Lithium X Energy — Update 13 October 2016

Latin America, through its natural abundance and concentration of lithium in numerous salt lakes (salars), produced 48% of global lithium supply based on USGS estimates for 2015. The main contributors to Latin American production were SQM, Albemarle (previously by Rockwood), FMC Corp and new entrant Orocobre. Lithium X is well positioned with its Sal de Los Angeles project in Argentina and its Clayton Valley, Nevada, projects. Both regions play to the expanding North American electric vehicle market and to the lower-carbon future legislated in the Paris COP 21 climate agreement and recently ratified by the two largest polluters, China and the US.

Lithium X’s flagship project is called Sal de Los Angeles and covers 95% of the Diablillos salar (salt lake) in the Salta province in north-west Argentina. The company currently owns 50% of this project with an option to increase this to 80% (see pages 11 & 12). The brine is enriched not only in lithium, but also potassium, a saleable product in its own right and a likely by-product credit to any future brine operation. No historical lithium extraction from Los Diablillos has occurred, and only small-scale mining of the borate mineral ulexite has taken place via <1m deep pits. The project was most recently investigated by Rodinia Lithium, which spent US$17.2m on the project between 2010 and 2015. Works comprised 140 auger holes, 23 reverse circulation holes, seven diamond holes and 16 monitoring and pumping well tests. Gravity and seismic surveys were also conducted over the area.

The Diablillos salar is located east of Ratones Hill at an altitude of 4,000m above mean sea level and is situated within an endorheic or closed basin, meaning that the only outflow from the basin occurs as evaporation, and inflows are primarily from only one source – the Diablillos River. Rainfall is minimal with anecdotal records from third parties suggesting annual rainfall of only 70-80mm pa. Los Diablillos brine fluids are stated (Rodinia Lithium 2011 PEA) as containing 16% salts (by weight) and 84% water. The basin itself covers 416km2 of which 33km2 correspond to the salar environment.

The Diablillos salar is enriched in lithium, borates and potash. In 2011, the previous owners of the project, Rodinia Lithium, commissioned a preliminary economic assessment (PEA) that contemplated an operation that produces all three. We understand that Lithium X places little value on borates due to the minimal value they currently fetch at market. The newly announced resource estimate does state a sizeable potash component that could be extracted alongside processing brine fluids for the lithium component.

A historical resource estimate was completed by Rodinia Lithium and given in an announcement dated 1 April 2011. The historical resource stated 2.8Mt LCE were contained solely within the inferred resource category. Since acquiring the deposit, Lithium X has undertaken additional drilling and technical work to upgrade a portion of the resource from inferred to indicated. With 1Mt LCE now classified as indicated, Lithium X is now able to initiate work to complete a feasibility study. Feasibility studies cannot be signed off if only inferred resources are stated; indicated and measured resource categories are the only categories with a high enough confidence level to be converted into ore reserves under NI 43-101 guidelines.

Lithium X’s updated mineral resource estimate, which follows current Canadian NI 43-101 guidelines, is provided in Exhibit 2 below. This revised estimate has incorporated new pump test data undertaken by SRK Consultants and FloSolutions and also some data from drilling on the northern half of the salar where the company states the resource is still open to further expansion.

Critical to the success of any lithium operation is the production of commercial-scale volumes of lithium end products prior to full-scale development. As with many technology metals, from rare earths to zirconium, consistency and quality are key and products must meet strict criteria, especially if used for the production of lithium-ion batteries that are required to last the 100,000+ mile term of a road car. The ponding facility trial will also provide Lithium X with key data, which is critical to understanding evaporation rates at the project’s altitude of c 4,000m amsl (metres above mean sea level).

On 20 April 2016 Lithium X completed its acquisition of an initial 50% interest in Potasio y Litio de Argentina (PLASA), which owns 100% of Sal de Los Angeles, from Aberdeen International. PLASA entered into a JV agreement with Salta Exploraciones (SESA) for the development of a pilot lithium carbonate plant at Sal de Los Angeles. The pilot plant requires final permit approvals to be obtained before production can start. Once pilot plant production has started it will run for 25 years at a maximum rate of 2,500tpa LCE unless decided by the governing committee to increase to 5,000tpa LCE.

Lithium X’s second project comprises two claim areas, situated directly north (Clayton Valley North) and south (Clayton Valley South) of Albemarle’s Silver Peak lithium brine operation.

The history of Silver Peak dates back to the latter half of the 19th century when a mine was built to extract gold, silver and other minerals and helped to establish a settlement of the same name in 1864. The Silver Peak mine provides an indication of the scale of a future brine well-field and associated evaporation ponds for any future operation owned by Lithium X in the area. Silver Peak pumps brines from its well-field to the evaporation ponds, which cover c 4,000ha. The brine naturally evaporates and concentrates using only sunlight. Once the brine is suitably concentrated in salts, it is pumped to a processing plant where it is treated with soda ash used to precipitate the lithium carbonate.

