Sigma Lithium (SGML) is a quiet but well-advanced Brazilian company that’s only now getting its story out, and as a result appears significantly undervalued in comparison with its peers, notes Brien Lundin, mining sector expert and editor of Gold Newsletter.

The company’s story revolves around the Grota do Cirilo spodumene project in Minas Gerais State, Brazil. Spodumene is the hard-rock source of lithium (as opposed to the brine-hosted deposits you find in South American’s Lithium Triangle).

Spodumene can be converted either into lithium hydroxide or, with further processing, into the lithium carbonate on which the market is more typically priced.

Sigma has a large-scale lithium mine under construction (about 25% complete) and, assuming Phase 2 comes online in a couple of years, it will produce 72,200 tonnes of lithium carbonate equivalent (LCE) annually for 13 years.

That brings me to the economics for Phase 1 and Phase 2, which are extraordinary. The mine has an eye-popping internal rate of return (IRR) of 589% after tax and an after-tax net present value (NPV), discounted at 8%, of $5.1 billion. The mine should average $595 million in annual free cash flow.

Phase 1 of the mine is scheduled to be commissioned by year-end 2022, with full scale production starting in 2023. Phase 2 just had a prefeasibility study completed on it and could be boosting production by 2024.

There’s even a Phase 3 in the works on the project that would incorporate 50% more high-purity lithium oxide into the project’s mineral reserves. Even without Phase 3’s additions, the current proven and probable reserves for Phases 1 and 2 are 1.18 million tonnes LCE.

Adding to the project’s allure is the offtake agreement that Sigma Lithium has secured with LG Energy Solutions, which involves take or pay contracts with prices linked to the lithium hydroxide price.

The NPV for Phases 1 and 2 is sensitive to increases in the average price of lithium hydroxide, with a 20% increase from the base case prices of$2,247/tonne resulting in an after-tax NPV increase from $5.1 billion to $6.4 billion.

Sigma is currently selling about 20% below peak and, at these levels, its valuation is about half or less of its peer group of lithium producers. That said, it does have a bigger market cap than we’re used to featuring in these pages (around $2 billion); but again, that’s less than half of what other similarly sized lithium producers are trading for.

Most junior mining companies spend 80% of their time on marketing and 20% on building a project. Sigma has spent 100% of its time on building Phase 1 at Grota do Cirilo. Now, they’re just starting to market the story.

Upcoming catalysts, besides lithium market movement, include a construction decision for Phase 2 of the mine and the commissioning of Phase 1. The company is currently finalizing financing, although the cash balance right now should cover remaining expenses on Phase 1. The company seems likely to raise another $60-$90 million for working capital and to build Phase 2.

There’s also tremendous room for growth, with even more proven targets, including many previously producing mines on its property position.

Overall, the economics for this project are extraordinary, and if the lithium market continues to play out like I think it will, Sigma Lithium has a lot of valuation upside left ahead of it. In short, Sigma’s a strong buy right now.

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