LiOH production beckons

Lepidico 25 February 2019 Update
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Lepidico

LiOH production beckons

Technical update

Metals & mining

25 February 2019

Price

A$0.031

Market cap

A$104m

A$1.3936/US$

Net cash (A$m) at end December 2018

8.0

Shares in issue

3,356.2m

Free float

68%

Code

LPD

Primary exchange

ASX

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

88.2

88.2

(40.7)

Rel (local)

78.7

74.0

(42.5)

52-week high/low

A$0.1

A$0.0

Business description

Lepidico provides exposure to a portfolio of lithium assets via its wholly owned properties, JVs and IP in Australia, Canada and Europe. Uniquely, it has successfully produced lithium carbonate from non-traditional hard rock lithium-bearing minerals using its registered L-Max process technology.

Next events

Feasibility study

Q2 CY19

Permits & approvals

Mid-2018 to mid-2019

Pilot plant operation

May 2019

Phase 1 final investment decision

Mid-2019

Analyst

Charles Gibson

+44 (0)20 3077 5724

Lepidico is a research client of Edison Investment Research Limited

On 18 February, Lepidico announced that it had entered into a worldwide exclusivity arrangement over a new proprietary process (LOH-Max™) to produce lithium hydroxide from lithium sulphate. The technology uses established equipment and is expected to incur lower capital and operating costs than the conventional alternative. It seeks to capitalise on the growing preference among battery manufacturers for lithium hydroxide over lithium carbonate as a feedstock, which has resulted in the former now commanding a price premium over the latter. It also dispenses with the requirement for a sodium sulphate circuit in the plant, thereby further reducing capital costs as well as the commercial risks associated with producing this product.

Year end

Total revenues (A$m)

Reported PBT*
(A$m)

Cash from operations (A$m)

Net
cash (A$m)

Capex
(A$m)

06/17

0.1

(5.4)

(3.6)

3.3

(0.9)

06/18

0.2

(7.2)

(3.0)

4.9

(3.1)

06/19e

0.0

(5.9)

(6.2)

24.3

(21.4)

06/20e

19.9

2.5

3.2

(5.2)

(32.7)

Note: *PBT is normalised, excluding amortisation of acquired intangibles and exceptional items.

LOH-Max being incorporated into future planning

As a result of this arrangement, LOH-Max™ (hereafter LOH-Max) is being integrated into LPD’s pilot plant, which nevertheless remains on budget and on schedule for commissioning in April prior to one month’s operation in May incorporating LOH-Max. In the meantime, Strategic Metallurgy is developing the process design criteria for consultants Lycopodium to finalise the design for the LOH-Max circuit to be integrated into the Phase 1 plant project full feasibility study, which is expected to be completed next quarter.

Potential capex savings quantified; opex to come

Cost comparisons conducted to date indicate that LOH-Max offers material reductions in both capex (estimated at more than US$10m for a 5,000tpa lithium hydroxide operation) and opex relative to conventional methods of converting lithium sulphate into either lithium hydroxide or lithium carbonate. In addition, on account of their different molar masses, 5,000t of lithium carbonate equates to 5,679t of lithium hydroxide monohydrate in terms of the amount of contained lithium metal.

Valuation: 6.84c/share potentially rising to 7.27c

On the basis of our updated assumptions, we estimate that execution of the 7t/hour Phase 1 plant will result in free cash flow to Lepidico of A$71.2m per year once steady-state production has been achieved. Assuming US$30m (A$41.8m) of equity financing at the prevailing share price, this implies a valuation for Lepidico of A$0.0684/share in FY19 (vs A$0.0398 for the pre-LOH-Max plant), rising to A$0.0910 in FY22 with a A$5.2m net debt funding requirement, or A$0.0727/share (in FY19) with an unchanged A$16.8m net debt funding requirement (implying US$21.2m in equity funding in H219; see page 4). Note that neither of these valuations ascribe value to the Phase 2 plant or other development options.

