American Lithium Corp (NASDAQ:AMLI) is a Canadian company that specializes in the exploration and development of lithium projects. The company’s primary focus is on acquiring and developing lithium resources. Currently, American Lithium Corp owns and operates the TLC Lithium Project situated in Esmeralda County, Nevada, USA. The project covers an extensive area of over 13,000 acres and boasts of considerable lithium resources, including 1.7 million tonnes of lithium carbonate equivalent (LCE) indicated mineral resource estimate and 5.6 million tonnes of LCE inferred mineral resource estimate. These reserves and the land that the company has its projects in are what many investors see as a major catalyst. Lithium is a necessary part in order for our society to be able to transition into a renewable energy one. Companies like AMLI should see a lot of demand both now and in the future. But the company has reported a negative bottom line right now, so I am not confident enough to rate it a buy and I think a hold is more fitting right now. Until there is a clear trend with a profitable bottom line, I will remain hesitant.
As I mentioned before, I think one of the major catalysts for companies like AMLI is the increased demand for raw commodities like lithium in order to make the transition to renewables.
In a report by GrandViewResearch, the lithium market is expected to grow around 11.8% CAGR between 2023 and 2030. This would put a lot of demand on a company like AMLI, and I am confident they will have buyers willing to take on their product.
As seen above where the company has been able to establish some very strategic projects that cover vast amounts of areas. The difficult part now will be to keep margins at an acceptable level and intrigue investors to stay on. We are at the beginning of the lithium boom, and right now, it seems like everything will just keep chugging along. But I think eventually the market will show its cyclical attributes and prices will just like copper go in cycles. When that is no one really knows. This is why I think it is very important to look at companies like AMLI and see when the margins seem to be peaking. That is often a sign that the market might be reaching its ceiling and the cycle continues.
What I think is risky with a company like AMLI is their being able to keep a healthy balance sheet whilst also trying to expand and come out ahead of competitors. The lower cash position the company had in the last report means they are in a less ideal position to invest heavily right now. I think that will change when they can get their levered cash flows in order then they are in a fantastic position to capture the market growth that is estimated.
I think it’s important to also mention the immense share dilution the company has been doing over the last few years. As an up-and-comer, it’s important to raise capital to make ends meet and invest in projects, but this has meant shares outstanding has more than tripled since 2020. Going from 66 million outstanding to around 205 million instead. I think this trend is very likely to continue as cash flows are still negative.
One of the exciting news that came out of the company recently was about the promising mine the company has in Tonopah, Nevada. The company announced they have filed TLC PEA reports and it shows there is a promising future for the mine here to provide a long-term source of lithium for the company.
Perhaps the most exciting part was that the mine offers the possibility of extracting high-quality lithium in a low-cost manner which could provide a very profitable opportunity that I think the company is in need of. In the announcement, the company also mentions there is the possibility of an IRR of 28.8% in the base case the company has. Looking at the alternative case which includes different by-products in the valuation of the mine, the IRR jumps to 38.6%. In any of these cases, I think AMLI has found a very promising project that could provide them with ample revenues down the road.
Looking at the financials I don’t actually think there are too many worrying signs. The company currently doesn’t have any long-term debt, which makes the small cash position more forgiving.
The current liabilities amount to just $1.6 million, which is easily covered and managed by the company. I think that the worrying part is instead the share dilution happening and the negative cash flows.
Obviously, there isn’t too much to say when the company is not generating any revenues yet, but I think it’s important to at least have an idea of the financial state the company is in. With around $37 million in cash right now and using the last earnings reports numbers on costs, AMLI has another 7-ish quarter of operations before cash run out. In that time, I expect the company to dilute a lot more shares to keep the company alive before these projects start to pay off properly. If you can stomach having your shares lose value from this, then perhaps AMLI is a good option, but until then, I think there is a lot of risk present here that trumps the bull thesis.
Valuation & Wrap Up
The valuation of American Lithium Corp is tricky since they aren’t generating any revenues and instead burning cash to keep operations alive. This is fueled by massive share dilutions over the last few years.
When I look at a potential investment, I want to have some checkmarks to make me feel safer and more secure with my choice. AMLI doesn’t fulfill some of the most critical, like a positive bottom line, no share dilution, and a good FCF margin. Mining companies as a whole I think can be described as rather risky. If there are delays at the sites which halt production or postpone, the companies are left with paying a large bill anyway without any capital coming in. I think that possibility is present with AMLI too and that is part of what keeps me from rating them a buy. Proof of concept is very important for me to see before investing in anything, which is why I will hold off on ALMI for now.
In all honesty, I think it’s a little too early to invest in the lithium space. There aren’t enough stable companies operating that have consistently good margins. Instead, it’s a new space where a lot of failed projects will happen. I think that the only thing keeping me from not rating AMLI a sell is the sites and projects that are managed. I have faith in that these one day will pay off generously.
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