The following sections outline Lithium X’s ownership of each claim area and any obligations it has over their development and funding.

Clayton Valley North is at the exploration stage, with Lithium X undertaking a Phase 1 exploration programme, comprising the drilling of one hole with a further three holes contingent on the results of the first. Lithium X will also investigate the lowest gravel aquifer, which management states shows “strong potential” in terms of brine content.

The lower gravel aquifer is expected to be intersected at a depth of approximately 350m, which we consider should take 10 days to two weeks to complete, assuming minimal stoppages and drilling on only one shift.

Lithium X has an option to acquire a 100% interest in the NSP Lithium Claim Group from Clayton Valley Lithium (CVL), a private company. In order to exercise this option Lithium X must:

Other payments that are or could be due by Lithium X to CVL are:

Lithium X completed its acquisition of the Clayton Valley South project on 25 February 2016 paying US$0.35m and issuing 4m shares to the vendor. The name of the vendor was not stated. In connection with this acquisition, Lithium X also issued a finder’s fee of 295,000 Lithium X shares, which have now passed the expiration holding date (26 June 2016). Raise at least US$3m via a non-brokered private placement.

The Clayton Valley South project covers an area totalling approximately 9,540 acres (3,861 hectares). The property is strategically located between and contiguous with the Silver Peak lithium mine operated by Albemarle Corp. on the northern boundary, the Clayton Valley South project operated by Pure Energy Minerals Ltd to the east and the Neptune property owned by Nevada Sunrise Gold Corporation to the west.

An exploration model will be crucial for Lithium X to understand the complex basin characteristics governing brine deposit formation as well as their development. Such a model would include the identification of prospective aquifers as well as structural controls on ground water flow, recharge rates, path ways/conduits and analysis of impurities such as magnesium, iron and sulphur (as sulphate).

As can be seen in the following exhibit, Sal de Los Angeles has very favourable levels of magnesium and sulphate relative to lithium. The key magnesium to lithium ratio for Sal de Los Angeles is 3.8, 64% below the simple average for the peer group. The level of sulphates expressed as the SO4/Li ratio in the following exhibit also shows the project to have a very favourable ratio, 52% below the mean and 39% and 53% below Orocobre and Lithium America’s, respectively. The latter is notable as these projects are located in the same region as the Sal de Los Angeles project.

Newly appointed Lithium X COO Eduardo Morales, a past-CEO of Rockwood Latin America before its takeover, has considerable local expertise in the development of brines similar to Los Angeles. Specifically, his expertise involves the development of South America’s first producing lithium carbonate plant. His experience will be invaluable as the company looks to firm up its understanding of the technical aspects of the Sal de Los Angeles project. His responsibilities will include addressing the development characteristics particular to brine deposits, such as:

Below we note the outcome of the 2011 Preliminary Economic Assessment (PEA) on the Sal de Diablillos salar. This PEA, completed by SRK consulting and commissioned by Rodinia Lithium, is subject to revision by Lithium X as it was compiled at a time when lithium demand related as much to its uses in electronic devices such as tablets and smart phones as its uses in electric vehicles. With a step change in demand related to electric vehicle use, which is expected to accelerate, the scope of any pre-development lithium project needs to account for the current and future size of the electric vehicle market.

We also note that the PEA included revenues and costs attributed to the production and sale of boric acid, which we understand will not form part of the feasibility study’s economic analysis.

The PEA contemplated a 15ktpa LCE plant, operating over a 20-year life-of-mine, costing a total of US$120m to develop (with a further US$55m incurred as sustaining capital over life-of-mine). The PEA also assumes production of 52ktpa of potash and 18ktpa of boric acid. Lithium carbonate, potash and boric acid price assumptions were US$5,500/t, US$620/t and US$1,150/t respectively. The estimated average LCE and potash operating costs were US$2,280/t LCE and US$253/t LCE, respectively. Boric acid processing is considered incidental to processing LCE and potash and has no direct cost of production. The total operating cost per LCE tonne on average is therefore US$2,533/t.

After royalties (3% of gross revenues) and taxes (35%) and on the basis of the above data inputs, the 2011 Rodinia-commissioned PEA returned a positive NPV8 of US$560.8m and an internal rate of return of 34%.

