Phase 2 coming into view

Lepidico 18 June 2021 Update
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Lepidico

Phase 2 coming into view

Rights issue, placement and
lithium price

Metals & mining

18 June 2021

Price

A$0.012

Market cap

A$74m

A$1.3267/US$

Net debt (A$m pro forma) at end-March 2021

4.4

Shares in issue*

6,152.1m

*Includes 96m shares (effectively) in treasury

Free float

78%

Code

LPD

Primary exchange

ASX

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(18.8)

(48.0)

62.5

Rel (local)

(22.4)

(51.8)

30.6

52-week high/low

A$0.03

A$0.01

Business description

Via its Karibib project in Namibia and unique IP, Lepidico is a vertically integrated lithium development business that has produced both lithium carbonate and lithium hydroxide from non-traditional hard rock lithium-bearing minerals using its registered L-Max® and LOH-Max™ processes.

Next events

Offer issue date

18 June 2021

Product offtake commitments

Q3 CY21

Debt finance package

Q3 CY21

Commencement of mining

Q3 CY22

Analyst

Charles Gibson

+44 (0)20 3077 5724

Lepidico is a research client of Edison Investment Research Limited

On 15 June, Lepidico announced that its one for seven entitlement (rights) offer to raise A$9.6m had closed ‘significantly oversubscribed’ to the extent that the company had taken advantage of the strength in demand to place a further 223.1m shares (plus options) with investors to raise an additional A$2.9m. The funds raised will be used to generate product samples for a new prospective customer, with which negotiations are well advanced. They will also be applied to fast-track initial development activities for the Phase 1 project in order to keep it on schedule for mining to start in Q3 CY22 and chemical plant commissioning in Q1 CY23 – thereby positioning Lepidico to take advantage of improving lithium market fundamentals – and also to start work on a full-scale 20,000tpa LCE Phase 2 plant.

Year end

Total revenues (A$m)

PBT
(A$m)

Cash from operations (A$m)

Net cash/(debt)*
(A$m)

Capex
(A$m)

06/19

0.0

(5.1)

(3.5)

10.4

(6.3)

06/20

0.0

(10.8)

(4.7)

(0.4)

(7.5)

06/21e

4.1

(0.4)

2.6

17.7

(1.2)

06/22e

0.0

(26.7)

(30.1)

(42.3)

(48.4)

Note: *Historical numbers include Desert Lion Energy convertible.

Rights and placement attractively priced

While existing shareholders taking up their rights in order to maintain their interest in the project should have been agnostic towards the price of the issue, we calculate that new investors at a price of 1.3cps were able to buy into the project at a price which was at a 23.5% discount to the normal rating of a project at definitive feasibility study (DFS) stage of development (Edison estimate – see page 9).

Lithium price recovering strongly

In recognition of its strong recovery so far this year, we have upgraded our long-term lithium carbonate price to US$12,000/t (cf c US$10,000/t previously) and our lithium hydroxide price to US$15,091/t (cf US$14,021/t previously). Note that this latter compares to the life of mine average price of US$13,669/t assumed for the purposes of the Phase 1 Plant project DFS in May last year.

Valuation: 4.96cps plus potential 0.61–1.53cps

Lepidico’s Phase 1 Plant project has been materially de-risked by its running of a earlier pilot plant campaign. Its Karibib mine in Namibia is now fully permitted, while its Abu Dhabi chemical plant is almost fully permitted. Having raised initial equity, it is now committing to Phase 1 development activities to keep the project on a fast track, in parallel with its ongoing funding and offtake workstreams and continual improvements in environmental and social performance. In our last note on the company (Fine tuning the mine and chemical plant, published on 21 April 2021), we valued Lepidico at 4.76c/share and this has now risen to 4.96c plus a potential risk-adjusted 0.61–1.53 cents (post-FY21 equity funding) for a conceptual 20,000tpa LCE Phase 2 plant (see pages 5–7). Note however that this valuation still does not attribute any value to Lepidico from either the supply of concentrate from third-party sources or any other development options (eg third-party, technology licensing).

Rights/entitlement issue and placement

Rights/entitlement issue

On 20 May, Lepidico announced a pro rata renounceable entitlement offer (effectively a rights issue) on the basis of one new share plus half an option (exercisable at 2.6c/share) at a combined price of 1.3 Australian cents per share for every seven existing shares held to raise A$9.6m.

Prior to the announcement, there were 5,187.9m shares in issue and the maximum number of shares to be issued under the terms of the entitlement offer was 741.1m with the funds raised being applied to fast-track initial development activities for the Phase 1 project in order to keep it on schedule for mining to start in the September 2022 quarter (Q123) and chemical plant commissioning in the March 2023 quarter (Q323) – thereby positioning Lepidico as a first mover for the new lithium price cycle – as well as advancing the Phase 2 growth project.

