Neometals Offers 4 Great Opportunities For The Price Of 1

Summary

• A 13.8% share in the producing Mt Marion lithium mine.
• A near-term lithium hydroxide processing facility probably near Kalgoorlie WA.
• A near-term lithium-ion battery recycling business.
• The very near-term Barrambie Titanium Vanadium Iron Project.
• Note: China has just made lithium-ion battery recycling compulsory for electric car manufacturers in China.

This article was first published on Trend Investing on March 9, 2018: therefore, all data is as of that date.

Neometals [ASX:NMT] [GR:9R9] (OTCPK:RRSSF) (OTCPK:RDRUY) - Price = AUD 0.355, USD 0.28

Neometals is an Australian lithium producer with growth opportunities in lithium processing, lithium-ion battery recycling, titanium and vanadium, and more. I will look at each of these areas.

Neometals 5-year price graph

Source: Bloomberg

Lithium China Spot prices

Source: Lithium Americas January 2018 company presentation

Note that Neometals produces spodumene whose prices tend to track the lithium hydroxide price. Current spodumene price contracts range from around USD 850 to USD 1,000 per tonne for 6% LiO2 spodumene.

1) Lithium - 13.8% of the Mt Marion spodumene mine

The Mt Marion Lithium mine is located approximately 40km South West of Kalgoorlie, Western Australia, and is jointly owned by Neometals Ltd (13.8%), Jiangxi Ganfeng Lithium Co. [SHE:002460] (one of China's largest lithium producers) (43.1%), and Mineral Resources [ASX:MIN] (43.1%). Production began in March 2017.

Mt Marion has a JORC Resource 77.8Mt @ 1.37% Li2O, with FY 18 forecast production of 400k tonnes (~50kt LCE) of equivalent 6% spodumene (or 450kt of 6% & 4% Li2O), at a LOM forecast spodumene C1 cash cost of ~US$290/t. The Mt Marion plant is being upgraded to produce all 6% spodumene. The off-take is guaranteed by partner Ganfeng Lithium with a life of mine take or pay contract with prices linked to International lithium carbonate equivalent [LCE]. C1 costs have been higher initially but are forecast to decrease significantly as the project ramps up to nameplate production. You can view details here on page 47.

Note: Neometals has a 13.8% share of the above Mt Marion project figures.

The Mt Marion lithium spodumene mine in Western Australia

Mt Marion location map

Source

2) Lithium processing - 100% of the Kalgoorlie Lithium Hydroxide Facility

Neometals is currently assessing the possibility for a 20,000 tpa lithium hydroxide plant near Kalgoorlie Western Australia. The company says it will need ~7t spodumene concentrate to produce 1t of LiOH. That means a 20ktpa LiOH plant will need 140ktpa spodumene. Neometals has an off-take option from Mt Marion for (a minimum 12.37%) ~50ktpa spodumene from 2020.

The proposed process route will utilise the conventional sulphate/caustic soda process used by leading Chinese lithium converters (including Ganfeng) and will eliminate the need for pilot testing as Ganfeng will be processing Run-of-Mine concentrates at commercial scale from the December Quarter 2016.

The 2016 FS supported operating costs of US$4,630/t of LiOH and had a pre-production capex of US$158m (including contingency), based only on a LiOH price of US$11,000/t. The 2016 Feasibility Study [FS] was focused on a Malaysian site, but the company now prefers near Kalgoorlie Western Australia as it is near to Mt Marion.

As the company did with Mt Marion, it will likely bring in a partner to help fund CapEx of ~AUD 250m. The company expects to be able to make a final decision by December 2018 and if going ahead a planned March 2021 commissioning (3 years from now).

Note: It is better to sell LiOH at ~14,500/t with US$4,630/t costs (net USD 10,000/t gain), rather than spodumene at USD 850t with USD ~300/t costs (net 550/t), even after adjusting for a 7:1 dilution (7x 550 = USD~3,850/t). 10,000/t is a lot better than 3,850/t even after some capital costs to build the plant. For a 20ktpa operation, the improvement is USD 123m pa, compared to the plant CapEx of say USD 200m (AUD 250m).

3) Lithium-ion battery recycling - 50% of the IP

Neometals has completed a scoping study showing it can recycle cobalt from lithium-ion batteries for a cost of US$4.45/lb Co (US$10k/t). Given cobalt is currently above USD 80,000/t, economics are very compelling. The company is now building a USD 4.5m pilot plant in Montreal Canada.

The recycling opportunity - cobalt is the main attraction

Arlington analysts state: "While not yet commercially proven, we believe that the Battery Recycling tech could be a game-changer, and it has a developing Tech royalty business which could become a good earner."

On February 26, Reuters reported, "China puts responsibility for battery recycling on makers of electric vehicles." The rules are effective from August 1, 2018. The market seems to have mostly missed this very significant news, especially given about half the world's electric cars are made in China.

