Last month, clay-hosted lithium junior Cypress Development Corp. [TSX-V CYP] / [OTCQX: CYDVF] contracted Vancouver based NORAM to conduct additional testing for its 100%-owned Clayton Valley project in Nevada (USA).
Test work will focus on the downstream portion of the revised extraction flow sheet. This incremental step pushed back delivery of a third-party Preliminary Feasibility Study (“PFS“), until January. Readers are reminded that at nearly 9 million tonnes Lithium Carbonate Equiv. (“LCE“), Cypress has one of the largest resources (Indicated + Inferred) in the world.
The company’s Preliminary Economic Assessment (“PEA“) shows an after-tax NPV(8%) of nearly C$2 billion, 3.0 times the upfront cap-ex figure. Operating costs are about US$4,000/tonne and the IRR is 32.7%.
Some shareholders were disappointed by the timeline being pushed back, but I think the company is doing the right thing. If the delay had been due to running out of cash, bad / inconclusive study results, or some other project setback, that would of have been troubling. I’m content to wait until January, by which time we could start to see some signs of improvement in the lithium sector.
A lot has changed in the past 3-4 years….
Consider what’s changed since 2015-16. Brine projects in south America were thought to be the cheapest and most reliable way to produce lithium carbonate. Brine was the wave of the future. Fast forward to 2020, it’s not nearly as cheap or easy as expected.
Look no further than Argentina’s Orocobre Ltd., a company that’s several years behind schedule, and over budget, in achieving nameplate capacity of 17.5k tonnes LCE/yr. Even giants Albemarle & SQM have experienced significant difficulty in expanding their large-scale lithium carbonate operations in Chile.
In Australia hard rock producers have had great success bringing on new production. So much so, that the price of spodumene concentrate (6%) (used as feedstock for lithium hydroxide) is down ~60%. There will be meaningful downsizing of hard rock operations in Australia. Non-producing juniors are having, and will continue to have, a very challenging time as producers cut costs and streamline production.
Taken together, south American brine projects coming online much slower than expected, and the curtailment or cancelation of several hard rock projects; these factors open a window of opportunity for non-traditional / unconventional lithium projects. At the very least, industry dynamics suggest higher lithium prices next decade.
Renewed interest in non-brine / non-hard rock lithium sources
Circling back to Cypress’ recent news, readers may recall that the company announced positive results (see press releases in Feb. & July) from the first two phases of its PFS-stage metallurgical program. On Aug. 29, the company reported another milestone; a commercially viable process was identified, based on filtration, to deal with the separation of clay particles from leach solutions.
This achievement should enhance the project economics and lead to improved, more efficient recoveries. Equally important is the more effective use of sulphuric acid (a large component of op-ex). These changes have been deemed, “significant” and have been incorporated into the PFS.
As per the press release, “The results represented a major milestone in the project that simplifies the process flow sheet.” Further, according to CEO Dr. Bill Willoughby,
“Cypress identified a commercially-viable process that takes solid-liquid separation from bench-scale, to operational scale.” Importantly, “Cypress now has a greater understanding of this portion of the process.”
In the most recent press release CEO Willoughby commented,
“We are pleased to work alongside NORAM during this stage of testing. It lays the groundwork for pilot-scale testing & a full Feasibility study we plan for next year.”
After delivery of what I hope will be a robust PFS in January, management will start pilot-scale testing of the flow sheet and work on a Bank Feasibility Study (“BFS“). Pilot-scale testing will start well before delivery of a BFS. Cypress has roughly C$1.4 million in the bank, enough to carry them comfortably into 2020.
January’s PFS could potentially deliver both lower cap-ex & op-ex
Work over the past year points to the real possibility of being able to lower both op-ex per tonne & upfront cap-ex in next month’s PFS. In addition, Willoughby indicated that pilot-scale testing is typically not done until BFS-stage. Therefore, Cypress should have a 6-9 month head start in that important undertaking.
Armed with a PFS — 100% ownership, a giant resource, a great location (USA) [vs. major civil unrest in Chile, and a less mining-friendly (new) President in Argentina] — Cypress will be in a very strong position. Even more so if/when the lithium price & market sentiment rebounds later next year.
Based on the large number of global EV platforms and over 100 battery mega-factories coming online (according to Benchmark Mineral Intelligence). I expect lithium prices to move higher, perhaps trading between US$10k-$16k per tonne, for much of the 2020s. A price around US$10k/tonne is all that Cypress would need to thrive, as management believes op-ex will be around US$4k/tonne.
Looking beyond the PFS and pilot-scale testing, in 12 to 18 months management should have a BFS demonstrating 100% ownership of a great project at a long-term assumed lithium price of US$10k/tonne. Or, a tremendous project at US$12k/tonne. Or, a spectacular, top-decile, mining project at US$16k per tonne.
At C$0.17 per share, Cypress Development Corp.’s [TSX-V CYP] / [OTCQX: CYDVF] valuation appears cheap compared to peers and to its after-tax NPV(8%). The Enterprise Value (“EV“) is less than 1% of the PEA-derived NPV. Compare that to a range of 2.0% to 12.5% (average of 6.3%) among peers on the chart above.
Make no mistake, almost every lithium junior is trading cheaply, but most will never make it past PFS-stage. Cypress has an excellent chance of moving beyond PFS-stage next year, especially if/when it finds a strategic / financial partner to share development costs.
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