Lepidico — Fine tuning the mine and chemical plant

Lepidico’s announcements that it has signed a non-binding letter of intent for lithium, caesium and rubidium offtake with China’s Hubei Baijierui Advanced Materials Corporation (BJR) and chosen Lycopodium as its consultant to complete the engineering, procurement and construction management (EPCM) of its integrated Phase 1 project come a month after it announced the expansion of its resource at Karibib in Namibia. Rather than the hard rock resource previously delineated (and the subject of an announcement by Lepidico on 30 January 2020 – see our note Valuation update pending feasibility study, published on 6 April 2020), the March 2021 resource expansion quantified material contained in tailings at Rubicon, stockpiles at Rubicon and Helikon and historical dumps at Rubicon. Full details of the expansion are included in Lepidico’s announcement; however, a summary of Karibib’s updated resource within the context of its pre-existing resource as well as the expansion is as follows:

The table above shows that the increase in the surface resource equates to approximately one to two years’ worth of mining and processing at average rates (assuming 100% conversion into reserves). However – unusually for surface material – the mineral resources added are of a relatively high grade. Coupled with its surface disposition, we would therefore expect there to be good potential to promote this material from resources to reserves – especially in the case of the stockpiles and dumps, which now account for 88.9% of the surface material delineated (by tonnage).

Currently, 74.3% of resources at Rubicon 1 and Helikon 1 convert into reserves, by tonnage, and 78.9% by lithium content. Hence the 15.4 years of life implied by the resource inventory at Rubicon 1 and Helicon 1 translate into 14 financial years of operational life at Karibib, including one part year of mining before processing commences and one year of processing after mining finishes. However, Lepidico is now targeting a 20-year mine life. At an average ore mining and processing rate of 588ktpa, this would imply reserves of 11,760kt (cf 6,720kt currently) and, pro rata with the existing reserves:resources conversion ratio of 74.3% (by tonnage), resources of 15,828kt (cf 11,871kt currently), as shown below:

Lepidico’s mineral resource expansion announced on 12 March 2021 may therefore be interpreted as a first initiative within the context of the strategic objective to increase resources and reserves to the level required to support a 20-year mine life at Karibib.

Pro rata to the existing reserve:resource conversion ratio at Rubicon 1 and Helikon 1 of 74.3% (by tonnage), Karibib’s existing resource of 11,871kt should support a reserve of 8,820kt which, in turn, should support mining and processing operations for 15 years (at average rates) once the required work has been completed (see Exhibit 1).

In order to achieve its targets, Lepidico has therefore adopted a two-pronged strategy:

Output from a Phase 2 plant could be in the order of 20,000tpa lithium monohydrate, which compares with an average 4,893tpa from the currently planned Phase 1 plant. Thus, Lepidico would be required to identify approximately twice as much material as would be required for the 20-year Phase 1 plant for a Phase 2 plant to operate for half the time (ie 10 years) or approximately four times as much material in order for a Phase 2 plant to operate over a similar 20-year lifespan.

It is intended that the two prongs of the strategy will be conducted in parallel.

Given the precedent established by its Phase 1 plant project, with a mine in Namibia and a chemical plant in Abu Dhabi, an obvious location for Lepidico’s Phase 2 plant would be either Namibia or Abu Dhabi. However, the US has declared caesium and rubidium as well as lithium to be critical minerals, while Canada has declared caesium and lithium to be critical elements and the EU has recently added lithium to its list of critical raw materials. Together with industry’s focus on reducing supply chains, these strategic considerations on the part of the United States, the EU and Canada mean that any of these could also be viable locations for a Lepidico Phase 2 plant project with the Karibib mine considered to be a critical part of the strategic supply chain. While Namibia and Abu Dhabi will offer the benefit of the Phase 1 plant project precedent when it comes to developing a Phase 2 plant, the United States, the EU and Canada will offer the benefit of strategic and geographic diversification, along with shorter logistical routes. All of these considerations, among others (including governmental incentivisation), will be considered by Lepidico in a series of studies to ultimately determine the optimal location of a Phase 2 plant project in due course.

Lepidico’s Phase 1 Plant project is now fully permitted in Namibia and almost fully permitted in the United Arab Emirates (UAE). On 19 April – consistent with its timetable and stage of development – the company announced that it had agreed commercial terms with Lycopodium for the EPCM contract for the integrated project.

Lycopodium (LYL:AU, A$5.51) is a A$219.0m publicly listed and well established engineering consultant based in Perth, Western Australia, that was responsible for completing and delivering the design and engineering for both the pre-feasibility (PFS) and definitive feasibility studies (DFS) on the Phase 1 project to Lepidico in May 2020. In addition to its size and technical ability, Lycopodium was chosen by Lepidico as the lead engineering consultant on the basis that its prior involvement will make the project more readily acceptable to US debt financiers and thereby contribute to making it fully bankable.

