Canadian lithium – everything you need to know (and our #1 micro-cap pick)

We have written previously about lithium being the hottest sector on the ASX and our view that brine projects are materially undervalued. This doesn’t, however, preclude us from investing in hard rock projects and producers.

In our mind, Canada’s James Bay region in Quebec is fast becoming the most exciting mining province on the planet right now and clearly, we aren’t the only ones getting excited. So, what make James Bay so special?

Tier 1 jurisdiction

Quebec, Canada is a politically stable jurisdiction, and although underexplored for lithium, it has a long history of mining gold and base metals.  Quebec has access to low-cost, sustainable hydro power, offers tax incentives for Canadian investors (reducing the cost of capital) and is in close proximity to the North American car industry / EV battery market, where the US has a dearth of large-scale lithium projects relative to say, Australia and South America. Canada is also a full participant in the Inflation Reduction Act, with subsidies selectively available.

As for other riskier jurisdictions, investors only need to look so far as AVZ Minerals (ASX: AVZ) in the DRC or Leo Lithium (ASX: LLL) in Mali more recently to see the pitfalls of straying off the beaten path in the resources sector.

High Grade

Projects in the James Bay region have yielded outstanding grades across numerous discoveries. The major ASX listed players to make discoveries in the area include Patriot Battery Metals ASX: PMT  at Corvette, Allkem’s (ASX: AKE) James Bay project, Winsome Resources Ltd (ASX: WR1) at Adina and Sayona Mining Ltd (ASX: SYA) at Moblan.

Patriot Battery Metals (PMT) announced a maiden resource estimate at its Corvette lithium project of 109.2Mt @1.40%. This briefly made it the largest lithium resource in North America before Allkem upgraded their James Bay resource by 173% to 110.2Mt @1.30% just one week later.

However, PMT’s Corvette does have significant growth potential. The resource was published for the CV5 area, where the bulk of drilling has been done, but the CV13, CV8, and CV12 regions along strike from each other display similar mineralisation and if the areas between can be incorporated into future resource estimates, there is substantial growth potential.

Mineralisation is widespread and continuous

One thing that that has been reinforced recently is the importance of metallurgy in exploration/development projects (*cough* Chalice (ASX: CHN) *cough*). In the lithium space, there are two primary methods for processing pegmatites containing spodumene, dense medium separation (DMS) and floatation. The choice is based on how large and how coarse the spodumene crystals are. In general, floatation is much more expensive from a capex and opex standpoint but has higher recovery rates for finer crystals of spodumene.

The sweet spot is to be able to use DMS only and maintain sufficiently high recoveries. Core Lithium (ASX: CXO), for example, opted for DMS only but reported poor recoveries of <50% due to a higher proportion of fine spodumene than expected.

Back to the James Bay region, early met testwork conducted by PMT suggests that mineralisation at its Corvette deposit is continuous and amenable to DMS only, with recovery rates of >70% achieved in the lab to produce 6+% Li2O spodumene concentrates (remembering that the benchmark SC6 price is a 6% product, and players such as PLS, AKE and SYA all produce spodumene concentrate <6%).  The math is pretty simple, higher product % = low cost of production = better placed to manage commodity cycle and price fluctuations.

The consistency and continuity of mineralogy in the region also indicates the potential for companies to significantly grow resource estimates, providing they are able to connect separate areas of known mineralisation (looking at you PMT, WR1).

Strategic interest in the sector

With Albemarle Corporation’s (NYSE: ALB) bid for Liontown Resources Ltd (ASX: LTR) front of mind, you might have missed Albermarle taking a 4.9% stake (fully diluted basis) in PMT. Albermarle is so keen on the project that they have agreed to forego voting rights and not creep above the 5% threshold for 12 months (preventing an opportunistic takeover).

Rio Tinto Ltd (ASX: RIO) have said they will look at small acquisitions in Canada and have so far struck earn-in agreements with Midland Exploration Inc (CVE: MD) and Azimut Exploration Inc (CVE: AZM) for an aggregate outlay of ~$200m. Our top pick (keep reading) is right nearby and has, in our view, some highly attractive acreage pegged.

More generally, hard rock projects in tier 1 jurisdictions are worth keeping an eye on. Essential Metals Ltd (ASX: ESS), despite being a small deposit received a scrip-based bid from Develop Global (ASX: DVP) after Mineral Resources Ltd (ASX: MIN) foiled an initial approach from IGO Ltd’s (ASX: IGO) joint venture. And MinRes, never too far from the action, looks to be making a play for the Bald Hill lithium mine in a jostle to take the keys off the administrator's hands. 