We would expect, purely on the basis of current LCE prices and the anticipated future strength of prices for this product alone, that Lithium X’s upcoming economic assessment of this project should exceed that of the historic 2011 SRK authored report. We note from a number of industry sources that lithium carbonate prices are on and off-contract at or above US$10,000/t. However, we caution as to the use of this price over the long term due to risks associated with a lack of future demand driven by a slower than anticipated take up of electric vehicles and the potential for future oversupply. On a per Lithium X share basis, this undiluted and unfinanced PEA NPV8 outcome is worth C$7.57 (US$5.75). This assumes a mine start-up date of 2020. We adjust the capex assumption of US$120m given in the PEA on the basis that it is far too low compared with similar projects in the region and use Orocobre’s US$207m initial capex estimate as given in its 2011 feasibility study on its Salar de Olaroz project as a guide, adjusted to include a contingency amount of US$22.1m, also stated in the 2011 feasibility study. The total US$229.1m capex figure used by Orocobre provides for a 17.5ktpa LCE operation (which is now in production following some further minor capital injections to rectify certain process plant bottlenecks). Further, a 17.5ktpa operation is comparable to the 15.0ktpa operation outlined in the 2011 Diablillos PEA.

Factoring in assumed share dilution based on 50% of our capex assumption of US$229.1m raised in equity at the company’s prevailing share price of C$2.30 results in a ‘post-dilution’ value of C$4.50 (US$3.42) per share (Exhibit 8).

The above rudimentary analysis of the potential post-dilution value of Sal de Los Angeles cannot factor in future resource expansions or the eventual size of reserve (although we note the current new resource estimate factors in certain parameters that guide to the amount of recoverable brine), the cost of eventual development based on changes to the scope of the PEA or the costs and revenues associated with boric acid production (which may well be excluded, though we note boric acid production is incidental to lithium production). However, it does provide an illustrative order-of-magnitude view of the project’s potential value. It suggests that the level of production achievable from Sal de Los Angeles (based on the hydrogeochemical and hydrogeological characteristics given in the PEA) will warrant a material revaluation of Lithium X’s shares. A feasibility study on the project, which is currently stated to run to at least end 2017, will significantly de-risk the project and provide significantly more robust cost inputs and a far more defined project scope.

An assessment of EV/t per project is provided in Exhibit 9 and currently shows that, based on the inclusion of the new Sal de Los Angeles inferred and indicated resource, Lithium X ranks in value alongside its regional peer Lithium Americas, yet has only just provided to market a code-compliant resource estimate. We consider Lithium X’s current market valuation reflects confidence by investors in the region in which Diablillos is situated, which is an established lithium-producing area already host to a number of operating lithium brine operations.

Lithium X also has a strong technical management team that brings invaluable knowledge of development brine deposits and, crucially, lithium carbonate plants in South America. Lithium processing is still relatively immature, with pilot plant testing critical to guaranteeing project revenues. There are relatively few processing plants and the recent issues surrounding Orocobre’s ramp up (caused by a number of bottlenecks relating to “physical and equipment limitations and the development of good-working practices”) to full production are an indication of the complexities involved in successfully producing lithium carbonate.

Exhibit 10 provides a visual overview of lithium project resource sizes and grades (given in LCE terms). A general pattern exists in that the generally smaller and higher-grade hard rock deposits group together on the left, with the larger, but lower-grade clay and brine-based deposits situated centre to centre-right. The historical Sal de Los Angeles resource compares very favourably with the lithium grade of its local peers (Salar de Olaroz and Sal de Vida); while its resource size is on the low side compared to its local peers. However, the scale of the Diablillos brine resource is such that it would likely be able to support an appropriately sized (15-20ktpa) lithium operation for a period of greater than 20 years.

Lithium X was incorporated in Alberta on 28 August 1997 and moved to British Columbia effective 11 May 2011; it trades under the symbol LIX on the Canadian Venture Exchange. The following bullet points provide a summary of key historical events:

At 31 March 2016 Lithium X had C$10.8m in cash. Post-period the company completed, via the issue of 6.1m new shares at C$1.65 each, a non-brokered private placement for a further C$10m (before costs), and C$9.4m (after finder’s fees of C$0.6m). After project and central costs, the company has stated that it currently has “over C$18m cash in-hand” (28 July announcement).

The company forecasts it will spend C$5.5m on Sal de Los Angeles over the coming year. This has already provided for an updated NI 43-101 resource estimate at Sal de Los Angeles, and will fund the completion of a feasibility study and costs incurred with the ponding facility trial (ie C$3.3m, after which Lithium X will own 80% of the project).

The company has budgeted a further C$0.96m to provide an inferred resource estimate for its Clayton Valley project in Nevada and has an annual G&A budget totalling C$1.8m.

Therefore, a total of C$8.3m in expected expenditure can be easily met via the company’s current stated cash resources.