Lifezone Metals: A High-Risk High-Reward Play On Battery-Driven Commodity Opportunities

Mining is a risky endeavor in the best of times, in no small part due to the swings in commodity prices, but pre-production mining companies are in a risk category all their own and basically on par with biotech in terms of risk-reward trade-offs. Outcomes here are typically binary – a select few generate substantial returns for long-term shareholders and most flame out. Of course, along the way there are plenty of trading opportunities and I suspect that’s what appeals to many who choose to invest in this more speculative segment of the market.

All of this brings me to Lifezone Metals (NYSE:LZM), a pre-production mining company legally headquartered in the Isle of Man with a nickel project (Kabanga) in Tanzania and a proprietary refining technology (“Hydromet”) that the company is looking to license to others.

The prospects for nickel are certainly bright today. Not only is a multiyear up-cycle in commercial aerospace likely to fuel demand for nickel as a key ingredient in high-performance alloys, but the expansion of vehicle electrification is almost certainly going to drive substantial demand growth for high-grade nickel in the coming years. While the outlook for nickel is indeed encouraging, and Lifezone may well be on to something with its Kabanga project, the risks here are well above average and this is what I refer to as a “consenting adults” type of investment situation, where investors really need to be aware of the above-average execution, financial/liquidity, and market risks.

Kabanga Looks Promising

Lifezone’s key asset is its right (granted through a Special Mining License from the government of Tanzania) to develop the Kabanga mining project in the northwest part of the country. Kabanga is a nickel sulphide deposit that could hold something in the neighborhood of 2.3 to 2.5B pounds of recoverable nickel, as well as economically-viable quantities of copper and cobalt.

Nickel sulphide ore deposits are attractive (relative to laterite deposits) as they are typically higher grade and easier, cheaper, and cleaner to process. Speaking in general terms, processing laterite ores typically requires larger facilities and more energy input (driving higher cash costs) and generates more waste products (CO2 and various effluents), and both mining companies and national governments are becoming more attentive to these issues. On the other hand, sulphide deposits are less common (particularly large-scale deposits) and they typically require more expensive and technically demanding underground mining.

Lifezone is still conducting drilling operations to fully characterize the potential nickel content at Kabanga, but results to date have been quite encouraging, with nickel grades around 2.6% (2.63% for measured and indicated resources, 2.57% for inferred resources). With 25.8Mt of measured and indicated mineral resources and another 14.1Mt inferred, this could be one of the largest nickel sulphide deposits in the world, and certainly among the largest not controlled by a major mining company (Vale (VALE) has the large Sudbury resource in Canada and there is also Nornickel’s Taimyrsky mine in Siberia). Moreover, with a very high ore grade (the amount of nickel in a given amount of rock), this could be a very profitable mine as well – management is projecting top-quartile cash costs.

On the operational side, Lifezone hopes to complete drilling relatively soon and complete a Definitive Feasibility Study by this time next year (Q3’24). Provided that goes to plan, the company would target ore production in 2026.

Management is also planning to process the ore it mines from Kabanga and a facility (Kahama) that will be located around 340km away. The company has an agreement with the government to cooperate at this phase (a joint venture called Kabanga Nickel Limited) and Kahama will use the company’s proprietary Hydromet technology to produce battery-grade nickel that will then be transported to the port at Dar es Salaam (about 1,000km away) for export.

Ample Risks Between Here And There

There are numerous risks and issues that could challenge Lifezone’s Kabanga and Kahama projects and success is by no means assured at this point.

For starters, the feasibility study is not complete yet and the total scope and quality of the resources at Kabanga are still unknown. The drilling results to date have been promising, but there’s a reason the company has to continue drilling to further characterize the deposit and even when that’s complete, it’s not exactly uncommon for real-world mining results to differ from what exploratory drilling suggested.

Operating the mine itself will also present challenges. Underground mining is more expensive and more technically demanding and I would argue that Lifezone’s management team may not have all the experience in on-the-ground (or under the ground, in this case) mining that you might want. That said, and I’ll discuss this more in a moment, BHP (BHP) is onboard as a partner and they can contribute a lot of technical expertise.

There are also risks to trying to build and operate a mining project in Tanzania. While the government has been supportive (it owns 16% of the mine project and is entitled to royalties and taxes, and also participates in the Kahama refinery JV), Tanzania sports a low Ease of Doing Business rank (calculated and published by the World Bank) of 141 out of 190, a Corruption Perception Index score of 87 (better than much of Latin America, Africa, and Russia, but still not “great”), and a Freedom House score of 36 out of 100 (“partly free”; better than most of Africa, but worse than Europe and most of Latin America).