Risks for investors

Geography

The terrain in the James Bay area is not without its challenges, with large swathes of land classified as marsh/wetlands. However, accessibility is doable with helicopters able to deliver drill rigs even to remote parts.

PMT is situated on top of a shallow lake, hence the blue water in its drilling maps. However, there are precedents for draining such lakes, including our own BHP Group Ltd (ASX: BHP) mining diamonds under a lake at Ekati. 

Most recently, bushfires have ravaged the James Bay region, disrupting the summer drilling period which may impact land access going forwards. 

Comparing apples with oranges

Another thing to be aware of when investing in Canadian projects is the different reporting compliance requirements compared to ASX-listed players. Where ASX mining companies are governed by the JORC code, Canadian companies must abide by NI-43, a similar but slightly different set of rules which can produce different outputs (eg. pit constraint changes resource size).

Like Australia, Canadian projects require first nations approval as well as government approval, so permitting can be an extended and variable process. 

Not all Canadian lithium co’s created equal

While all the Canadian players mentioned so far have been based in Quebec, there are also a handful located in the adjacent state of Ontario, such as ASX: GT1, ASX: CRR, ASX: BM8, and ASX: PAT.

New entrants aplenty

As always, it pays to know who you’re investing with. Any hot sector comes with lifestyle companies, bad actors and bad projects. With the rapid capital inflow in the sector, there will undoubtedly be a lot of moose pasture acquired. We think it is prudent to be wary of failed gold (or other commodity) explorers inexplicably pivoting to lithium exploration.

Timeline to production

With the excitement surrounding early-stage projects, it's easy to forget that many of these companies are several years away from first revenue. Even major projects such as PMT are still early stage, and first production is not projected until at least 2028. Investors searching for near term cash flow and dividends would be placed looking elsewhere. 

Our top pick – James Bay Minerals (ASX: JBY)

Scheduled for listing on the ASX on Tuesday 12 September, James Bay Minerals holds one of the largest lithium exploration tenures in James Bay, Quebec at 224km2 . 

Its flagship Joule, Aero & Aqua projects are in North Quebec along strike from Patriot Battery Metals’ (ASX: PMT) Corvette and Winsome Resources’ (ASX: WR1) Cancet deposits. The Troilus project is in the Southern James Bay region only 5km from Sayona Mining (ASX: SYA) Moblan deposit, which was up until a month or two ago, the largest Spodumene deposit in all of Quebec.

James Bay Minerals meets Seneca’s 6-step investment criteria when assessing a greenfield exploration companies

1. A commodity with momentum

It doesn't get much hotter than hard-rock lithium in Quebec.

2. The project is in a ‘tier 1’ jurisdiction

See above

3. Management is known, aligned and trustworthy

JBY board have worked on succesful hard rock lithium projects from discovery through development, construction, and production of spodumene and Lithium Hydroxide.  They are  highly aligned and incentivised to add value for themselves and other shareholders.

4. There is potential for the discovery of a globally significant resource

Spodumene deposits are hosted in “Massive LCT Pegmatites” that are found in Archean rocks that are between 2.6-2.8bn years old. With the ‘big pegmatites’ forming on regional faults, in greenstone belts, within close proximity to granites.

All three of James Bay Minerals’ projects have this exact profile.

Further, JBY’s deposits are in the same geological formation as Patriot Battery Metals (ASX: PMT) and Winsome Resources (ASX: WR1), who have both made significant spodumene discoveries in the region.

5. A clean, tightly held, unencumbered capital structure

As a high-risk explorer, we want a ‘tight’ capital structure to maximise upside in the event of a mineral discovery.  What we mean by this is a company should have:

• 100% project ownership
• a highly concentrated shareholder register,
• filled with management, staff, and long-term, high conviction investors.
• they should all be equitably incentivised - no dilutive options or un-escrowed seed or pre-IPO shares that will weight on the share price post-IPO. 

JBY management and vendors own just under 50% of the company and their holdings are escrowed for 12 months. There are no options, no convertible notes or other securities. 

6. Attractively Priced

When assessing greenfield explorer share valuations, we are looking for a sufficiently low price to appropriately compensate us for significant risk, preferably <$10m EV. JBY fits the bill, with a tiny $12m market cap and $6m EV, despite the demonstrated potential of peers. With ~$5m cash in bank upon listing, JBY is well capitalised to deliver initial exploration results.

Pre-hit vs post-hit examples - quantifying upside potential

There are some exceptional examples of recent post-discovery valuation uplift in the ASX hard-rock lithium sector, especially when minimal upside is baked into the IPO price. 

As with all early stage investments, JBY is speculative and carries a high degree of risk, including but not limited to exploration risk (whether they find anything of value), funding risk (ability to raise further capital in future), and normal commodity market and price risk.