The pricing of the offer was at a 19% discount to Lepidico’s volume weighted average share price in the 10 days prior to the announcement of the offer and eligible directors indicated that they intended to participate in it.

Placement

Subsequently, owing to the strong demand demonstrated for Lepidico’s equity from both investors and existing shareholders at the time of its entitlement/rights issue, on 15 June, Lepidico announced that it had also authorised a placement of an additional 223.1m (plus 111.5m options) at a price also of 1.3c to raise a further A$2.9m.

Prior to these two fund-raising announcements, we had assumed that Lepidico would fund the equity portion of its development capital via an issue of shares to raise A$27.5m in FY22. In the aftermath of the announcement, we have assumed that it will fund itself via this A$9.6m rights issue and A$2.9m placement in FY21 plus a further issue of shares to raise A$18.0m in FY22 (note: we have increased the total equity being raised by A$2.9m, from A$27.5m to A$30.5m, to account for a second pilot plant campaign plus product R&D work in FY22, see below), ie we estimate that Lepidico has already raised 41.0% of the total equity required to develop its Phase 1 Plant project.

Continued sales and marketing initiatives

Lepidico has a three-pronged marketing and offtake strategy. The three initiatives – representing three different types of potential customers – are as follows:

Long-term, direct sales contracts with a major cathode manufacturer(s), supplying the lithium-ion battery manufacturing industry and thereby providing it with access and exposure to the electric vehicle (EV) sector.

Agency sales via a trading company. This will provide Lepidico with exposure to both the spot market and contract customers for its bulk chemicals output. Ideally, Lepidico’s counterparty would account for a substantial portion of its output and have global capability not only in lithium hydroxide but also other chemicals produced from Phase 1, including potash, with sales directed towards Europe and the US in particular (thereby representing a US supply nexus to support the debt funding contemplated under LPD’s mandate with the US International Development Finance Corporation (DFC – see our note, Enter the US government, published on 5 November 2020).

The third source of Lepidico’s sales is direct, industrial offtake.

On 13 April, Lepidico revealed 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 speciality chemicals, thereby marking progress on the third of these three initiatives to build a customer base for an expanding business with the objective of supporting longer-term growth (including, ultimately, a Phase 2 plant). In this case, BJR operates three manufacturing sites in Hubei Province in China (capital Wuhan) and Lepidico will supply it with lithium hydroxide, caesium sulphate and rubidium sulphate for both industrial use and synthesis into fine speciality chemicals for both domestic and international customers.

Subsequently, on 28 April, Lepidico announced that it had entered into a non-binding letter of intent with Bisley & Co Pty (an Australian multinational marketer and distributor of industrial raw materials to the Anzac region, South-East Asia, the Middle East and North America) for the supply of up to 2,000tpa lithium hydroxide, sulphate of potash (SOP) and amorphous silica, as well as other products from the company’s planned Phase 1 Project to long-term strategic customers – thereby marking progress with the second of its three initiatives.

At the time of the announcement of its share placement (see above), Lepidico also announced that it had been in further (unsolicited) offtake talks with a counterparty connected with the electric vehicle sector that had requested material samples of lithium hydroxide from Lepidico. While the company released relatively few details about its counterparty, it seems logical to conclude that it is likely to be a cathode manufacturer seeking security of supply of raw materials for batteries to be directed towards the electric vehicle market – thereby marking progress for Lepidico with a new prospective lithium customer. Anecdotally, the fact that Lepidico is in such talks and that they were unsolicited suggests, among other things, that the lithium chemical market has been transformed compared to its state even just six months ago. It also suggests a high level of commitment to the future production of batteries in quantity in Europe and/or North America – not least as a result of the new Biden administration’s recently announced twin initiatives of a network of charging stations for electric vehicles and a US$2tn climate plan. Inevitably, however, it will take time for the supply-side consequences of such commitments to translate into medium- to long-term physical demand. Based on recent discussions with industry participants, we understand that demand for new sources of supply for 2023 and 2024 is at a relatively early stage and we would therefore expect to see the effects of such long-term strategic planning begin to manifest themselves in new contracts from the second half of this calendar year. In the meantime, however, with its Phase 1 Plant project on schedule for production in 2023, we believe that Lepidico is well positioned to benefit from early mover advantage in the new lithium price cycle.