Agreement

On 18 February, Lepidico announced that it had entered into a worldwide exclusivity arrangement over a new proprietary process to produce lithium hydroxide from lithium sulphate. The process was developed in collaboration with the owners of Strategic Metallurgy (a material shareholder in Lepidico) and the agreement grants Lepidico the right to use the process and the sole rights for marketing the technology to third parties worldwide in exchange for Lepidico funding the development of the process.

Rationale

The technology seeks to capitalise on the growing preference among battery manufacturers, in particular, for lithium hydroxide, rather than lithium carbonate, as a process feedstock, which has resulted in the former commanding a premium price compared to the latter. The technology uses conventional equipment and is expected to incur lower capital and operating costs than the erstwhile conventional process to convert lithium sulphate into either lithium hydroxide or lithium carbonate. It also dispenses with the requirement for a sodium sulphate circuit in the plant, thereby further reducing capital costs as well as obviating the commercial risks associated with the production of this material (eg low/negative/commoditised margins and potential additional environmental costs).

Impact

Lepidico’s intention is that L-Max will provide feed to LOH-Max in order to produce either lithium hydroxide or lithium carbonate, depending upon market conditions. In anticipation of this, LOH-Max is currently being integrated into LPD’s pilot plant development, which nevertheless remains on budget and on schedule for commissioning in April prior to one month’s operation in May (incorporating LOH-Max) in order to confirm the design performance of the major component parts of the plant in continuous process at an intermediate throughput rate of 15kg/hour and thereby to minimise subsequent scale-up risk to the Phase 1 plant.

At the same time, in reviewing the engineering for the Phase 1 L-Max plant project, Lepidico has determined that a proportion of re-work will be required to integrate the LOH-Max process. To this end, Strategic Metallurgy is developing the process design criteria for consultants Lycopodium to finalise the design for the new circuit to be integrated into the Phase 1 plant project full feasibility study (which is therefore now expected to be completed during Q2 CY19, around the time of the pilot plant run in order to accommodate LOH-Max).

Valuation considerations

Lepidico has already conducted cost comparisons between LOH-Max and the conventional process to convert lithium sulphate to lithium hydroxide and has concluded that “material reductions in both capital cost – estimated at more than US$10 million for 5,000tpa of lithium hydroxide – and operating cost should be achieved using LOH-Max.” At the same time, lithium hydroxide commands a premium price compared to that of lithium carbonate that has ranged between 53.2% in April 2015 and 9.5% in June 2018:

Exhibit 1: Lithium hydroxide price and lithium carbonate price, January 2013-present (US$/t)

Exhibit 2: Lithium hydroxide price premium vs lithium carbonate, January 2013-present (US$/t)

Source: Bloomberg

Source: Edison Investment Research. Note: Underlying data provided by Bloomberg (Exhibit 1).

Exhibit 1: Lithium hydroxide price and lithium carbonate price, January 2013-present (US$/t)

Source: Bloomberg

Exhibit 2: Lithium hydroxide price premium vs lithium carbonate, January 2013-present (US$/t)

Source: Edison Investment Research. Note: Underlying data provided by Bloomberg (Exhibit 1).

Although the premium of the lithium hydroxide (monohydrate) price over that of lithium carbonate has therefore narrowed materially over the course of the past two years, it has nevertheless still averaged 16.8% since May 2017. In addition, on account of their different molar masses, 5,000t of lithium carbonate equates to 5,679t of lithium hydroxide monohydrate in terms of the amount of contained lithium metal (ie a factor of 113.6%).

