Interesting feedback on LAC...

Lithium Americas: The volatility noted above in LAC has resulted in solid returns via our options trades around our core equity position. At the current time, we are short calls on LAC, as we have done multiple times throughout the position's life, expiring on May 21, 2021, at a $17.5 and $22.5 strike price. The volume of contracts sold at each strike corresponds to the size of the equity position we want should the calls expire in the money, and the underlying equity gets called away from us. The thought process behind this trade construction is that if we know the size of the position we want at a particular price point, there is no reason not to accumulate additional returns by pre-selling the stock we would have sold anyway.

High levels of volatility positively impact the price of options, increasing the premium we can earn from selling covered calls. To date, we have sold covered calls on LAC that have expired worthless four times, yielding a roughly 7% return on the equity position's current value or 71bps for the portfolio overall. The outstanding covered calls appear to be trending towards a similar worthless expiration. If they do, the covered call trades on LAC will result in us owning the shares with committed capital of -$0.28 per share.

Although we believe in the fullness of time LAC warrants a $30+ valuation, the prices achieved in early January of this year were not justified by the underlying fundamentals. Some will argue we should have sold down our position. We had already established our option positions and believe LAC is an emerging major in the lithium mining industry. Thus, we decided to maintain the position unchanged. Although still relatively high, the current $15 per share valuation is not crazy compared to where we think the firm should be trading based on fundamentals, so we are no longer overly concerned with the position as is.

LAC management also took advantage of the volatility issuing stock on January 22 for $22 a share. The ~$400 million in proceeds will be used to develop Thacker Pass, the US-based clay lithium deposit, which will likely be the largest producing Lithium mine in America when turned on. In our opinion, the stock issuance could not have come at a better time. LAC management has advanced the project through various development stages (de-risking), but with the share issuance, they have significantly reduced the need to bring in an outside partner to develop the asset as the first phase of the project is expected to cost roughly $581 million. After-tax and at an 8% discount rate, the Thacker Pass project's present value is approximately $2.6 billion (the firm's current market capitalization is $1.5 billion). Although the share issuance was dilutive, increasing the total shares by 17%, we believe it will, in the long run, prove a forward-looking, value-additive decision by management.

The lithium market remains an area of interest and focus for us. This reflects our belief that the most exciting investment opportunities to capture secular trends in EV's and batteries are found upstream in the mining industry. It is also a reflection that there is a greater diversity of lithium investment opportunities relative to other battery metals.

Over the next ten years, we do foresee widespread adoption of EV's and even widespread adoption of batteries in different use cases, but we also envision the rollout being hampered by a shortage of essential metal inputs. VW, the world's largest car manufacture, outlined an aggressive plan in the first quarter to build 240 GWh of annual battery production capacity across six European facilities. Those facilities would require ~60% to 70% of 2020 global lithium production if in operation today. Of course, VW is not the only firm building gigafactories. According to Benchmark Mineral Intelligence, China is building a Gigafactory every week. The US is building one every four months, and Europe is building them at some pace in between. Ganfeng Lithium, arguably the world's leading lithium processer, has committed to establishing no less than 600,000 tons of lithium processing capacity annually. Its current annual capacity is just over 120,000 tons, and the current world demand is just above 400,000 tons.

The development of the assets necessary to fill these factories with metal inputs is not proceeding at speed with the factory development. A shortage is looming, and it will likely slow the pace of adoption of EVs as auto manufacturers sort out supply chains and mining firms scramble to catch up. We anticipate that the price shock to many metals will be persistent, not transitory.