Three immediate consequences of the improvement in market conditions for lithium chemicals are pertinent to Lepidico – two direct and the other indirect:

We understand that the counterparty has requested a sample of product from Lepidico’s process that is material in scale. As a result (and with the obvious agreement of the counterparty), we understand that Lepidico intends to run a second campaign through its pilot plant in Perth. In the first instance, this will require funds which will be supplied by the additional placement noted on page 2 of this report and was a major motivation for the company in seeking to increase the size of its equity raising.

The positive lithium market environment has caused us to reassess our lithium price assumptions and supply/demand fundaments (see ‘Lithium price’ on page 7 below).

It has brought forward the company’s assessment of its development options for a 20,000tpa LCE Phase 2 plant. Whereas this had, until now, been very theoretical in concept, with both investors and offtake partners obviously keen to invest in the growth potential of the sector, some of the proceeds of the expanded equity raisings announced in May and June have now been budgeted towards funding the start of a preliminary economic assessment into a Phase 2 Plant. In consequence of this fact, we have also attempted to put together an early-stage appreciation of what such a project might look like and the financial returns that might be expected from it (see Phase 2 Project (P2P), immediately below), in advance of more tangible developments (eg drilling results) later in the year.

Phase 2 project (P2P)

Our previous reports on Lepidico have noted the upside potential to our valuation via the eventual development of a full-scale, Phase 2 plant, but have declined to attempt to quantify it. Recently, however, Lepidico has published its estimate of the capital intensity involved in developing such a plant. In the light of its announcement that it has now commenced Phase 2 mineral resource expansion drilling, this note therefore attempts for the first time to ascribe some value to this project (although investors should note that the resources to support such a project have yet to be identified by Lepidico).

According to its Phase 1 Plant project DFS (see Valuation update post-feasibility study, published on 20 July 2020), Lepidico will mine c 0.5Mt ore pa at a strip ratio of 3.8 in order to produce c 60kt of concentrate pa at an average grade of 3.23% lithium oxide after a (lithium) recovery to concentrate of 80.6%. The chemical plant will then process c 56,700t concentrate (dry) pa to produce 5,600tpa lithium hydroxide monohydrate at a concentrate grade of 4% lithium oxide. As a result of progressive debottlenecking, from year five of the project, the target throughput rate will increase to 66,577tpa concentrate to result in ongoing lithium hydroxide production that is within 11% of 4,900tpa plus a range of by-products to take total output to c 7,800t lithium hydroxide equivalent per year. By contrast, a Phase 2 plant could have the capacity to produce 20,000tpa of lithium carbonate equivalent, or 22,717tpa lithium hydroxide monohydrate equivalent – ie a scale-up factor of approximately 2.9x.

In formulating our valuation of a Phase 2 plant, we have therefore made the following assumptions:

The geological characteristics of the orebody approximate those of Karibib, but scaled up to support a mining rate 2.9x the current operation. The stripping ratio, ore grade, recovery and mass pull are all assumed to be the same as the Phase 1 operation to result in 2.9x the production of concentrate.

Production and consumption of concentrate into end-products is assumed to be in balance (ie negligible stockpiles of concentrate are presumed to be created).

Output from the chemical plant is assumed to be 20,000tpa lithium carbonate equivalent, or 22,717tpa lithium hydroxide monohydrate equivalent, with the production of end-products (lithium hydroxide monohydrate, rubidium sulphate, caesium formate, sulphate of potash and amorphous silica) assumed to be pro rata to the Phase 1 Abu Dhabi chemical plant production profile.

Unit mining and processing costs are assumed to be the same as for the Karibib and Abu Dhabi chemical plant operations, with the exception that 70% of costs are presumed to be variable (and scaled up 2.9x therefore) and 30% are assumed to be fixed and therefore invariant to scale.

In March 2021, Lepidico quoted scoping study design parameters as indicating a capital intensity of US$16,900/t LCE or US$10,500/t after credits for a 20,000tpa LCE operation (note: for these purposes, capital intensity is defined as pre-production capital per tonne of annual lithium carbonate equivalent plus by-products adjusted to lithium hydroxide equivalent). On this basis, we estimate that initial capex for the Phase 2 plant will amount to US$238.5m (being 10,500 x 22,717) plus capex for the mine (all distributed over three years). In this case, we assume that capex for the mine will be pro rata to the Karibib mining and concentrating operation and amount to US$124.2m. We therefore estimate that total pre-production capex will amount to US$362.8m, or US$15,972/t lithium hydroxide monohydrate equivalent, which will be funded from retained earnings from the Phase 1 Plant project (ie no additional assumed dilution at present) and which compares with equivalent figures of US$139.0m and US$17,758/t for the Phase 1 Plant project (Edison calculation excluding working capital). Sustaining capital is assumed to be pro rata to the Phase 1 Plant project.