The integrated EPCM contract will now be separated into two sub-contracts that meet country specific requirements separately for Namibia and the UAE. In the meantime however, early services engineering works and front-end engineering & design (FEED) is expected to commence in mid-May and thereby maintain Lepidico’s momentum towards:

Lepidico revealed on 13 April that it had signed a non-binding letter of intent to supply China’s BJR with lithium, caesium and rubidium salts from the Phase 1 plant for both industrial use and/or conversion into fine specialty chemicals. The announcement marks progress on the first of three marketing and sales initiatives by Lepidico to build a customer base for an expanding business with the objective of supporting longer-term growth (including, ultimately, a Phase 2 plant). The three initiatives – representing three different types of potential customers – are as follows:

On 6 April, Lepidico announced that it had lodged a provisional patent application for the production of nominal battery grade specification lithium carbonate from a LOH-Max intermediate crude lithium hydroxide via the sequestration of carbon dioxide from the upstream L-Max process, followed by refining. The new process is designed so that it can be integrated with either L-Max and/or LOH-Max technology or, potentially, in the chemical conversion of spodumene concentrates. The significance of the process is that it:

Apart from the need for carbon dioxide reticulation and gas sparges, both process flowsheets use similar equipment and it has been estimated that it will cost no more than US$1m in capital expenditure to retrofit the proposed Phase 1 chemical plant in Abu Dhabi with the required infrastructure to achieve this functionality from production year 2 of the project. In the meantime, Lepidico perceives that lower CO2 emissions from a process that is already relatively low in emissions will provide it with a competitive advantage in tendering to supply lithium chemicals to battery manufacturers. To this end, two further alternatives to minimise chemical plant CO2 emissions are being evaluated, namely:

Concurrent with its technical and strategic announcements, Lepidico announced on 19 April that it has successfully raised A$2.925m (effectively) via the issue of 134.0m shares to Acuity Capital under the terms of the Controlled Placement Agreement (CPA) already in place between the two since December 2019. The shares had a deemed price of A$0.0218 representing an 8.0% discount to the 15-day volume-weighted average price immediately prior to their issuance. This issue reduces the number of collateral shares already issued to Acuity, but which Acuity would otherwise be required to return to Lepidico upon termination of the CPA, to 96.0m (from 230.0m, previously).

In the aftermath of this issue, we calculate that Lepidico has 5,091.9m shares in issue excluding the 96.0m returnable shares, deemed to be effectively ‘in Treasury’, and 5,187.9m including them. Given their returnable nature, Edison’s valuation of Lepidico below is conducted on the basis of a net 5,091.9m shares being in issue, currently. The balance may be assumed to be a constituent part of the A$27.5m equity fund-raising that we expect to be conducted by Lepidico (now assumed to be in the coming FY22 financial year) in order to achieve a peak leverage (net debt/[net debt+equity]) ratio of 66.0% on its Phase 1 Plant project in mid-FY23.

Project

Lepidico’s DFS (see our note, Developing to the (L-)Max, published on 29 May 2020) calculated a project NPV8 for the integrated Karibib mining and chemical plant operation of US$221m, or A$284m (5.6c/share on the enlarged share base) at the current foreign exchange rate of A$1.2831/US$ (cf A$1.3511/US$ at the time of our last note in December 2020).

In our report Gold stars and black holes, we calculated a mean enterprise value (EV) for companies with projects at the definitive feasibility study (DFS) stage of development of 30.9% of project net present value (NPV) (ranging up to 133.5%). This alone would imply an immediate valuation for Lepidico of 1.7c/share, ranging up to 7.4c/share.

Company

Our valuation of Lepidico varies from our value of the integrated Karibib mining and chemical plant project in that it takes into account Lepidico’s 80% interest in the Namibian mine (but 100% of the Abu Dhabi chemical plant), which will give rise to both a tax paying position in Namibia and a minority interest in the profits generated from mining operations. It also assumes ongoing corporate costs in the order of A$3.1m pa. Hitherto, our company model has assumed that Lepidico will raise this equity at a price of 2.9c/share (as set out in our report Valuation update pending feasibility study, published on 6 April 2020). This price is at a 26.1% premium to the current share price of 2.3c. However, given that Lepidico’s shares have appreciated by 283.3% from their level of 0.6c in May 2020 and by 130.0% from their level of 1.0c in December 2020, we believe that a near-term share price of 2.9c is achievable, especially in the event of the successful conclusion of additional offtake negotiations and/or US DFC debt funding on preferential terms (see our note Enter the US government, published on 5 November 2020). In addition, management has indicated that it would be unlikely to commit to raising equity at much below this price. Hence, we continue to show the results of our analysis on this basis. However, we also show the results of the analysis with equity raisings conducted at a series of different prices in the ‘Future equity funding price’ section of the note, below.

In our last note on the company (see Convertible bond acquired with DLI fully retired, published 8 December 2020), we calculated a value for Lepidico’s shares of 4.65c plus 0.26c for the value of an envisaged loan to the minority shareholders in the upstream Namibian operation to give a total valuation for the company of 4.91c/share. We have now updated our valuation to take account of the following in our financial model:

In the wake of these changes, our (discounted) valuation of Lepidico’s future (maximum potential) dividend stream to shareholders remains largely unchanged at 4.48c/share, as shown in the graph below:

To this valuation of 4.48c/share should then be added the value of Lepidico’s envisaged future loan to the minority shareholders in the Namibian mining and concentrating operation, which we estimate to be 0.29c/share to result in a total value for Lepidico’s shares of 4.76c/share (cf 4.91c/share previously), based solely on its Phase 1 project.

Future equity funding price

Our financial model assumes that Lepidico will raise A$27.5m in FY22 (cf A$37.8m in FY21 previously) at a share price of 2.9c in order to achieve an (unchanged) future, maximum net debt:equity ratio of 66:34. Exhibit 4 demonstrates the sensitivity of our valuation to variations in this price: