Nemaska Lithium announces layoffs

Nemaska Lithium (TSX: NMX, US-OTC: NMKEF) plans to lay off 64 employees, or about half of its staff, after financing delays for its Whabouchi project in Quebec.

“This difficult decision comes after a rigorous review of the current situation and is aimed at both the optimization of current cash flow and the continuation of the project,” the company said in an Oct. 15 release.

Nemaska Lithium — which hopes to become one of the largest suppliers of lithium hydroxide, a key component in the fast-growing lithium-ion battery and energy storage market — also stated that it’s “still confident in its ability to successfully complete the project. However, the corporation cannot currently specify the precise date for closing the required financing.”

It said no definitive agreement has yet been concluded with The Pallinghurst Group, which would help it finalize the project’s implementation timeline. “In this context, the corporation is obliged to carry out a collective dismissal, as it expects that mine and plant production preparation activities will need to be slowed down pending the completion of financing,” the release states. The employment terminations will occur until year-end, the company said.

“We have always asserted that we recruited the best talent to make this project a success. We are still deeply convinced of this, which makes this decision all the more difficult. As we cannot confirm the time line for the resumption of construction, and although negotiations with Pallinghurst are progressing well, this is the responsible decision to be made,” company president and CEO Guy Bourassa said in the statement.

Bourassa declined a request to be interviewed for this article.

Nemaska shares fell 23% on Oct. 15 — the day of the announcement — to 18¢, and ended the week at 21¢ that Friday. The stock is down 70% over the past year.

Eight Capital analyst David Talbot said in a recent note to clients that the move means the Phase 1 plant will cease operations at the end of December, “mainly due to financing delays that were previously announced on Oct. 8 (the negotiation period with Pallinghurst was extended to Dec. 31, 2019).”

Nemaska Lithium’s Whabouchi lithium project. Credit: Nemaska Lithium.

Talbot, who has a “buy” recommendation and 60¢ price target on the stock, described it as “good news in terms of saving cash, but some revenue from selling material to Johnson Matthey may be foregone.”

He cited Nemaska’s release, stating the company is confident it will complete the project, and remains committed to completing the required financing.

BMO Capital Markets analyst Joel Jackson has a “market perform” recommendation on the stock, and lowered his price target to 20¢ per share from 30¢ after the announcement.

“Companies rarely downsize to greatness, in our view,” Jackson says in a note.

“NMX’s equity value seems to be slipping away and cash burn concerns appear dramatic enough to provoke NMX to lay off about half of its workforce, and close the Phase 1 pilot plant at year-end,” he wrote, referring to the company’s stock symbol.

Jackson said the layoffs will “reduce continuity at the project materially,” and occur between the Whabouchi mine site and the plant site in Shawinigan.

He also called the closure of the plant at Shawinigan “surprising,” adding that “if the Pallinghurst transaction falls through, the pilot plant will not be available to show future strategics the operation. Management believes the pilot plant ran long enough to generate meaningful metrics [and] data, and help optimize the hopefully eventual commercial-sized plant.”

Given the financial shortfall for the integrated lithium hydroxide operation, Jackson said Nemaska “seems like a binary proposition relying on Pallinghurst to secure needed equity and debt financing. However, this could prove even more punitive than originally thought — we now assume required equity at [about] 15¢ per share, versus 25¢ per share previously.”

Even if the financing comes through, Jackson says, “the key question still remains if the commercial hydroxide operation can scale [at about] 65 [times] at outlined operating expense/capital expense.”

Canaccord Genuity analyst Eric Zaunscherb lowered his target price on the stock to 25¢ from 45¢ after news of the layoffs, and kept a “speculative buy” rating on the stock.

“The reduced target price mirrors extended project time lines, as management seeks to complete project funding, as well as an increased discount rate (10% from 9%) reflecting increased uncertainty and risk,” Zaunscherb says in a note. “We continue to be positively inclined towards the technical aspects of the project and overall demand for high-quality lithium salts, but recognize management’s challenges in getting project financing across the finish line.”

The latest corporate news “introduces considerable uncertainty to Nemaska’s time lines,” Zaunscherb says, and, as a result, Canaccord expects the commencement of the Whabouchi spodumene concentrate out to 2021 from 2020, and the Shawinigan lithium hydroxide out to 2023 from 2022.

Zaunscherb says Canaccord is modelling a Pallinghurst private placement for $200 million and a rights offering for $400 million, but at a reduced price of 20¢ from 25¢ per share, “given ongoing share price weakness.”

Canaccord has also modelled an additional equity issue for $245 million at a 10% discount to market “to close any potential funding gaps.” Zaunscherb increased his project discount rate to 10% from 9%, “again reflecting increased risk and timing uncertainty.

“We view the technical aspects of the Whabouchi mine and concentrator and the Shawinigan electrochemical plant positively … [and] high-quality lithium salts demand for the EV industry remains strong,” Zaunscherb says, while adding that his valuation “is highly sensitive to management success in delivering the Pallinghurst private placement, and subsequent rights and equity offerings.”