Depreciation is assumed to be over 10 years.

The corporate tax rate is assumed to be the global average corporate tax rate of 23.65% (source: KPMG corporate tax rate tables for 2021–22).

Conceptual Phase 2 Plant project valuation

On the basis of the above assumptions, we calculate an income statement for the Phase 2 Plant project in a typical year approximately as follows:

Exhibit 1: Conceptual Phase 2 Plant project income statement

US$m pa

Revenue

356.4

Fixed costs

19.2

Variable costs

130.2

Gross profit

207.0

Depreciation

36.3

EBIT

170.7

Interest

-

Pre-tax profit

170.7

Tax

40.4

Tax (%)

23.65

Profit after tax

130.3

Free cash-flow

166.6

Sustaining capex

4.8

Net cash-flow

161.8

Revenue

Fixed costs

Variable costs

Gross profit

Depreciation

EBIT

Interest

Pre-tax profit

Tax

Tax (%)

Profit after tax

Free cash-flow

Sustaining capex

Net cash-flow

US$m pa

356.4

19.2

130.2

207.0

36.3

170.7

-

170.7

40.4

23.65

130.3

166.6

4.8

161.8

Source: Edison Investment Research, Lepidico

Discounting 20 years’ worth of cash flows of this order of magnitude back to present value at a discount rate of 10% and subtracting US$362.8m in initial capex yields a preliminary theoretical value for the Phase 2 Plant project of US$594.7m at the start of capex, or US$0.097/share (post-FY21 equity funding).

Risked conceptual Phase 2 Plant project

Two methods of adjusting the above valuation to reflect risk occur to us.

Method 1 – Stage of development risk

The capital intensity estimate for the Phase 2 plant is quoted as being performed to ‘scoping study design parameters’, while the operational cost estimates are compiled to a DFS standard – albeit there is no guarantee that either the mining or the chemical cost portions of a Phase 2 Plant project would approximate those at Karibib and Abu Dhabi, respectively. As such, a preliminary economic assessment (PEA) level risk factor applied to our valuation (above) could be appropriate in formulating a risk-adjusted valuation for a conceptual Phase 2 Plant project. Alternatively, it could be stated that we believe our valuation to be correct in the event that the assumed parameters are confirmed in a PEA or scoping level study. In our report Gold stars and black holes, we calculated a mean enterprise value for companies with projects at the PEA or scoping study stage of development of 11.7% of project net present value (NPV). This would imply a valuation for the Phase 2 Plant project of US$70.8m, or 1.15 US cents per share (1.53 Australian cents per share) post-FY21 equity funding.

Method 2 – Resource risk

In order to achieve its targets of supporting both a Phase 1 chemical plant in Abu Dhabi and a Phase 2 plant perhaps in Abu Dhabi but also, potentially, elsewhere in the world, Lepidico has adopted a two-pronged strategy at Karibib (with the two prongs being conducted in parallel):

to focus on near mine site evaluation at Rubicon and Helikon 1 in order to support a Phase 1 operating life extension to 20 years; and

to focus on Helikon 2–5 and other lithium mineralised pegmatites that have yet to be drill tested within Lepidico’s 64km2 prospecting licence area in order to support a Phase 2 plant with a life of 10–20 years.

In order to support a 20,000tpa LCE chemical plant operation, we estimate that a 1.7Mtpa ore processing capacity would be required. Over 20 years, this would imply a required ore reserve of c 34Mt (at a similar grade to the current ore reserve) which, at the existing reserve:resource conversion ratio at Rubicon 1 and Helikon 1 of 74.3% (by tonnage), would imply a minimum resource of 45.9Mt at an acceptable minimum grade in order to support a Phase 2 plant. This compares with a current resource at Helikon 2–5 of 2.2Mt, as shown in the table below:

Exhibit 2: Mineral resource estimate, Helikon 2–5 (January 2020)

Deposit

Category

Cut-off
(% Li
2O)

kt

Grade
(% Li
2O)

Contained Li2O

Contained LCE

Helikon 2

Inferred

0.20

216.0

0.56

1,210

2,991

Helikon 3

Inferred

0.20

295.0

0.48

1,416

3,501

Helikon 4

Inferred

0.20

1,510.0

0.38

5,738

14,189

Helikon 5

Inferred

0.20

179.0

0.31

555

1,372

Total

Inferred

0.20

2,200.0

0.41

8,919

22,054

Source: Lepidico, Edison Investment Research.