4) Titanium and Vanadium - 100% of the Barrambie Titanium Vanadium Iron Project

Titanium is a small market mostly involving super-strong alloys. There is a possibility that titanium may be used in the future for lithium-ion battery anodes, due to its extreme strength, and hence ability to cope with very high voltage fast charging of batteries (80% charge in <15 minutes).

Vanadium is mostly produced as a by-product from processing titanium iron ore. Vanadium is rapidly gaining popularity, especially in China for energy storage. Vanadium redox flow batteries [VRB] are currently leading the market for flow batteries, as vanadium flow batteries can last more than 10,000 cycles and maintain 90% of their capacity over 20 years.

Barrambie's Eastern Band is one of the highest grade hard rock titanium deposits globally and contains a Mineral Resource (2005) of 48Mt @ 22% TiO2. That is equivalent to ~22mt of iron oxide, ~10.5mt of titanium oxide, and 297 kt of vanadium oxide. The Barrambie PFS supports 98Ktpa TiO2, 2Ktpa V2O5 project for capital cost of A$625m.

The Arlington analysts report puts a DCF value for the Barrambie project at AUD 190m or AUD 0.35 per share, or if sold as DSO AUD 101m or AUD 0.18/share.

Source

Neometals has received approvals to mine ~50,000 tonne bulk sample of high-grade titanium at Barrambie. A representative sample of Barrambie Direct Shipping Ore [DSO] has been received by a Chinese titanium processor with performance tests to be completed on the sample. Discussions with toll treatment operators as well as titanium and vanadium end users are progressing. Additionally, Neometals is doing beneficiation test work with sample concentrates at its laboratory in Montreal. The company plans to commence pilot testing of the Neomet Process in the June Quarter 2018 in Canada.

5) Other bets

• ELi process (70% of the IP) - The ELi process converts spodumene concentrate into a high purity lithium chloride solution, then uses "electrolysis" to produce high purity lithium hydroxide and lithium carbonate. Whilst electrolysis is expensive as it uses a lot of electricity, according to CEO Chris Reed, the end result of producing lithium hydroxide is worth it, as it sells above USD 10,000 per tonne compared to spodumene around USD 600/tonne. You can read more here. The ELi process can also be used as a direct extraction of Lithium Chloride from brine thereby avoiding the time-consuming evaporation process. You can read more here.
• Lithium Titanate Anode Production (100%) - Neometals is developing a process for producing lithium titanate anode material, which shows the potential to replace graphite anodes. You can read more here.
• Alphamet - Neomet Process (100%) - The Neomet Process provides energy efficient and environmentally-friendly proprietary processes, designed to effectively extract valuable metals for a wide spectrum of base, light and precious metal oxides and sulphides, intermediates and waste feeds. Sedgman has been appointed as the project implementation partner for global clients. You can read more here. Also of interest is the Neomet process is effective at extracting nickel and cobalt from laterite ores.

NB: All of the other bets propriety intellectual property [IP] is amenable to licensing royalties.

NB: The company also has some other investments including a ~40% shareholding in Hannans [ASX:HNR], which has a 20% free carry interest in a potential spodumene project next door to Kidman Resources [ASX:KDR] Mt Holland.

Neometals Neomet laboratory in Montreal Canada

Source

The business model

• In the short term, Neometals will continue to develop projects and bring in partners to reduce their upfront expenditures such as large CapEx on new mining projects. It did this with Mt Marion and will likely do it again with the Kalgoorlie Lithium Hydroxide Facility, the Barrambie Titanium Vanadium Iron Project, and perhaps with the Lithium-ion battery recycling commercial size plant.
• The company will also commence a revenue stream from licensing and third party royalties for some of their IP processes involving lithium extraction, processing, or recycling.

A summary graph of Neometals strategy (excludes vanadium)

Source

Management

Chris Reed - Managing Director

Chris started in the mining industry in 1990 and co-founded Reed Resources in 2001. Chris holds a Bachelor of Commerce from the University of Notre Dame and a Graduate Certificate in Mineral Economics from WA School of Mines. He is a Member of the AusIMM and immediate past Vice-President of the Association of Mining & Exploration Companies.

The full management team can be viewed here on pages 9 and 10.

Large Shareholders - Insiders own ~12%

Source

Investors can view the company history here on page 6. Clearly, the company has come a long way since commencement and showed exceptional skill and timing to achieve their share in Mt Marion essentially for only AUD 3m and a royalty payment, as Mineral Resources funded the project construction. Signing Ganfeng Lithium in July 2015 as an equity partner brought in cash and a guaranteed off-take at market-linked pricing. The one failure being the Meekatharra gold project.

Valuation

Neometals had AUD 61.28m in cash, AUD 11.5m in listed security investments, and no debt as of end December 2017. Current market cap is AUD 193m, and GuruFocus has the current enterprise value [EV] at $112m. As of 31 December 2017, there was 543.5m shares in issue, no options and 4.5m performance rights.