On the basis of the above assumptions regarding output (+13.6% LiOH vs lithium carbonate, ie configured to produce 100% lithium hydroxide monohydrate) and prices (16.8% LiOH premium) plus those set out in our note Lepidico: Piloting its way through, published on 9 October 2018, our estimate of Lepidico’s annual income statement once steady-state production at an (unchanged) output rate of 5,000tpa has been achieved at the Phase 1 L-Max plant (incorporating LOH-Max) is as follows:

Exhibit 3: Edison estimate of Lepidico free cash flow once steady-state Phase 1 achieved

L-Max incorporating LOH-Max
(current)

L-Max only
(previous)

Australian dollars

Australian dollars

Revenue

163,973,251

138,207,900

Costs

64,270,382

65,188,135

Gross profit

99,702,869

73,019,765

Depreciation

(5,837,053)

(9,220,921)

General & administrative costs

(3,146,290)

(3,146,290)

Operating profit

90,719,527

60,652,554

Net finance income

0

0

Loss before income tax

90,719,527

60,652,554

Income tax expense

22,679,882

15,163,139

Marginal tax rate (%)

25.0

25.0

Profit from continuing operations

68,039,645

45,489,416

Sustaining capex

(2,657,131)

(2,695,073)

Free cash flow

71,219,567

52,015,264

Source: Edison Investment Research

Discounted at a rate of 10% per year over 10 years, steady-state free cash flow of A$71.2m pa (cf A$52.0m previously) has a net present value of A$437.6m (A$319.6.4m previously). This reduces to A$298.9m (A$218.3m previously) to account for steady state not being achieved until FY23 and A$225.6m (previously A$173.3m) once initial capital expenditure had been taken into account.

Ultimately, however, our detailed valuation is derived from the discounting of future, real, maximum potential dividends to shareholders and thus depends, in part, on the degree and price of any future equity financing of Phase 1 capex. In our base case, we have consistently assumed US$30m (A$41.8m at our updated forex rate of A$1.3936/US$) of equity financing in FY19, in this case via the issue of an additional 1.3bn shares at the prevailing share price of A$0.031 later in the current financial year to finance the start of Phase 1 capex. All other things being equal, our ultimate valuation of Lepidico shares, on this basis, is A$0.0684 (cf A$0.0398 previously) at the start of FY19 (1 July 2018), rising to A$0.0910 at the start of FY22, when the first (maximum potential) dividend is potentially payable to shareholders:

Exhibit 4: Edison estimate of future Lepidico EPS and (maximum potential) DPS

Source: Edison Investment Research

On account of the estimated US$10m reduction in capex associated with the 5,000tpa operation however, this scenario is now extremely conservative in terms of implied future financial gearing/leverage (assuming the same US$30m equity funding contingency). Whereas previously we had calculated a maximum requirement for the company of A$16.8m in debt/strategic partner-sourced funding requirements, in the aftermath of the LOH-Max changes, this reduces to just A$5.2m. Should Lepidico instead choose to maintain the same level of maximum net debt, then we calculate that it will require only US$21.2m in equity funding in H219 via the issue of an additional 1.0bn shares at the prevailing share price, in which case our immediate valuation of the company in FY19 increases to A$0.0727/share (vs A$0.0677) on account of the lower subsequent equity dilution of the project’s value.

Exhibit 5: Financial summary

Accounts: IFRS, Yr end: June, AUD: Thousands

2015A

2016A

2017A

2018A

2019E

2020E

Total revenues

9

116

127

171

16

19,948

Cost of sales

0

0

0

0

(2,090)

(11,170)

Gross profit

9

116

127

171

(2,074)

8,778

SG&A (expenses)

(455)

(617)

(912)

(5,284)

(3,868)

(3,146)

Other income/(expense)

0

0

0

0

0

0

Exceptionals and adjustments

(16)

(415)

(878)

(2,171)

0

0

Depreciation and amortisation

(5)

(6)

(6)

(6)

(9)

(3,277)

Reported EBIT

(467)

(923)

(1,670)

(7,290)

(5,951)

2,354

Finance income/(expense)

(18)

(5)

128

70

24

121

Other income/(expense)

(559)

(448)

(3,815)