At 0.41% lithium oxide, the average grade of Helikon 2–5 compares well with the average resource grade of Rubicon 1 and Helikon 1 combined of 0.43% and the average reserve grade of Rubicon 1 and Helikon 1 combined of 0.46%. Self-evidently, however, the current resource of 2.2Mt is only 4.8% of that required to support a 20,000tpa LCE chemical plant operation for 20 years and, as such, this percentage could be invoked as an appropriate measure to apply to the valuation of US$594.7m (above) to reflect the risk surrounding the development of the project. In this case, the appropriately risked valuation of US$28.5m equates to 0.46 US cents per share (post-FY21 equity funding) or 0.61 Australian cents per share (post-FY21 equity funding).

Lithium price

Lithium carbonate price

After more than two years in a bear market, between mid-2018 and late 2020, the spot price of lithium carbonate has begun to recover strongly.

The price of lithium carbonate is extremely sensitive to general economic conditions in China as well as those pertaining to the electric vehicle (EV) market in particular. Initially, demand for EVs in China softened from Q2 CY18 on account of a more stringent Chinese policy towards EVs that supported higher battery energy density and range. As a consequence, the price of lithium carbonate in China, which had previously traded at a c 100% premium to the world market level, began to decline to the point at which the China CIF price and the China spot price were at close to parity by Q219. This trend of a weakening price was then further exacerbated by a slowdown in the domestic Chinese economy throughout 2019, coupled with rising trade tensions with the United States, to result in the domestic Chinese market undergoing a long period of destocking throughout 2019 to the point at which China had become a net exporter of lithium carbonate by the end of the year. This destocking occurred despite attempts by the Chinese authorities to implement generally favourable policies in support of the EV industry (which it regards as a strategic priority), including penalties, in the form of higher taxes, on the production of internal combustion engine cars and new emissions standards on cars in the provinces. The period of destocking in China also coincided with a period of restocking the rest of the world, to result in a situation in which stocks were high in the rest of the world by the end of 2019, but optimism was also high, despite the relatively low price, on account of the perceived long-term effect of a major shift in the world economy away from fossil fuels, in particular, and towards electrification and battery technology. Then coronavirus hit and, although it hit the prices of all base metals initially, the effect on lithium was generally much greater than on any of the others, owing to its much greater dependence on the EV sector. Thus, whereas the prices of other base metals recovered from approximately March 2020 onwards, the price of lithium carbonate continued to decline until late October and barely recovered to finish the year close to its low (rather than high as for most other metals) for the period. Unsurprisingly, exploration and mine development was severely curtailed in the period 2018–20, with the result that the long-term thesis in support of lithium remains, to all intents and purposes, unchanged (ie EV demand to account for nearly half of all cars sold by 2030, battery power to increase 13x relative to today and lithium demand to sextuple from 2019 to 2030), but after two years of ‘lost’ time and investment in the interim. As a degree of normality has returned to the world economy in 2021, therefore, there has been a period of restocking – especially in China – superimposed onto a background of previously depleted inventories throughout the supply chain, causing lithium prices to bounce sharply, if also belatedly. Anecdotally, we understand that prices as high as US$13,000/t have been achieved on the spot market in China and that, selectively, the price of lithium carbonate has traded at a premium to lithium hydroxide recently. Similarly, we understand that cathode manufacturers have increased order volumes by 10–20% and, as contracts roll over and new contracts are agreed for 2022 and 2023 (typically in the September to November period), we would naturally expect to observe contract pricing increases on a quarter-by-quarter basis.

Where before we had assumed a long-term price for lithium carbonate of US$10,000/t, we are now predicting a long-term lithium carbonate price of US$12,000/t, supported not only by long-term demand trends but also inflationary price pressures that have acted to increase the cost curve (and therefore the level below which it is difficult for the price to drop).

Lithium hydroxide monohydrate price

We first adopted US$14,021/t as our long-term lithium hydroxide price forecast in February 2019 (see LiOH production beckons, published on 25 February 2019). At the time, both the lithium carbonate price and the lithium hydroxide price were relatively high (see Exhibit 3, below) and the premium of the latter over the former relatively low (Exhibit 4):

Exhibit 3: Lithium hydroxide price and lithium carbonate price, January 2013 to present (US$/t)

Exhibit 4: Lithium hydroxide price premium vs lithium carbonate, January 2013 to present (US$/t)

Source: Bloomberg, Edison Investment Research

Source: Edison Investment Research. Note: Underlying data from Bloomberg and Edison Investment Research.

Exhibit 3: Lithium hydroxide price and lithium carbonate price, January 2013 to present (US$/t)

Source: Bloomberg, Edison Investment Research

Exhibit 4: Lithium hydroxide price premium vs lithium carbonate, January 2013 to present (US$/t)

Source: Edison Investment Research. Note: Underlying data from Bloomberg and Edison Investment Research.