A single party has controlled Tanzania’s government since independence in 1961, and infrastructure in the country is not great (a 0.25 score from ND-GAIN). That leads me to questions and concerns about whether the government can deliver on the infrastructure (power, water, roads, et al) needed for this project to succeed.

I also see risk with the company’s Hydromet smelting/refining technology. This is a proprietary technology developed by two of the company’s officers (the Chairman and the CTO) and while it sounds promising as a lower-cost, less resource-intense alternative to current smelting technologies, it has been in development for 30 years and I don’t believe it has ever been used in a commercial-scale project like Kahama. The company did recently sign an MOU with a customer that is looking to use the technology to recover platinum group metals (or PGMs) from old automobile catalytic converters, but I think it is very much fair to note that scaling up and operating an unproven technology (unproven at commercial/economical scale) is a meaningful risk.

While not an operating risk per se, I will note here that Lifezone went public through a reverse merger with a SPAC. This is typically seen as a lower-quality path to market; say what you like about whether Wall Street firms really do meaningful due diligence, but there’s more of a vetting process with traditional IPOs than you typically see with this sort of arrangement. This doesn’t prove that Lifezone is inferior or in any way not aboveboard, but I think it’s something investors need to know.

The Opportunity Is Attractive

While there are outsized risks here, Lifezone is targeting a very attractive opportunity. With global battery production to facilitate passenger vehicle electrification almost certain to increase substantially in the coming years, there will be tremendous demand growth for key elements like nickel; at this point I expect global nickel supplies relative to battery-driven demand to become problematic around 2026. Likewise, demand for copper and cobalt should remain robust as electrification grows, not just in transportation but in areas like factory automation, commercial building operations, and renewables.

In addition to the ore in the ground, Lifezone has a potentially invaluable partner in BHP. This global mining company has already invested $100M in the project (between Lifezone and Kabanga Nickel Limited) and has options to substantially increase its ownership in the years to come. Not only does BHP represent a potential source of essential cost-effective funding, but BHP can also lend its expertise to establishing the mining, smelting/refining, and logistics operations, as well as help secure attractive customer off-take agreements.

Summarizing what I’ve said above, Lifezone could be in the early stages of developing a critical nickel production complex that could generate $25B or more (perhaps substantially more) in future revenue just based upon current metal prices. If mining operations go smoothly and the Hydromet approach works, that revenue can be generated at very attractive costs, possibly leading to robust EBITDA and cash flows and good market multiples.

The Outlook

Valuation at this stage is almost a choose-your-own-outcome exercise. Yes, you can (and I have) produce a detailed discounted cash flow model and/or NPV analysis, but given the speculative nature of the project it doesn’t really increase the accuracy of fair value estimates – you’re basically replacing a few simple estimates with numerous smaller estimates and just further complicating what is on some level guesswork.

Assuming that Lifezone can generate around $2B/year when it’s at normal operating scale (I’m not assuming any meaningful out-licensing revenue from Hydromet) and do so with EBITDA margins in the mid-30%’s, I can get to a fair value of around $18 today. This is just a very rough ballpark estimate; I’m not discounting back (and it will take several years before $2B in revenue happens, if it ever does), I’m not assuming meaningful future debt (and it will take more capital to get operations up and running) and so on. Maybe the company will never come close to $2B in revenue, and maybe a mid-30%’s EBITDA margin will prove meaningfully low. Time will tell. I will say, though, that other valuation approaches (DCF, NPV) using an estimated 20-year mine life get me to a mid-to-high teens fair value, and that’s including double-digit cost of capital estimates.

The Bottom Line

I want to emphasize in the strongest possible terms that this is a brief overview; there are risks and opportunities beyond what I’ve laid out here, and likely a few that I haven’t even consciously contemplated. Pre-production mining stocks are notoriously risky and investors ought to approach this with an attitude that failure is a very real (if not likely) potential outcome.

That said, I am a believer in electrification – from factory automation to passenger vehicles – and I believe the world will need more high-quality nickel mines to drive that electrification. Lifezone has a chance of becoming one of those winners. I expect the stock to be quite volatile, and it wouldn’t surprise me to see another boom/bust cycle (or two … or three) in EV/battery-related component and commodity stocks, but for risk-seeking investors it’s worth the time investment of further due diligence.