Does Lithium Offer Hope in a Tough Mining Climate?

Down and down have sunk the mining indices, following down the commodities index – all except the one for lithium.

Rising interest rates and weak commodities are a toxic mixture for early stage miners as well as for established ones, so the falls are not surprising.

What goes down must (must it?) come up though. It certainly did in 2011 when, after a long period in the doldrums and when very little had been invested over many decades to explore for new mines, the indices woke up almost overnight staring in the face of a looming shortage of all raw materials.

It is always different ‘this time’, but one day surely the same thing will happen, and probably even more determinedly. Everything depends on the world economy for which pessimism hasn’t yet run its course. But market recoveries always seem to come out of the blue even before gloom has dispersed.

As for lithium, although the London Metal Exchange index has held up, it is large volume single deals between industry users and producers that counts, and warning lights are flashing over these as electric vehicle production slows. News that BritishVolt – planning to make batteries for 300,000 electric cars annually – is nearly bust without funding, isn’t good.

But that is a UK problem, and perhaps uncertainty re lithium prices and the suddenly poor outlook for project funding, is the reason why Atlantic Lithium who I first flagged at around 20p but cautioned buying above 40p, has seen its shares fall almost overnight by 30% from a 47p reached on its listing on ASX in September. It has also ignored the up-to-date pre-feasibility study published just afterwards for ALL’s planned Ewoyaa lithium mine in Ghana, showing a truly exceptional 224% IRR and capital cost payback of only 5 months, leading to a NPV of $1.33bn compared with ALL’s $230m market cap.

Atlantic Lithium last two years

On top of that, the PFS was based on an received lithium price of US$1,359/tonne – only 18% of a price obtained recently by Australia’s world scale Pilbara mine . It has accordingly been met by some UK analysts predicting a truly staggering ‘target’ price based on a lithium price over 4 times higher.

But that is pie in the sky at the moment. There is still a Definitive Feasibility Study to come before Nasdaq listed Piedmont Lithium contributes its 56% of the $125m capital cost to start building, which no doubt will use a less optimistic price than those analysts.

All this has caused a lot of confusion among the few (so far) private investors whose views one can see on the bulletin boards. And in fact one broker has recently come out with a ‘target’ of only 46p against those 300p sky high’s.

Which is probably because he has factored in more realistic assumptions – like the ones I relied on to caution not to chase the shares. They include that ALL still has to contribute some $55m to the build cost, and meanwhile will have at least another $20m or so company costs to meet before its 50% share of income from Ewoyaa starts in maybe two years time at the best.

In addition, the co has only just submitted its mining permit application, while the serious cost increases now being seen around the world will almost certainly make the capital cost estimate out of date.

Against these uncertainties, including that rumours of a bid for ALL or Ewoyaa have dried up, investors will be looking at the scope once the mine is built.

At the assumed $1,359/tonne lithium price, the PFS predicts an average cash income from ALL’s 50% share of $120m, although only reaching that level after year six having started at half that amount.

By then, also, shares in issue will certainly have expanded beyond the present 580m. Assuming my $75m needs to be spent, offset by $22m cash in ALL’s balance sheet last June, extra shares issued at (say 50p) would take that to 680m, on which average annual cash flow per share (over a 12 year life) would be 8.5p per share to start with. That compares with a 80p share price produced by ‘targeting’ the NPV per share.

ALL could, of course, raise that cash from borrowings instead, which would improve the figure.

So initially (in three years time ?) investors would be looking at a cash flow per share of 8.5p, which because the mine life is only 12 years won’t attract a ‘PER’ rating, but only one based on a few years’ dividends.

Although crude, and subject to the current uncertainties, that comparison demonstrates how a NPV based price is expecting an investor to pay ‘up front’ for future income. That works only up to a 10 year or so life, but beyond that produces a share price well above what investors would pay based on annual income and is why I always caution against using it.

So I still think paying above 40p now is a bit premature. However, lithium price volatility is the big bugbear. The PFS highlights that a 10% difference in the price Ewoyaa receives produces a 17% change in the NPV. So it is the lithium price that will almost certainly determine ALL’s share performance, and no one can predict that.

In terms of dilemma between an eventual apparently large reward, against short term uncertainties about funding and commodity price, ALL and EML look rather similar.

I haven’t mentioned Xtract Resources for a few months – after the last time saying that, following the initial excitement on the long intervals of copper shown by the initial drilling of Racecourse, the rather low grades disclosed by later drilling meant that initial expectations of a 2 million tonne copper resource that would attract Anglo American might be misplaced. I didn’t suggest selling (as I was tempted to do for my holding) because, as always in these situations, it is difficult to know what other investors will do when the resource still looks more valuable than the then share price.

As it is, the shares have drifted back to the low 3’s (and a low £30m market cap) reached when early holders had cashed their profits from the initial spurt from the 1’s to the 7p’s. The latest drift hasn’t been helped either by fewer excited blogs from CEO Colin Bird. But with all drilling results now in, and a new, apparently separate, resource discovered less than a mile away and named Ascot, news is due soon on an up to date economic model. This will be for a larger open pit than was assumed for the earlier estimate of 400m tonnes contained copper at Racecourse, and might also add a preliminary estimate for Ascot.

So, while investors are assuming Racecourse won’t meet the 2m tonnes copper target, what may still be worthwhile in their own right are the still unexplored Ascot and Footrot prospects, which might revive interest. That is especially so because a recent Queensland deal established a US$170m price for a smaller deposit (670,00 tonnes) than Bushranger. It is, however, more developed, with a Preliminary Economic Analysis under its belt and possibly better economics. So it’s all eyes on Xtract’s own forthcoming reports.

Neither did I update on Pan African Resources’ recent results where the expected enhanced dividend didn’t materialise. As well as a weaker gold price, that seems to be down to the later than expected acquisition of the Mintails Mogale Gold tailings business which is expected to add, very cheaply, some 25% to PAF’s output. However, its first gold production isn’t now expected until end 2024, so the already strong cash generation PAF is seeing from its current operations won’t see the further strong increase that will support an even higher dividend yet. Meanwhile the yield on merely the final dividend is just under 5% – and nearly double that for a full year. (It is always denoted in Rands, before 20% withholding tax, so a bit obscure for UK shareholders)

Neither have I said much about Toronto based, Co Tyrone located, Galantas Gold, whose shares, while holding up better than the market, aren’t yet reflecting the potential, which was based on my own estimated update of the only, 9 years old, feasibility study.

However the picture has changed markedly now, for the better in the long term, but not quite so in the short term, because new management, and the financial backing they have brought in from top rated mining investors like Eric Sprott, has been spending to enhance the Cavanacaw mine’s efficiency and life while finding very encouraging drilling results. Like everything it is proving more expensive and longer than expected, while in its latest August 26 update management said rising energy and other costs mean it is updating its forecasts . Until they do, there is little point updating mine, but back in June production was expected to restart at some 80,000 gold ounces per month and ramp up to considerably more over the next year. That, alone, would transform the balance sheet of this still tiny £30m market cap company.