Our February 2019 long-term lithium hydroxide price was derived from a long-term lithium carbonate price of US$12,000/t and an anticipated lithium hydroxide premium of 16.8% per tonne. As discussed previously, the price of lithium carbonate declined after February 2019 and, while the price of lithium hydroxide initially declined in tandem, its premium widened materially. As the reverse has happened since October 2020 and the price of both has risen, the premium of hydroxide over carbonate has once again narrowed (Exhibit 4). Note that in terms of lithium metal units alone, all other things being equal, lithium hydroxide monohydrate would be expected to trade at a discounted price relative to lithium carbonate in the ratio 74:84 based on the different masses of the two salts per mole of lithium ions. The fact that it trades at a premium to lithium carbonate and that it has a lower volatility is, to some extent, indicative of its attractiveness as a raw material for lithium-ion battery manufacturers. It also reflects the fact that the majority of lithium hydroxide production has historically been derived from lithium carbonate produced from brines.

One potential interpretation of this apparent behaviour is that the lithium hydroxide price premium (in percentage terms) is inversely correlated with that of lithium carbonate (ie a high lithium carbonate price correlates to a low lithium hydroxide price premium and vice versa) and this is borne out by statistical analysis. A regression analysis between the two (Exhibit 5, below) reveals a Pearson product moment (correlation) coefficient of -0.62 which, given the number of data points in the analysis, is statistically significant at the 5% level (ie there is less than a 5% chance that the observed relationship occurred by chance).

Exhibit 5: Lithium carbonate price (US$/t) vs lithium hydroxide price premium (%)

Source: Edison Investment Research

However, if data points prior to February 2016 (when the market might be said to have been immature) are excluded, the correlation coefficient improves to a much more significant -0.88, as shown below. Note: effectively, this knocks off the ‘spur’ observed in the lower left of Exhibit 5:

Exhibit 6: Lithium carbonate price (US$/t) vs lithium hydroxide price premium (%), February 2016 to present

Source: Edison Investment Research

As can be seen from the above regression analysis, a long-term lithium carbonate price of US$12,000/t corresponds to a lithium hydroxide price premium of 25.8% and therefore a long-term lithium hydroxide monohydrate price of US$15,091/t. Note that the curve entitled ‘Required’ shows the premium required for the lithium hydroxide price to be US$15,091/t at the lithium carbonate price shown. Thus:

Any long-term lithium carbonate price above US$10,250/t could be consistent with a lithium hydroxide price at or above US$15,091/t.

A long-term lithium hydroxide price of US$15,091/t is consistent with a long-term lithium carbonate price of US$12,000/t and a lithium hydroxide price premium of 25.8% (the intersection of the ‘Required’ curve with the linear best-fit regression line).

A lithium carbonate price above US$13,000/t almost guarantees a lithium hydroxide price above US$15,091/t.

One risk to this analysis is the potential for the lithium hydroxide price to diverge from its historical relationship with the lithium carbonate price. Currently, lithium hydroxide may be formulated either from brines (with the production of lithium carbonate as an intermediate product) or via the alkaline conversion process from spodumene concentrates. Production of lithium hydroxide from brines and therefore via lithium carbonate necessarily requires lithium hydroxide to command a premium price given the expense of the conversion. However, direct production of lithium hydroxide from spodumene concentrate does not. In the event that the market bifurcates into lithium carbonate production from brines for mass-market lithium battery applications (eg mass-market cars) and lithium hydroxide production from spodumene (eg for prestige cars with greater battery power density), the current (close) relationship between lithium carbonate and lithium hydroxide prices may break down and a new relationship be established between the lithium hydroxide price and the price of spodumene concentrate. Note however that the cost to convert spodumene concentrate into lithium hydroxide is currently estimated to be in the order of US$2,500/t lithium carbonate equivalent alone and that the overall AISC for spodumene concentration and conversion into lithium hydroxide is much higher than for brine so, from a margin perspective, it is still entirely possible that lithium hydroxide will maintain its pricing premium relative to lithium carbonate. As discussed previously, readers should note that in terms of lithium metal units alone, all other things being equal, lithium hydroxide monohydrate would be expected to trade at a discounted price relative to lithium carbonate in the ratio 74:84 based on the different masses of the two salts per mole of lithium ions. On the other hand, lithium hydroxide remains a ‘premium’ product appropriate for use in higher-specification, higher-power density batteries destined for use in premium automobiles.

