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Lithium buzz the key to European Metals' re-rating

There is a buzz around lithium mining that is missing in the bombed-out natural resources sector. Elon Musk and his plans for the US$5bn Tesla Gigafactory in the desert of Nevada.
Lithium buzz the key to European Metals' re-rating
Tesla has heightened lithium interest

There is a buzz around lithium mining that is missing in the bombed-out natural resources sector.

It has been created by the billionaire Elon Musk and his plans for the US$5bn Tesla Gigafactory in the desert of Nevada.

His futuristic plant will eventually churn out 500,000 batteries a year, but to do that it will require vast amounts of the chemical element.

So much so that the Gigafactory is expected to suck in most of North America’s supplies of lithium, which will have ramifications globally.

Forget for a moment state-of-the-art electric cars. Lithium is used in a multitude of other things that makes the modern world turn: power units for tablets, phones and laptops; batteries to store electricity from wind turbines. It is in huge demand.

Security of supply might explain why the Chinese have taken control of Australian firm Talison, one of the world’s biggest suppliers of the white-silver metal.

This shift in the tectonic plates will, over the next few years, leave Europe scratching around to meet its needs, which currently stands at 35,000 tonnes year.

You wonder how, given the impending shortfall, AIM and ASX-listed European Metals (LON:EMH) has flown under the radar for so long.

Its project, Cinovec, in the Czech Republic, has the potential to become a major low-cost producer.

A former tin mine, it is host to 5.5mln tonnes of lithium carbonate equivalent in the inferred resource category.

It also has a target that if it can be firmed up, formalised and brought under the JORC code would make (the mine) the mine the largest hard rock (producer) resource of lithium in the world.

The costs will be best in class from this low grade, near surface deposit because the ore also contains reasonably easy to extract tin and tungsten. What's more, saleable potash (yes, potash) will be a by-product from processing this metal rich material.

Cinovec’s position, a short car journey from the German border, puts it at the heart of Europe – and right on the doorstep of the European car industry.

While Tesla has grand plans for the electric car market, it is a pygmy in automotive terms.

It is only a matter of time before the industry giants stomp wholesale into Tesla territory.

In fact VW is actively looking to re-establish its green credentials after ‘diesel-gate’, while VW's Porsche unit is throwing billions at the development of an electric super-car.

And the next generation of battery powered cars will require the vital ingredient European Metals (EM) plans to mine: lithium.

The Czech Republic, home to Skoda, is actively lobbying Tesla to site its factory in the country.

While there is no doubt automotive demand for lithium will increase dramatically over the next decade, the more immediate call for the metal will likely come from the renewable energy sector, said chief executive Keith Coughlan.

“The momentum is growing. The whole space is growing and it is quite exciting to be in this space at the moment,” he added.

With a gap in supply expected to exist until 2020, there has probably never been a better time to build a mine such as Cinovec, which is slated to come online in 2018.

A scoping study carried out by EM put the cost of building an operation there at around US$320mln, or £224mln.

Now, that’s quite a sum for a firm as small as EM; however, the project itself really isn’t huge on an industry scale and is eminently financeable.

Before financing and mining become a discussion point the company has to complete a preliminary feasibility study (PFS), which is a prelude to a more comprehensive bankable document it can take to funders.

The PFS is expected to be completed by the end of the year. There will be a drilling campaign to confirm the scale and consistency of Cinovec that will hopefully also move some of the resource into higher confidence categories.

“We hope to bring the majority of the inferred [resource] that was used in the Scoping Study into the indicated category for PFS,” said Coughlan.

“We are very confident in the ore body; it is a very consistent, homogenous ore body.”

EM also has data from around 80km of drilling that points to Cinovec’s potential to become a large-scale lithium carbonate producer.

As part of the development process the company is applying to convert its exploration (papers) permits into a provisional mining licence and will start work on the base-line environmental study that will be key to the more extensive bankable study.

All of the work for 2016 will require money – around £2.5mln to £3mln, according to Coughlan.

EM will also look to establish pilot production to provide potential off-takers with enough lithium carbonate to assess the product.

With “precious little” in the bank, it is inevitable investors will be tapped to fund the work.

At the moment Coughlan is looking to raise the cash in two tranches with the hope of minimising dilution for existing investors.

“I am looking for someone to take the first tranche that doesn’t just bring money to the table,” he explained.

“Introductions, expertise in the industry and existing investment in the industry is what we are looking for.”

So, Cinovec has the potential to be a low-cost, volume producer of one of the few metals where there is strong demand and a growing shortage. Is that reflected in the share price? I’ll let you judge.

The market capitalisation of EM is £5.5mln or 80p per tonne of resource it is currently sitting on.

Fellow AIM-listee Bacanora is worth around £9 a tonne, while some of the major lithium producers are valued at multiples of that figure.

Okay, Bacanora, whose assets are in northern Mexico, has a deal with Tesla, which has excited the market.

But it seems EM has been priced at long odds for success. Either that, or investors just aren’t paying attention.

A re-rating of the stock will happen at some point, Coughlan reckons.

“I think we have a lot going for us – size, cost and location,” he says.

“There is value there, but then most directors of companies will tell you that.

“In our case I there are enough factors there to support the argument.”

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