0

0

0

Exceptionals and adjustments

0

(888)

0

0

0

0

Reported PBT

(1,044)

(2,263)

(5,357)

(7,220)

(5,927)

2,476

Income tax expense (includes exceptionals)

0

0

0

0

0

(619)

Reported net income

(1,044)

(2,263)

(5,357)

(7,220)

(5,927)

1,857

Basic average number of shares, m

178

465

1,802

2,624

3,803

4,705

Basic EPS

(0.0)

(0.0)

(0.0)

(0.0)

(0.0)

0.0

 

 

 

 

 

 

 

Balance sheet

Property, plant and equipment

9

4

8

27

21,390

50,794

Goodwill

0

0

0

0

0

0

Intangible assets

0

16,204

16,698

19,027

19,027

19,027

Other non-current assets

1,485

715

1,620

730

730

730

Total non-current assets

1,494

16,922

18,326

19,783

41,147

70,551

Cash and equivalents

53

650

3,307

4,860

24,288

24,288

Inventories

0

0

0

0

1

1,662

Trade and other receivables

4

3,886

706

712

1,176

1,640

Other current assets

0

0

0

0

0

0

Total current assets

57

4,537

4,013

5,572

25,465

27,590

Non-current loans and borrowings

0

0

0

0

0

29,486

Other non-current liabilities

0

0

0

0

0

0

Total non-current liabilities

0

0

0

0

0

29,486

Trade and other payables

105

614

1,663

804

991

1,177

Current loans and borrowings

115

0

0

0

0

0

Other current liabilities

40

33

46

51

51

51

Total current liabilities

260

647

1,709

856

1,042

1,228

Equity attributable to company

1,292

20,812

20,630

24,500

65,570

67,427

Non-controlling interest

0

0

0

0

0

0

 

 

 

 

 

 

 

Cashflow statement

Profit for the year

(1,044)

(2,263)

(5,357)

(7,220)

(5,927)

1,857

Taxation expenses

0

0

0

0

0

619

Depreciation and amortisation

5

6

6

6

9

3,277

Share based payments

450

40

1,736

2,138

0

0

Other adjustments

(451)

1,036

(162)

2,066

0

0

Movements in working capital

(10)

132

133

(28)

(279)

(1,939)

Interest paid / received

0

0

0

0

0

0

Income taxes paid

0

0

0

0

0

(619)

Cash from operations (CFO)

(1,050)

(1,049)

(3,644)

(3,038)

(6,197)

3,195

Capex

(9)

(63)

(861)

(3,057)

(21,373)

(32,681)

Acquisitions & disposals net

0

32

122

110

0

0

Other investing activities

(563)

(80)

0

0

0

0

Cash used in investing activities (CFIA)

(572)

(111)

(739)

(2,947)

(21,373)

(32,681)

Net proceeds from issue of shares

1,505

1,872

7,040

7,555

46,998

0

Movements in debt

100

(115)

0

0

0

29,486

Other financing activities

0

0

0

0

0

0

Cash from financing activities (CFF)

1,605

1,757

7,040

7,555

46,998

29,486

Increase/(decrease) in cash and equivalents

(18)

597

2,657

1,570

19,428

0

Currency translation differences and other

0

0

0

(17)

0

0

Cash and equivalents at end of period

53

650

3,307

4,860

24,288

24,288

Net (debt) cash

(61)

650

3,307

4,860

24,288

(5,198)

Movement in net (debt) cash over period

(61)

711

2,657

1,553

19,428

(29,486)

Source: Lepidico accounts, Edison Investment Research


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This report has been commissioned by Lepidico and prepared and issued by Edison, in consideration of a fee payable by Lepidico. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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General disclaimer and copyright

This report has been commissioned by Lepidico and prepared and issued by Edison, in consideration of a fee payable by Lepidico. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

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The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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Germany

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United Kingdom

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United States of America

Sydney +61 (0)2 8249 8342

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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