Until any reconfiguration of the market therefore and as a consequence of the above analysis, we have increased our long-term lithium hydroxide price to US$15,091/t (cf US$14,021/t previously) to reflect a long-term lithium carbonate price of US$12,000/t (cf c US$10,000/t previously). Note that this compares to the pricing assumed in its Phase 1 Plant project DFS (dated 28 May 2020 and provided by BMI) of US$13,669/t lithium hydroxide over the life of the project, reverting to a long-term real price of US$12,910/t from 2030.

Valuation

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$293m (5.7c/share on a pre-funding basis and 4.8c/share on a post-FY21 equity funding basis) at the current foreign exchange rate of A$1.3267/US$ (cf A$1.2831/US$ at the time of our last note in April 2021).

In our report Gold stars and black holes, published in January 2019, we calculated a mean enterprise value for companies with projects at the DFS stage of development of 30.9% of project net present value (NPV), ranging up to 133.5%. This alone would imply a pre-funding valuation for Lepidico of 1.7c/share (ie subscribers to the rights/entitlement offer at 1.3c/share bought into the project at a below average price) and a post-FY21 equity funding valuation for Lepidico of 1.5c/share, ranging up to 6.4c/share (excluding cash).

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 per year.

Our company model assumes that Lepidico will raise the balance of the required equity of A$18.0m (cf A$15.1m previously) 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 142% premium to the current share price of 1.2c. However, given that Lepidico’s shares reached 2.8c in March 2021 and 3.4c in January 2021 and that they have nevertheless appreciated by 100% from their level of 0.6c in June 2020 and by 20% from their level of 1.0c in December 2020, we do not believe that a medium-term share price of 2.9c is unreasonable, 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 new 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 under ‘Future equity funding price’ in the ‘Sensitivities’ section of the note, below.

In our last note on the company (see Fine tuning the mine and chemical plant, published 21 April 2021), we calculated a value for Lepidico’s shares of 4.48c plus 0.29c 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 4.76c/share. We have now updated our valuation to take account of the following in our financial model:

the current one for seven rights/entitlement offer to raise A$9.6m via the issue of 741.1m shares (plus 370.6m options) at a price of 1.3c/unit;

the top-up placement to raise an additional A$2.9m via the issue of an additional 223.1m shares plus 111.5m options also at 1.3c/unit;

an expanded A$18.0m equity raise in FY22 (cf what would have otherwise been A$15.1m on a like-for-like basis previously);

an updated long-term lithium hydroxide price of US$15,091/t (cf US$14,021/t previously); and

an updated current and future FX rate of A$1.3267/US$ (cf A$1.2831/US$ previously).

In the wake of these changes, our (discounted) valuation of Lepidico’s future (maximum potential) dividend stream to shareholders has increased by 4.9% to 4.70c/share in FY21, rising to a peak of 6.89c/share in FY25 when we estimate that the company could pay a maiden dividend, as shown in the graph below:

Exhibit 7: Edison estimate of future Lepidico EPS and (maximum potential) DPS

Source: Edison Investment Research

To this valuation of 4.70c/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 0.26c/share to result in a total value for Lepidico’s shares of 4.96c/share (cf 4.76c/share previously), based solely on its Phase 1 project. A ‘bridge’ chart, showing the transition in valuation from 4.76c/share to 4.96/share by component is shown below.

Exhibit 8: Lepidico valuation bridge, April 2021 to June 2021

Source: Edison Investment Research

To this may then be added a potential risk-adjusted 0.61–1.53 cents (post-FY21 equity funding) for a conceptual 20,000tpa LCE Phase 2 plant (see pages 5–7), to take the total conceptual aggregate valuation to 5.57–6.49 cents per share.

Sensitivities

Future equity funding price

Our financial model assumes that Lepidico will raise the balance of the equity required of A$18.0m in FY22 (cf A$27.5m previously) at a share price of 2.9c in order to achieve an (unchanged) future, maximum net debt:equity ratio of 66:34. Exhibit 9 demonstrates the sensitivity of this valuation to variations in the price at which this future equity is raised.

Exhibit 9: Lepidico valuation sensitivity to future equity funding price (Australian cents per share)

Equity funding price

1.00

1.20

1.50

2.00

2.50

2.90

3.00

3.50

4.00

4.50

5.00

5.16

Lepidico valuation

4.24

4.41

4.58

4.77

4.89

4.96

4.97

5.04

5.08

5.12

5.15

5.16

Source: Edison Investment Research

Exhibit 10: Financial summary

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

 

 

2018A

2019A

2020A

2021E

2022E

Total revenues

 

 

171

2

47

4,084

0

Cost of sales

 

 

0

0

0

0

(22,464)

Gross profit

 

 

171

2

47

4,084

(22,464)

SG&A (expenses)

 

 

(5,284)

(4,006)

(4,904)

