Lake Resources shares dip on another short seller report

Lake Resources (ASX: LKE) shares fell nearly 3% after short seller J Capital Research released a new report questioning the purported success of the lithium junior’s direct lithium extraction (DLE) technology.

According to J Capital analysts, the DLE technology the company is looking to use could be “dramatically” underperforming expectations. This technology is critical to making the lithium developer’s Kachi project in Argentina a success, so its failure would be a big blow to the company’s ambitions.

In its report, J Capital alleges that Lake’s new CEO, David Dickson, who took the reins as chief executive in September, has been contacting other DLE providers due to the underperformance of the current technology. The technology in question is being developed by its partner, Bill Gates-backed Lilac Solutions.

J Capital says one of Dickson’s first actions was to contact Chinese-based Sunresin to ask if Lake could explore using their DLE technology. “We have confirmed this with multiple sources, including Sunresin,” said J Capital in its report.

“If Lake is reaching out to alternative technology suppliers and going back to the drawing board for its technological solution for DLE, then investors deserve to know about it. Lake should advise investors if Kachi brine will be evaluated by alternative DLE technology partners for the extraction of lithium.”

J Capital also highlights that after 600 hours of operation, the DLE technology has produced 80% less lithium carbonate equivalent (LCE) than was expected. In a recent market update, Lake aimed to make 2,500 kg of LCE after 1,000 hours of operation but only indicated that 303 kg LCE was produced after 600 hours.

J Capital believes that there could be issues with the quality of the product, given that no shipments have been announced.

“It appears there may also be a quality problem with the lithium concentrate produced at the pilot plant to date. We estimate the first 2,000 litres of lithium concentrate was produced by the end of October and still has not been shipped 30 days later. Lake has not explained this delay,” said the firm.

“Lake should be clear with investors about why they have delayed the first shipment of 2,000 litres and why it will take up to three months to process the lithium carbonate from the lithium concentrate produced at the site. Is there a quality problem with the lithium concentrate being produced by Lilac that creates difficulty for processing it into lithium carbonate?” J Cap asked.

J Capital’s report is the third this year, with a previous report in November alleging Lake’s funding commitments from the UK Export Finance were misleading. The UK Export Finance said that Lake was just at the beginning of the funding application process.

J Capital’s first short attack on Lake was published on July 11 when it scrutinized the company for paying advisory businesses to produce favourable research and first questioned its DLE technology.

In September, Lake said a dispute had arisen with Lilac Solutions over the deadline of the U.S. partner achieving milestones to get a 25% stake in the Kachi project, sending its shares down 20%.

J Capital says Lake has cleared up that automakers Ford and Hanwa were no longer negotiating offtake agreements. Lake announced the deals with great fanfare in April and then quietly stopped mentioning them in early October. At the recent AGM, Lake’s chairman Stuart Crow said the offtake negotiations with the automakers had been replaced by non-binding memorandums of understanding with two other companies.

“What happened in that situation was that those agreements move through their exclusivity period, and we open the offtake discussions with other parties, and then became a commercial negotiation with six different people, and it was a case of whoever got over the line with the agreed terms first we secure the off-taker. So, this is why SK and WMC Energy have prevailed, and we’ve subsequently closed also those uptake discussions with other parties,” Crow said, according to J Capital.

The investor said it was curious that Lake implied Ford was not fast enough to act, when in the same time frame, Ford was able to reach a negotiated binding offtake agreement with ASX-listed ioneer (ASX: INR).

“Lake has said the dispute with Lilac was resolved with a contract amendment but has not provided any details about those amendments, such as performance criteria or timeline. When pressed at the AGM, the chairman refused to disclose any further information,” said J Capital.

A spokesperson for Lake Resources said J Capital had simply ignored the November 21 press release in which CEO David Snydacker said Lilac and Lake were working together closely “to set a new standard for pace of project development in the lithium industry”.

“Progressing the on-site plant from completion of construction to shipping of on-spec bulk samples of lithium chloride in just two months is significantly faster than conventional projects move, where commissioning of evaporation ponds typically takes many years,” Snydacker said in a statement.

“We expect to continue to improve upon the traditional project development timeline as we advance toward commercial production, ultimately bringing the Kachi project online years ahead of competing projects.”

The spokesperson also pointed out that Lake had strengthened its legal and compliance counsel and added two new board members. “Look at their background and experience and ask yourself who knows more about the prospects for LKE?”

The company is down around 53% from its April 5 all-time high at A$2.65. The stock also sold off extremely aggressively following its inclusion into the ASX 200. Between June 16-23, it fell 58% from A$1.67 to just A70¢ but has since recovered to $1.00 per share.