Lithium Play Critical Elements, Why so Unknown?

posted in: Lithium | 0

Screen Shot 2016-03-22 at 9.46.46 AM

Critical Elements Corp. (TSX-V: CRE) (US OTCQX: CRECF) is an emerging specialty metals (lithium, tantalum, rare earth) company, focused on its Rose Lithium-Tantalum (“RL-T”) project in northern Quebec. Management has proven its ability to repeatedly produce battery-grade lithium (99.98% purity) at lab scale. The management team believes it will be able to produce a Metric tonne (“Mt”) of Lithium Carbonate (“LC”), at a cost of US$2,900. This is a preliminary number. Note: All upcoming NPV figures are post-tax.

The Company’s very promising RL-T project is backed by a Preliminary Economic Assessment (“PEA”) [see pages 9-12] and very strong (current) LC prices, up from about US$5,500/Mt in October 2015 to a reported $20,000+/Mt today. Importantly, Critical Elements is no newcomer to the lithium scene, it has been advancing its RL-T project since late 2009. A total of 181 drill holes totaling 26,500 meters have been drilled to date. Out of the 181 drill holes, 175 returned significant mineralized values.

Assuming a LC price of US$6,000/Mt, the PEA highlights a NPV(8%) & IRR of C$279 million & 25%, respectively. The NPV(10%) is C$223 million. The assumed USD/CAD FX rate in the PEA is at parity. However, if today’s C$ 0.77 FX rate were to be incorporated, the NPV (in C$ dollars) would be much higher. Management also points out that the Company has made noteworthy improvements in recoveries since the PEA was done. Spodumene recovery is around 90% at a grade of 6.4% Li2O, and a robust 94% recovery on the carbonation process for Li2CO3. The industry average is around 80% for spodumene and 85% for carbonation.

Huge leverage to lithium prices, which have tripled in the past six months

All else equal, with an assumed LC price of US$8,500/Mt, the NPV(10%) more than doubles to about C$495 million. With an assumed LC price of US$10,000/Mt, the NPV(10%) nearly triples to roughly C$660 million. A growing number of industry participants believe that US$8,500/Mt is a reasonable intermediate-term forecast. Critical Elements offers very compelling leverage to long-term lithium prices. Of course, all emerging projects have upside in a bullish pricing scenario, but many will never see the light of day, or will hit Screen Shot 2016-03-17 at 5.40.39 PMthe market a few years too late…

Critical Elements has three things going for it that global peers don’t. First, the signature of a strategic Collaboration Agreement with a leading, global chemical company that includes take or pay off-take for ALL products. Second, its LC has exceptionally low iron content, making it ideally suited for the Glass & Ceramics industry. Third, the Company is actively pursuing a non-dilutive capital raise. Given these 3 important attributes, the Company could reach production of glass & ceramics grade LC within a few years. For the reasons cited below, in my view, just my opinion, (I’m not an investment advisor) the current share price of C$0.22 might represent a good entry point for investors willing and able to invest in highly speculative stocks.

Low cash burn & possible non-dilutive capital injection could be strong catalysts

Critical Elements’ management team & Board is determined to keep equity dilution to a minimum. They appear to be walking the walk, for example, with quarterly cash burn under C$150k. The Company is in discussions with a few funding parties regarding a potential non-dilutive cash injection. To be clear, that’s a Company goal, it’s by no means a done deal. Readers may have noticed that the Company has been trying to land non-dilutive financing for several months. Last week, management reiterated to investors at a big investment conference in Toronto, that active discussions are ongoing, but that there’s nothing to report at this time.

The Company has 125.7 million common shares outstanding [basic market cap. $21.4 million at 3/16/16 close] + 7.7 million options at a weighted average strike price of $0.21 (range $0.15 to $0.30) + 3.95 million warrants with a strike price of $0.35. Management & family members own about 18% of outstanding shares, and the top five shareholders own ~38%. 

Cheap valuation and stock price under-performance may not last

As mentioned, Critical Elements’ basic market cap is C$21.4 million. [$21.4 million divided by the PEA’s NPV(10%) of $223 million] = ~10%Screen Shot 2016-03-22 at 9.46.46 AM. The Company is trading at just 10% of its NPV(10%). Assuming a US$8,500/Mt LC price, the Company is trading at just ~4.5% of its NPV(10%). This sharp valuation discount is unwarranted given the above-mentioned factors. Shares in the Company offer a compelling investment proposition. Over the past six months, Quebec hard rock peers Nemaska Lithium Inc. & Houston Lake Mining Inc. are up 146% & 94%, respectively, while Critical Elements’ share price is down 8%.

Therefore, I believe that the Company’s stock has tremendous room to run, especially if management can lock down non-dilutive funding. Critical Elements Corp. (TSX-V: CRE) (US OTCQX: CRECF) is a company worth watching. The stock price has already begun to move, but the valuation is still cheap given the fundamental strength in lithium prices and company specific attributes that make it less risky than global lithium peers at similar stages of development. Critical Elements’ PEA is strong, possibly with room for improvement from a much more favorable FX rate and stronger reported lithium recoveries. 

I reiterate my view, just my opinion, (I’m not an investment advisor) that the current price of C$0.22 might represent a good entry point for investors willing and able to invest in highly speculative stocks.

Disclosures: Readers fully understand and agree that nothing contained in this article authored by Peter Epstein, or on, including but not limited to, interviews, analysis, commentary, opinions, views, assumptions, reported facts, calculations, etc. is to be considered in any way whatsoever, implicit or explicit investment advice or guidance. Further, nothing contained herein is a recommendation or solicitation to buy, hold, or sell any publicly tradable security. Mr. Epstein has never been, and is not currently, a registered or licensed financial advisor. His article(s) on Critical Elements Corp must be considered carefully in this context.  

Any comparison between or among stocks is for illustrative purposes only and should not be taken as fact or relied upon. Readers understand and agree that they must conduct their own investment due diligence. An investment in any small cap stock, including Critical Elements Corp, can deliver a 100% loss. While the author believes that he’s diligent in screening out companies that, for any reasons whatsoever, are unattractive investment opportunities, he cannot guarantee that his efforts will (or have been) successful. Mr. Epstein is not responsible for any perceived, or actual, errors including, but not limited to, analysis, commentary, opinions, views, assumptions, reported facts & financial calculations, or for investment actions taken. 

At the time this article was posted, Critical Elements Corp. was a sponsor of and the author not own shares in Critical Elements Corp. The shares of Critical Elements Corp. are highly speculative, not suitable for all investors. Readers are urged to consult with their own financial advisors before making investment decisions.