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Delta Lithium Limited (ASX: DLI)

Pure play on lithium with a double engine of production and expansion

Delta Lithium Limited (ASX: DLI), initially called Red Dirt Metals, is a Perth-based mining operator. DLI is developing highly progressive lithium mines, namely Mt Ida and Yinnetharra. Based in the tier-1 mining jurisdiction of Western Australia (WA), it is one of the few Australian miners that have a live lithium mine in the region. These projects combined have one of Australia’s largest undeveloped lithium deposits. With lithium demand rising due to the EV revolution and global supply chain disruptions further widening the gap between its demand and supply, we see substantial value in DLI as it ramps up its development efforts.

Developing and expanding highly prospective lithium assets

DLI has been drilling c.15k m every month, much higher than the average run rate of c.2k m. This is a testimony to the confidence and eagerness of the management to develop Mt Ida and aggressively expand Yinnetharra sites. The plan is to start the Direct Shipping Ore (DSO) project from Mt Ida by the end of 2023. To achieve this, all the necessary studies have already been conducted and regulatory approval is being sought. At Yinnetharra, c.5k high-grade samples have already been sent to the lab for testing, c.20km drilling is being undertaken, and the management expects final resource estimation by the end of 2023.

Lithium is the new gold

Off late, lithium has become one of the most critical and sought-after elements. Apart from being used to build EV batteries, lithium is also used in powering mobile phones, computers and making renewable energy storage possible. Furthermore, it might be used in the treatment of bipolar disorder, dementia and Alzheimer’s. Subsequently, its market size is expected to reach US$19bn by 2030, representing an 8-year CAGR of 17%. With the global demand rising and very few new mines coming up on-stream, the demand-supply gap is expected to stay for the foreseeable future, providing DLI with a substantial market opportunity.

Valuation range of A$1.10–1.24 per share

Using a SOTP-driven asset base comparable valuation methodology and conservative assumptions on resource estimates, we have valued DLI at A$1.10 per share in a base-case scenario and A$1.24 per share in a bull-case scenario. The target price range represents a Price/NAV of 0.56x, which offers a significant upside potential for potential investors, in our view. Our valuation excludes possible value-unlocking from the sale of the Eureka gold mine and/or any M&A activity by the management. The key risks include: project delays, regulatory risks and commodity price risks.