Low Cost Lithium Expansion And Rising EV Demand Will Drive Exceptional Long Term Potential

Catalysts

About Sigma Lithium

Sigma Lithium produces high grade, low cost and environmentally responsible lithium concentrate from its integrated mine and Greentech beneficiation plant in Brazil.

What are the underlying business or industry changes driving this perspective?

• Completion of the mining upgrade to large scale equipment is expected to unlock the full 300,000 tonne annual capacity of Plant 1. This is anticipated to drive higher shipment volumes and support sustained growth in revenues and operating earnings as plant utilization rises.
• Phase 2 expansion, backed by BNDES funding and customer supported offtake prepayments, is targeted to lift total production to roughly 550,000 tonnes in 2027. This is expected to materially increase free cash flow and accelerate deleveraging and earnings growth.
• Structural positioning at the extreme low end of the global cost curve, with all in sustaining costs guided down toward about $500 per tonne after Plant 2, is expected to provide significant cushion in volatile pricing environments and support stronger net margins over the long term.
• Growing global adoption of electric vehicles and energy storage, reflected in deep and liquid lithium contract markets, is expected to underpin demand for high quality spodumene concentrate and support improved realized pricing and higher revenue over time.
• Increasing focus on traceable and responsible raw materials across global battery and automaker supply chains enhances Sigma Lithium’s commercial leverage with tier one customers. This is expected to support more favorable offtake terms that can improve price realization and help stabilize cash flow and earnings.

Assumptions

This narrative explores a more optimistic perspective on Sigma Lithium compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Sigma Lithium's revenue will grow by 56.7% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -23.8% today to 78.4% in 3 years time.
• The bullish analysts expect earnings to reach $419.3 million (and earnings per share of $3.73) by about December 2028, up from $-33.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 6.9x on those 2028 earnings, up from -34.8x today. This future PE is lower than the current PE for the US Metals and Mining industry at 24.5x.
• The bullish analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.03%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The company’s growth strategy relies on a tight execution of the mining upgrade and Phase 2 expansion, but any delays in mobilizing large scale equipment, adjusting mine geometry or commissioning new capacity could keep production below the 300,000 tonne and 550,000 tonne targets for longer than expected, limiting shipment volumes and revenue growth.
• The bullish case assumes sustained improvement in lithium prices and deep spot market liquidity. However, lithium remains a cyclical commodity and a prolonged period of lower spot prices or renewed volatility could erode the benefit of low costs, compress realized pricing and materially reduce free cash flow and net margins.
• Sigma’s cash generation, deleveraging and expansion plans are heavily supported by customer prepayments, offtake structures and supplier financing. Any deterioration in counterparties’ appetite to provide working capital or fund equipment, or delays in closing new offtakes, could constrain liquidity and slow investment, weighing on earnings and balance sheet strength.
• The business model depends on maintaining an extreme low cost position through rising scale and efficiency. If the mine upgrade fails to deliver the expected productivity, if logistics for monetizing middlings prove more expensive than planned or if industry peers also cut costs aggressively, the cost advantage could narrow, pressuring operating margins and long term profitability.
• The narrative leans on long term structural growth in electric vehicles and energy storage. Technological shifts, battery chemistry changes that reduce lithium intensity or slower than expected adoption could soften demand growth, weakening pricing power for spodumene concentrate and ultimately impacting revenue and earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Sigma Lithium is $15.0, which represents up to two standard deviations above the consensus price target of $13.0. This valuation is based on what can be assumed as the expectations of Sigma Lithium's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $15.0, and the most bearish reporting a price target of just $11.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $534.8 million, earnings will come to $419.3 million, and it would be trading on a PE ratio of 6.9x, assuming you use a discount rate of 12.0%.
  
• Given the current share price of $10.33, the analyst price target of $15.0 is 31.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.