven and probable reserves of 1.02 million tonnes of lithium carbonate equivalent (LCE) at a concentration of 480 milligrams per litre lithium.

The reserves were based on a measured and indicated resource released in March 2019 of 4.8 million tonnes of LCE at 476 milligrams per litre lithium. Inferred resources add 1.5 million tonnes LCE at 473 milligrams per litre lithium.

The processing design involves pumping the lithium-rich brine to surface and diversion to ponds for solar evaporation. During evaporation, certain salts would be crystallized to generate a lithium solution for lithium carbonate precipitation. This solution would then be polished to remove metals before being recrystallized to make a battery-grade product.

Advantage Lithium started exploration work at Cauchari in 2017.

According to the prefeasibility study, Cauchari could start as early as 2022 with a three-year ramp up to a steady production rate of 25,000 tonnes per year of battery grade lithium carbonate,

In addition to its 75% ownership stake in the Cauchari project, Advantage Lithium has three lithium exploration properties in Argentina — Antofalla, Incahuahsi, and Guayatayoc.

Guayatoayoc is 80 km east of Cauchari; Incahuasi is 250 km from the port of Antofagasta; and Antofalla is on the northern tip of the Antofalla salar, about 80 km from a railhead.

Orocobre’s Olaroz lithium facility recently achieved record half-year production of 6,679 tonnes as lithium brine feedstock concentration and the production process achieved improved stability. At the end of December, its Stage 2 expansion was 25% complete and work will continue throughout the year and into 2021.

“This will deliver an additional 25,000 tonnes of capacity just as demand from European emissions regulations is expected to encourage a shift towards electric vehicles,” Andrew Barber, Orocobre’s chief investor relations officer, told The Northern Miner via email.

For shareholders of both companies the transaction provides a strong base from which to participate in the ongoing electrification of the transportation sector, Barber noted.

Advantage shareholders “will gain exposure to the Olaroz lithium facility that is producing both battery and industrial grades of lithium carbonate,” he said. “Overhead expenses will also be minimised which means Advantage shareholders avoid dilution by future capital raises that would otherwise be needed.”

As for Orocobre shareholders, they will “benefit as we will maximise the long-term productive capacity of the world class Olaroz/Cauchari basins and gain access to high quality resources located immediately adjacent to our existing leases.”

Joel Jackson, a mining analyst at BMO Capital Markets in Toronto, commented in a research note that Cauchari “slightly touches some of Olaroz at the southern portion of Orocobre’s land package border,” but pointed out that Olaroz “actually surrounds more resource owned by Lithium Americas (TSX: LAC; US-OTC: LACDF), so perhaps this transaction is more future proofing Orocobre such that if Ganfeng or another strategic wants to buy out the entire basin, this adds a more contiguous block.”

He also stated that he doesn’t expect Advantage Lithium “to ever develop its own stand-alone operation” and the “integration of Cauchari with Olaroz delivers better basin management and maximizes long-term capacity of the Olaroz/Cauchari basin.”