European Metals: World-Class Lithium-Tin Deposit In Central Europe
- European Metals owns 49% of the world-class Cinovec lithium-tin deposit in the Czech Republic.
- The deposit contains 7.22 million tonnes of lithium carbonate equivalent and 262,600 tonnes of tin.
- The current market value of contained metals is over $100 billion.
- According to the PFS, the mine should be able to produce 25,267 tonnes of battery-grade lithium hydroxide per year, at a cost of $3,435/t.
- At the current metals prices, the after-tax NPV (8%) is over $1.8 billion.
European Metals Holding (OTCQX:EMHLF) (OTCPK:ERPNF) is a relatively little-known company developing world-class lithium-tin deposit in the Czech Republic. The project has good economics, the company is well funded and it has a strong partner in CEZ (OTCPK:CEZYY), a major state-controlled power company (CEZ owns 51% of the project). The resource update, feasibility study, and permitting process are well advanced.
The Cinovec deposit is believed to host the biggest lithium deposit in Europe and the biggest undeveloped tin deposit in the world. It is located in the western part of the Czech Republic, near borders with Germany. Cinovec is a brownfield project, as tin and tungsten were produced at the mine for a better part of the 20th century. The infrastructure in the area is great, with good road and rail connections, electricity, and water sources.
The indicated resources contain 4.08 million tonnes of lithium carbonate equivalent (LCE) and 139,080 tonnes of tin. The inferred resources contain further 3.15 million tonnes LCE and 123,520 tonnes of tin. At the current prices of $13,770/t of lithium carbonate and $31,800/t tin, the market value of contained metals is well above $100 billion.
The 2019 PFS envisioned a 1.68 Mtpa operation that should be able to produce 25,267 tonnes of battery-grade lithium hydroxide per year, over 21-year mine life. Due to the tin, tungsten, potash, and sodium sulphate by-product credits, the operating costs should be only $3,435/t of lithium hydroxide (including sustaining CAPEX). The initial CAPEX was estimated at $482.6 million, including total mining costs of $70.3 million, communication and beneficiation plant costs of $104.9 million, lithium production facility costs of $264.3 million, and contingency of $43.9 million. At metals prices of $12,000/t of lithium hydroxide, $10,000/t of lithium carbonate, $22,500/t of tin, $330/MTU of tungsten, and $520/t of potash sulphate, the after-tax NPV(8%) of the project is $1.108 billion, and the after-tax IRR is 28.8%. The project has high leverage to lithium hydroxide prices, as a $1,000 growth in lithium hydroxide price boosts the after-tax NPV(8%) by nearly $200 million.
The definitive feasibility study is underway. It is possible to expect that it will provide some additional project optimizations and even better economics. The results are expected in early 2021. If everything goes well, the construction should start in Q1 2023 and production in Q1 2024. Meanwhile, some off-take agreements should be closed. CEZ alone may become a major customer, as it plans to build a battery factory. According to various sources (1, 2), CEZ is in discussions with the Czech government, as well as the Czech car manufacturer Skoda, which is owned by Volkswagen (OTCPK:VWAGY).
Risks and Opportunities
The upside potential is really high. European Metal's market capitalization is $211 million. It compares very favorably to its 49% share on the after-tax NPV(8%) which amounts to $545 million. However, the current metals prices are higher compared to prices used in the PFS. The current lithium hydroxide price is around $15,250/t, according to LME. Moreover, the tin price is around $33,000/t. It means that at the current metals prices, the after-tax NPV(8%) should be well above $1.8 billion. It means that over $880 million should be attributable to European Metals. It is also important to note that the PFS takes into account only 9% of the indicated resources. Therefore, there is huge potential to expand the mine significantly and also to expand the mine life well beyond the currently projected 21 years.
