European Metals Holdings Ltd (LON:EMH) has reached a conditional agreement with CEZ Group, one of the largest power utilities in central and eastern Europe for a potential strategic investment into the Cinovec Igneous Lithium Project in the Czech Republic.
The strategic partnership, if signed, will see CEZ Group invest €34.06mln (£32.88ml) in return for a 51% interest in the Czech subsidiary that holds the rights for the project (Geomet s.r.o.).
The proposed investment by CEZ Group would be enough to cover the cost of moving the Cinovec Project through to a construction decision, significantly reducing the projects funding risk for European Metals’ shareholders.
But is it a good deal? European Metals would be giving up the ownership of the project and would be a minority shareholder, so investors will want to know that investment is favourable to the company.
The Cinovec Zinnwaldite Project, has a total JORC 2012 compliant mineral resource estimate of 695.9 million tonnes (mt) at a grade of 1% lithium carbonate equivalent (Li2CO3 E), which makes it the third-largest igneous lithium deposit globally, with a contained Li2CO3 E content of 7.2mt.
So CEZ Group is potential acquiring its 51% interest in the project at a value of US$10.3 per tonne (t) of lithium carbonate equivalent in resource.
This compares to our estimate for the average lithium deal value for the year to date of US$95.1/t Li2CO3 E.
So, at first look, the deal looks cheap compared to other lithium deals completed this year.
However, the range of lithium deal valuations varies from US$5.8/t Li2CO3 E to US$224.2/t Li2CO3 E, which is a large range.
While this deal is towards the lower end of the value range, the majority of these deals were completed earlier in the year, when sentiment towards the lithium space was not as negative.
Also, many of these deals were for other types of lithium projects such as brines and spodumene deposits, which are given a higher market value than zinnwaldite deposits.
The only other deal involving a zinnwaldite project this year was done at an average price of US$5.8/t Li2CO3 E, so the European Minerals – CEZ Group deal is 78% increase on the other zinnwaldite deal.
Shareholder approval required
This proposed deal remains conditional on due diligence, shareholder, and other approvals so it is by no means a done deal.
There are positives for shareholders to consider with this deal that go beyond a simple examination of the valuation including: It would de-risk the remaining 49% interest in the project financially while final studies are completed during a financially challenging market; the deal would bring synergies with the Czech Republic Government, which holds a 70% in CEZ Group, de-risking the project from a geo-political perspective; and having a major strategic partner with experience of completing major projects and could help fund and source funding for the development of the mine, would de-risk the construction of the mine.