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European Metals Holdings Ltd: Capital Network – Sitting on the Largest Lithium Resource in Europe

Sitting on Largest Known Lithium Resource in Europe
European Metals Holdings Ltd: Capital Network – Sitting on the Largest Lithium Resource in Europe

European Metals Holdings is a London AIM and ASX listed minerals development company. The firm is currently progressing the Cinovec Lithium Project in the North-West of the Czech Republic (almost on the German border).

REASONS TO CONSIDER EUROPEAN METALS HOLDINGS:

The Lithium story: Lithium is a key component in modern battery technology. With the prospective boom in electric vehicle demand, in addition to growth in other battery storage requirements; lithium is widely regarded as a commodity which will be in demand.

A Low cost asset: The proposed Cinovec operation sits on the largest known lithium resource in Europe, and is initially proposed to have a 22 year mine life (commencing 2021), producing ~20.8Ktpa of Lithium Carbonate (LCE) (the lithium product immediately ready for battery production). We note that this mine life is only based on ~5% of the known resource, thus upside potential for life extension, and/or scale of the project is a meaningful possibility.  Importantly for potential European Metals Holdings investors, the operation is expected to have operating costs of ~US$3500/t LCE, placing the operation in the lower half of the global operating cost curve. Current capex estimates for the project are US$393m. Assuming a LCE price (flat for life of mine) of US$10000/t (broadly around current levels), and the net by-product operating cost of US$3500/t, investors could see an asset NPV (@10%) of ~US$370m (as compared to a ~US$75m company market capitalisation at present). Furthermore, at the asset level, at steady state production (and again assuming US$10000/t LCE price), the asset could generate cashflow yields of ~150% per annum. This is based on current market cap of ~US$75m, and before consideration of funding mix for upfront project capex, which is likely to contain significant debt portion, which would dilute cash returns to equity holders. That being said, the potential cashflow at the asset level should be able to allow for plenty of dilution, and still leave equity investors with significant cash yield. 

A strategic location: With lithium demand likely to surge in coming years, underpinned by the growth in electric car penetration (and battery storage applications), the Cinovec project is ideally placed in close proximity to some of Europe’s largest car manufacturers (and electronic manufacturers). We understand European Metals Holdings has already been attracting meaningful interest from some large potential customers, and we would envisage that as electric vehicle and battery storage output grows, that the major European auto-producers would prefer a stable source of proximate supply.

Funding is a key issue: With expected strong interest from German auto-manufacturers in the Cinovec product; we would anticipate European Metals Holdings signing meaningful offtake agreements ahead of project development, which would help facilitate a significant debt component to the funding mix for project development (typically assisting returns on equity). A strong asset value should underpin an attractive funding mix, of which the exact details will determine the upside potential for equity investors.

Overall: European Metals Holdings is one of the few European equity exposure’s to the Lithium demand thematic. It possesses a large resource base, in a strategic location. Production should be low cost, accordingly, the operation should be able to withstand the vagaries of commodity markets.  As the company commences the Cinovec definitive feasibility study in the second half of 2017, we recommend potential investors watch out for announcements of offtake or alliances with potential customers, as key catalysts for the stock.

The economics:  Current capex estimates for the project are US$393m, with approximately half that amount being spent on the Lithium Carbonate Plant (required to process the lithium concentrate into the higher value ‘battery-ready’ material).  Assuming a LCE price (flat for life of mine) of US$10000/t (broadly around current levels), and a net by-product operating cost of US$3500/t investors could see an asset NPV (@10%) of ~US$370m (as compared to a ~US$75m company market capitalisation at present). We note that this valuation moves by ~US$100m for each US$1000/t change in the average LCE price received over the life of the mine. Furthermore, at the asset level, at steady state production (and again assuming US$10000/t LCE price), the asset could generate cashflow yields of ~150% per annum. This is based on current market cap of ~US$75m, and, importantly, before consideration of funding mix for upfront capex, which is likely to contain significant debt portion, which would dilute cash returns to equity holders. That being said, the potential cashflow at the asset level should be able to allow for plenty of dilution resulting from the funding mix, and still leave equity investors with significant cash yield.

Full report is available via Capital Network website
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September 11 2018

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