(2,976)

(3,146)

Other income/(expense)

 

 

0

0

0

0

0

Exceptionals and adjustments

Exceptionals

 

(2,171)

(1,150)

(2,740)

(338)

0

Depreciation and amortisation

 

 

(6)

(8)

(1,208)

(1,154)

(1,154)

Reported EBIT

 

 

(7,290)

(5,162)

(8,805)

(383)

(26,765)

Finance income/(expense)

 

 

70

57

17

0

88

Other income/(expense)

 

 

0

0

0

0

0

Exceptionals and adjustments

Exceptionals

 

0

0

(2,026)

0

0

Reported PBT

 

 

(7,220)

(5,105)

(10,814)

(383)

(26,676)

Income tax expense (includes exceptionals)

 

 

0

0

696

151

0

Reported net income

 

 

(7,220)

(5,105)

(10,118)

(232)

(26,676)

Basic average number of shares, m

 

 

2,624

3,272

4,568

5,006

6,472

Basic EPS (c)

 

 

(0.0)

(0.0)

(0.0)

(0.0)

(0.0)

 

 

 

 

 

 

 

 

Balance sheet

 

 

Property, plant and equipment

 

 

27

20

1,904

1,993

49,227

Goodwill

 

 

0

0

0

0

0

Intangible assets

 

 

19,027

22,925

23,870

22,627

22,627

Other non-current assets

 

 

730

27,469

42,798

42,798

42,798

Total non-current assets

 

 

19,783

50,414

68,573

67,418

114,652

Cash and equivalents

 

 

4,860

13,660

4,793

17,707

17,707

Inventories

 

 

0

0

0

0

0

Trade and other receivables

 

 

712

1,869

1,767

227

6,864

Other current assets

 

 

0

0

0

0

0

Total current assets

 

 

5,572

15,529

6,560

17,934

24,571

Non-current loans and borrowings

 

 

0

3,276

5,215

39

59,972

Other non-current liabilities

 

 

0

0

10,055

10,055

10,055

Total non-current liabilities

 

 

0

3,276

15,271

10,094

70,027

Trade and other payables

 

 

804

10,940

565

396

2,474

Current loans and borrowings

 

 

0

0

0

0

0

Other current liabilities

 

 

51

86

108

108

108

Total current liabilities

 

 

856

11,026

672

503

2,582

Equity attributable to company

 

 

24,500

53,252

52,404

68,068

59,927

Non-controlling interest

 

 

0

(1,610)

6,785

6,687

6,687

 

 

 

 

 

 

 

 

Cashflow statement

 

 

Profit for the year

 

 

(7,220)

(5,105)

(10,118)

(232)

(26,676)

Taxation expenses

 

 

0

0

(696)

(151)

0

Depreciation and amortisation

 

 

6

8

1,208

1,154

1,154

Share based payments

 

 

2,138

520

1,027

338

0

Other adjustments

 

 

2,066

664

4,716

0

0

Movements in working capital

 

 

(28)

410

(1,509)

1,371

(4,558)

Interest paid / received

 

 

0

0

0

0

0

Income taxes paid

 

 

0

0

696

151

0

Cash from operations (CFO)

 

 

(3,038)

(3,504)

(4,676)

2,631

(30,080)

Capex

 

 

(3,057)

(6,251)

(7,452)

(1,244)

(48,388)

Acquisitions & disposals net

 

 

110

0

416

1,244

0

Other investing activities

 

 

0

0

0

0

0

Cash used in investing activities (CFIA)

 

 

(2,947)

(6,251)

(7,036)

0

(48,388)

Net proceeds from issue of shares

 

 

7,555

18,462

3,523

15,460

18,535

Movements in debt

 

 

0

0

0

(5,176)

59,933

Other financing activities

 

 

0

0

0

0

0

Cash from financing activities (CFF)

 

 

7,555

18,462

3,523

10,283

78,468

Increase/(decrease) in cash and equivalents

 

 

1,570

8,707

(8,190)

12,914

0

Currency translation differences and other

 

 

(17)

93

(678)

0

0

Cash and equivalents at end of period

 

 

4,860

13,660

4,793

17,707

17,707

Net (debt) cash

 

 

4,860

10,385

(422)

17,668

(42,265)

Movement in net (debt) cash over period

 

 

1,553

5,525

(10,807)

18,091

(59,933)

Source: Lepidico sources, Edison Investment Research


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 research department of Edison 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.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). 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.

New Zealand

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

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

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.

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

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.

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

1185 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

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

1185 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

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 research department of Edison 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.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). 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.

New Zealand

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

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

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.

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

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.

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

1185 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

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

1185 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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