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There’s been a lot weeping and gnashing of teeth over the share price of Cypress Development Corp. (TSX-v: CYP) / (OTCQB: CYDVF). It traded up to C$0.41 in anticipation of a blockbuster PEA announcement, which was delivered on September 5th. No one seems to deny the strength of the PEA, but what happened next was a shock to shareholders…. the share price began to move south.
Fast forward 5 weeks, the share price had been cut in half, driven down by a relentless decline in the lithium sector generally, and probably by the overhang of an expected private placement. However, the overhang is now behind us. A C$1.1 M private placement was announced on October 11th, and on October 29th, the deal was upsized and closed at C$2.01 M. While shareholders are not happy with the latest share price of C$0.23, one should consider how Cypress compares to early-stage lithium and mining peers.
Is Cypress Development Corp. Cheap Vs. Peers?
The lithium sector is in a massive funk. Yes, Cypress Development Corp. seems very cheap, but many other lithium companies are cheap as well. Make no mistake, I like CYP.v the best of the 6 listed below. CYP.v is trading at just 0.7% of its after-tax NPV(8%). As a frame of reference, according to Haywood Securities, many smaller cap, (less than C$100 M) pre-production, precious metals juniors trade at a “Price/NAV” ratio of about 0.3x. CYP.v is trading at 0.007x, that’s 1/37th the valuation of early stage precious metals juniors Haywood is tracking. It’s crazy, especially because I would choose lithium as my metal of choice for the next 10 years.
In addition, Cypress will be fully-funded through its PFS. Management believes that ongoing metallurgical work, if successful, will be positive data points to watch for.
A key takeaway here, and this is important, is that the investment world might not realize that the clay-hosted lithium deposit Cypress is advancing is different from that of Bacanora Lithium’s Mexican project and a project that Lithium Americas was working on prior to it switching over to its new Thacker Pass project. Those projects have (had) hectorite or other difficult to deal with clays as main lithium hosts.
Cypress is not a last cycle clay project from 3-5 years ago…. it’s new, it’s not hectorite, and lithium prices are no longer around US$5,500/tonne. Lithium contract prices have roughly tripled! (Note, SQM’s latest quarterly price was ~ US$16,500/tonne) and the entire process flow sheet being pursued by Lithium Americas at Thacker Pass & Cypress at Clayton Valley is less complex because the clay host is less difficult to work with.
Notes:
1) The Thacker Pass EV is estimated at 20% of the EV of parent company Lithium Americas. 80% of Lithium Americas’ valuation is attributed to its JV project in Argentina.
2) For Bacanora’s EV, I ascribed 15% to another clay project they have and 85% to the main Sonora Mexico clay project.
3) Unconventional junior, Australian-listed Global Geoscience, has a clay-hosted lithium / boron project in Nevada. It’s not included in the chart. A highly-anticipated PFS (there’s no PEA) is coming out on October 23rd.
2) For Bacanora’s EV, I ascribed 15% to another clay project they have and 85% to the main Sonora Mexico clay project.
3) Unconventional junior, Australian-listed Global Geoscience, has a clay-hosted lithium / boron project in Nevada. It’s not included in the chart. A highly-anticipated PFS (there’s no PEA) is coming out on October 23rd.
Sometimes investors get hung up on large cap-ex figures compared to tiny EVs. I get that, there’s a risk of substantial equity dilution. However, notice that the ratio of Enterprise Value (“EV”) [market cap + debt – cash] to cap-ex for Cypress is 3:1, the best of the bunch. If one looks at giant undeveloped copper projects held by juniors, of which there are a few dozen, many have large NPVs, but NPV to cap-ex ratios closer to 1:1.
Further, total cap-ex amounts are sometimes twice that of the above listed lithium projects. As if that weren’t bad enough, several projects have IRRs in the low to mid-teens.
Back to Cypress Development Corp. — As mentioned, I believe Cypress is getting limited respect because it’s a clay-hosted lithium project. The other two main clay projects are listed above, Lithium Americas’ Thacker Pass project and Bacanora Minerals’ Sonora project. I would argue that Thacker Pass is not getting proper attention because it plays second fiddle to a much larger conventional lithium brine project in Argentina.
Bacanora has the most advanced clay project in the world, there’s a BFS on it, but the company has not been able to finalize financing. That company just announced in an update that “ongoing site visits by potential strategic investors, at both the corporate and project levels, to secure outstanding development capital for the Mexican Sonora project. To date US$240 million or 52% of the US$460 million required for Stage 1 production of 17,500 tpa of Li2CO3 at Sonora has been conditionally committed.“
I had hoped that Bacanora would get into construction this year and be in production by late 2019 or early 2020, which would have been great for Cypress, but I imagine first production at Bacanora has been set back by 6-12 months.