The risks are reasonable. The lithium hydroxide production costs should be only $3,435/t, which means that the mine should be profitable also in an improbable case of significant lithium price decline. There is also the permitting risk. However, Cinovec is a brownfield operation, which should help a lot. Moreover, it is 51%-owned by CEZ, a state-controlled power company. The Czech Republic owns almost 70% of CEZ. It means that the government will benefit from the mining operation indirectly, via taxes and employment generated by the mine, and also directly, via CEZ's share on profits. Moreover, the European Union is supporting green energetics heavily. A European source of battery-grade lithium hydroxide is of strategic importance, therefore, the project should have support not only on the national but also on the European level.
After CEZ acquired 51% of the project, the general support of the project increased. However, it is important to note that not everyone in the Czech Republic is happy about the project. There is some local opposition, as the nearby town of Krupka, as well as the Usti county representatives, have some reservations towards the project. Moreover, also the Pirati party, the current leader of the opinion polls (parliamentary elections should take place in October) had some negative comments towards the project in the past.
Some risks are related to the metallurgy of the deposit. Lithium is contained in the zinnwaldite ore and its processing may be quite complex. Although the PFS states that tests have shown that 95% recoveries can be achieved by using the roasting method, these are only laboratory tests and there is a risk that the process won't work as well on a commercial scale.
And there is also the financing risk. European Metals held cash of only $326,000, as of the end of 2020. Fortunately, as a part of the 51% stake acquisition, CEZ paid approximately $35 million to Geomet, a subsidiary 49%-owned by European Metals and 51%-owned by CEZ. Geomet is the direct owner of the Cinovec project and it should have sufficient funds until the production decision. Therefore, European Metals' low cash balance isn't a problem right now. However, the company will have to fund its share of CAPEX, or approximately $236 million. This is where CEZ may help a lot. With a strong partner involved in the project, it should be easier for European Metals to obtain debt financing covering probably more than 60% of its attributable CAPEX. It means that it is reasonable to expect that European Metals won't have to fund more than $100 million from other sources, including the sale of a stream, the sale of another portion of the project, or equity financing. At the current share price, the resulting share dilution would be slightly below 50%. But I believe that this is the worst-case scenario. After the feasibility study is completed, assuming that its outcomes are positive, European Metals' shares should trade at higher prices. Also the lithium prices are expected to keep on growing, which should provide further support. Therefore, there is a good chance that the actual share dilution will be well below 50%.
For the majority of H1 2021, European Metals' share price has been moving in the $1-1.4 range. Right now, its share price stands in the middle of this range, at $1.2. The RSI is at 60 and the share price is above the 10-day, as well as the 50-day moving average. Moreover, the 10-day moving average is above the 50-day one. Right now, it seems like the share price should keep on moving towards the $1.4 area. The subsequent price development will depend on the lithium prices.
There are not many near-term catalysts, as the feasibility study should be completed only in Q1 2022, the construction should start in Q1 2023, and production in Q1 2024. Therefore, lithium prices should be the main force behind European Metals' share price movements. In the longer term, the economics of the project should prevail. Based on the PFS, European Metals has the potential to become a $1 billion company by 2024, or 2025. As I mentioned above, there shouldn't be more than 50% share dilution, which would lead to a share count of 220 million, and a share price of around $4.5. This represents an approximately 280% upside potential. But the longer-term potential is even bigger, as the PFS was based only on 9% of the indicated resources. The Cinovec deposit is so big that the contained metals have a market value of more than $100 billion. To sum it up, European Metals is an attractive way of investing in the green energetics revolution. It offers significant upside potential at a reasonable risk.
This article was written by
I am an associate professor at the University of Economics in Bratislava, Department of Banking and International Finance. My dissertation was focused on commodity markets and my habilitation was focused on the calendar anomalies. I have more than 15 years of investing experience. My investments mostly focus on small- and mid-cap companies in the resource sector. Since May 2019, I have been preparing regular monthly reports focused on the precious metals royalty & streaming industry. Based on positive feedbacks and numerous inquiries, I decided to launch a Marketplace Service named "Royalty & Streaming Corner", which provides an in-depth analysis of this exciting market segment, as well as investment ideas from the mining industry.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of EMHLF, ERPNF either through stock ownership, options, or other derivatives. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.