Valuation is not particularly easy, given the early stage of the many segments of the business. My model has a conservative end 2018 price target of AUD 0.58 for Neometals only considering the Mt Marion 13.8% share of the lithium business with no consideration for the other business segments. Given the enormous potential of the other business segments, I would say my valuation is really only a worst case scenario valuation. I would expect the valuation to rapidly rise as other earnings streams are brought online, and if successful, the stock price can be some multiples higher post 2020.

By comparison, 4-traders reports one analyst's target of AUD 0.40, which I assume would only be considering the lithium business.

A recent Arlington analysts report that values Neometals sum of the parts gives a current valuation target of AUD 1.43 (even after applying a 25% conglomerate discount, and various project risk discounts). Prior to the discount, the valuation was given as AUD 1.90.

Arlington's sum of the parts valuation for Neometals - AUD 1.43 - 1.90

Source

Arlington states:

"We believe that the market tends to value the company only on its 13.8% share in the Mt Marion lithium mine, and not much else. We believe that approach is significantly undervaluing the company."

A September 2017 Euroz analysts report had a valuation for Neometals at that time of AUD 0.44, but the report is a bit out of date now.

Catalysts

• 2018 - Announcements and possible off-take deals for Barrambie Titanium Vanadium Iron Project. Also, an equity partnership to help fund the project would be very likely.
• H2 2018 - Announcements regarding the updated FS and a FEED study for the Kalgoorlie Lithium Hydroxide Facility.
• 1 August 2018 - China recycling rule takes effect. This has huge potential for Neometals to license its IP into China.
• December 2018 - An investment decision on the Kalgoorlie Lithium Hydroxide Facility.
• 2018/2019 - Neometals has engaged advisers to assist it in considering demerging and separately listing the company's technology and titanium assets.
• 2019/2021 - Potential for 3 new revenue streams to have commenced - Lithium processing (Kalgoorlie), Li-ion battery recycling, Barrambie Titanium Vanadium Iron Project.

Competitors

• You can read about the lithium competitors here in my article "Lithium Miners News For The Month Of February 2018."

Risks

• Lithium price falling. Some minimal impact from titanium/vanadium prices.
• The usual mining risks - Exploration risks, funding risks, production risks
• Management and currency risks.
• Sovereign risk - Minimal as resource projects are in Australia.
• Stock market risks - Dilution, lack of liquidity (best to buy on local exchange), market sentiment.

Investors can view the latest company presentation here.

Further reading

• A Look At The Lithium-Ion Battery Recycling Industry And Companies
• Lithium Extraction Techniques - A Look At The Latest Technologies And The Companies Involved

Conclusion

Neometals offers investors so much more than just a share in a very successful lithium mine that is growing its production volumes steadily. Investors really get at least three other excellent growth opportunities for free. That includes a share in a future lithium hydroxide plant, a lithium-ion battery recycling plant, and a titanium-vanadium project. All three of these projects can be online by 2021 and be very significant earners for Neometals. Added to this can be licensing and royalty agreements on the IP as it is adopted by others following in their footsteps.

Valuation is extremely attractive and suggests Neometals 13.8% share of the Mt Marion lithium mine alone is worth between AUD 0.40 and AUD 0.58 per share. A recent sum of the parts valuation values Neometals at AUD 1.43 to 1.90. At a current stock price of AUD 0.355, investors get a discounted price on the lithium mine, a future hydroxide plant (except for allowing some possible debt or dilution or partner), a battery recycling plant, a significant titanium-vanadium resource, and a bunch of IP for free. Needless to say the current stock price is heavily discounted, in part due to poor sentiment in the lithium sector right now, and the fact Neometals' secondary projects are still at somewhat early stages.

The only negative I can see is the complex company structure, and perhaps sometimes having too many ideas, and not enough action. Of course, one can very reasonably say this is wise as they only go ahead with their best ideas, and they show caution.

I am very positive on their core lithium production business at Mt Marion and see enormous potential as management continue to be ahead of the curve and are positioning Neometals into the very profitable "value added" businesses of lithium processing (by 2021). Battery recycling has enormous potential especially given China's recent announcement to make it compulsory for Chinese car manufacturers to recycle their batteries starting August 2018. Neometals titanium and vanadium resource are in key metals that are in high demand. Finally, the other bets, especially with their lithium extraction technology, also have good potential. Managing Director Chris Reed certainly is a visionary leader.

In some ways, Neometals reminds me of a potential Umicore which has a focus on new metals, cathode productions, and some recycling. The difference is Umicore is well established and worth about 10.5 billion euros. Makes one wonder what Neometals can be worth in 5 years if it can execute its plans?

As usual, all comments are welcome.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I am/we are long NEOMETALS [ASX:NMT]. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The information in this article is general in nature and should not be relied upon as financial advice.