European Lithium Ltd (ASX:EUR, OTCQB:EULIF) has received a buy recommendation and a price target of €0.17 from First Berlin Equity Research based on a conservative average lithium hydroxide price assumption of US$25,000 per tonne (the current price is over US$70,000).
This implies a significant valuation upside of more than 100% from EUR’s current share price of €0.081 on the Frankfurt Stock Exchange.
The following is an extract from First Berlin’s comprehensive research update on EUR:
Existing and planned European battery factories are expected to generate over 600,000 tonnes of lithium carbonate equivalent demand in 2025 - the year when we expect European Lithium to be ramping up production at its Wolfsberg Lithium Project in Austria. In December last year European Lithium published an updated resource estimate showing 9.74m measured and indicated (M+I) tonnes at an average grade of 1.03% Li2O. At over 100,000 tonnes, the current M+I in situ resource is 36% above the equivalent figure implied by the previous 2017 resource estimate. The updated M+I resource estimate will be the basis for the definitive feasibility study (DFS), publication of which is expected in Q2. We expect the DFS to open the door to offtake deals and financing. We model combined CAPEX for the mine and lithium hydroxide converter facility at ca. USD500m, with financing split 20/40/40 between grants, equity and debt. Based on a conservative average lithium hydroxide price assumption of USD25,000 per tonne (the current price is over USD70,000) over a fifteen year mine life, we see fair value for the share at €0.17. Our recommendation is Buy.
Low environmental footprint suggests authorities will greenlight project
Ore crushing, screening and sorting as well as production of a spodumene concentrate will take place in or very close to the mine, thereby minimising material transport from the mine to the converter. All wheeled transport both inside and outside the mine will be electric. Waste rock from ore crushing and sorting will be deposited in mined out stopes within the mountain. No chemicals will be used at the mine site.
Potential to further expand the resource
The 2017 and 2021 resource estimates are based solely on Zone 1 of the Wolfsberg deposit. Zone 2 is thought to “mirror” Zone 1. It is likely that further M+I resource will be delineated at both Zone 1 and Zone 2 once production of the Zone 1 resource starts.
EV-related lithium demand growth reached an inflection point in 2021
Lithium commodity prices have exploded because demand for electric vehicle (EV) batteries has passed through an inflection point. We estimate that the EV market accounted for over 80% of the growth in lithium demand in 2021. As figure 8 shows, the EV market grew by 3.5m units last year. Annual growth had previously never exceeded 1m units. Unsurprisingly, the supply side has been unable to keep up.
Our price target for the European Lithium share is €0.17.
The recommendation is Buy. Figure 15 shows the valuation parameters used in our current study in comparison with the numbers shown in the 2018 PFS.
The increase in lithium hydroxide produced reflects the 36% increase in the M+I resource shown in the 2021 resource estimate compared with the 2017 resource estimate. We have raised our capex estimate by 17.5% due to inflation, and the gross opex estimate by 22.5% to reflect both inflation and the lower average grade of the 2021 M+I resource compared with 2017 (1.03% vs. 1.17%). The net opex estimate rises by 32% because we model US$1,500 per tonne in feldspar/quartz credits compared with US$1,735 in the 2018 PFS. Discounting the cashflows by 10% produces a valuation for the European Lithium share of €0.171. We set a price target of €0.17 and our recommendation is Buy.