In my opinion, good news from Bacanora, Lithium Americas or Global Geoscience could be a market catalyst for Cypress.
A year ago, I would have said that lithium brine stories were the best place to be. That’s partly because I don’t know the hard rock space nearly as well and because Canadian & Australian juniors with Argentina lithium brine projects were hot. Since then, the news has been nothing but bad (with one bright spot) for brine. How bad has it been? The “Lithium Triangle” in South America is a mess…
1) Morgan Stanley (“MS“) put out a lithium industry report in February saying that lithium prices would collapse by ~45% within 3 years. Note: {Contract lithium prices reported by SQM are up 22% since that report 8 months ago}
2) MS and a few others and writers at Bloomberg & Reuters, assumed (at face value, according to what they were told by ALB & SQM) that lithium supply from Chile’s Atacama salar would soar this year (and again in 2019/2020). So far, the MS report has been wrong as Albemarle & SQM have not meaningfully increased production this year. Further, there’s little-to-no evidence that production from Chile will soar next year.
3) Spot lithium prices (in China) have declined quite a bit, but these prices are not representative of the overall global contract market. Contract pricing is up year over year through June-2018.
4) Top 3 lithium brine producer Argentina is having a tough year, caught up in an emerging market sell-off, high inflation and a plunging currency, causing investors to fear a bad Presidential election outcome next year.
5) SQM bailed out of Argentina, selling its JV stake in a project to GanFeng Lithium. The project is thought to be world-class, and is fully-funded, but it seems to have been stalled for most of this year.
6) Bad weather has wreaked havoc on evaporation pond operations at FMC’s & Orocobre’s operations.
7) After nearly 3 years, Orocobre Ltd. has still has not attained nameplate capacity of 17,500 tonnes/yr. of lithium carbonate. The company’s annual sales figure for the FY ended June 30, 2018 was 11,837 tonnes, just 67% of nameplate.
8) In Chile, the fiscal balance, economic climate and political situation is much better than in Argentina, but ongoing disputes and distrust continue among SQM / Albemarle, select local communities and State-controlled entities CORFO & CCHEN is contributing to investment uncertainty.
9) In late August, it was widely reported that a Chilean agency is rethinking water allocation practices in the southern portion of the Atacama salar where ALB & SQM have their operations. A ban has been proposed for all new water authorizations.
10) Last week GanFeng’s IPO on the HK exchange was down 28% on day 1 of trading, although it recovered 10% on day 2
Given what I’m seeing in the lithium brine world, projects are billed as having ramp up periods of 3 years. Most of the PEAs say 3 years from 2021 to 2023. However, history suggests (and the slow pace of project funding) that instead of 2021 -2023 ramp up periods, we might be looking at 2022-2025 ramp ups, AND nameplate capacity might not be achievable for some projects. Why do I say this? Look at what I said earlier about Orocobre Ltd.
So, with all the talk about brine projects in Argentina, we might not see meaningfully increased production from that country until 2022-2023 at the earliest. That applies to Neo Lithium, Advantage Lithium, Millennnial Lithium, LSC, Lithium Americas’s JV with Ganfeng and Galaxy Resources’ Sal de Vida project. Don’t get me wrong, a lot of those projects probably will reach production, but probably not on budget or on time, and maybe not at anticipated nameplate capacity. Notice, only 1 of those projects is fully funded — Lithium Americas’ JV with Ganfeng.
These negative headlines have weighed heavily on the lithium sector. Yet, contract pricing has gone up, not down this year, and lithium demand forecasts for both vehicle batteries and grid-scale energy storage systems are inching up month after month.
This opens the door wide open for new technologies saving the day, diminishing and eventually replacing the need for NEW evaporation ponds. I imagine existing ponds would be allowed to continue working through designed mine lives in to the 2030s. The prospects for unconventional outcomes (technology driven solutions that avoid the need for extensive evaporation ponds) is beneficial for clay-hosted lithium companies like that of Cypress Development Corp., Bacanora Minerals & Thacker Pass.
I mentioned there’s one exception to the negativity… It comes from South Korean giant POSCO, who has agreed (deal has not closed yet) to acquire a lithium brine property in Argentina for US$280 M. This news has been largely ignored by the market. I think this too could be a positive catalyst for lithium stocks.
I do feel the share price could be near a bottom based on the above mentioned factors and relative value to other early-stage lithium juniors. If’/when the lithium sector rebounds, shares like CYP.v could be among the first to move higher. Even If CYP.v were to double, it would be trading at 1.4% of the Company’s PEA-derived after-tax NPV(8%). Still a far cry from junior miners in other sectors.
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