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Research: Metals & Mining
Lepidico recently announced a series of impressive drill results at Helikon 4 (including 34.8m at 1.25% Li2O) that extend the zone of mineralisation there both down dip and along strike to the east towards Helikon 3 and Helikon 2. Drilling will continue, with a view to upgrading the mineral resource estimate at Karibib into the measured and indicated categories, which will form the basis of a new mine plan at Karibib, potentially extending the Phase 1 operating life of the project from 14 to 20 years and complementing the company’s chemical plant front-end engineering and design (FEED) process, which is scheduled for completion in November, once procurement optimisation and design refinements are complete. A final investment decision on the project is then anticipated to be made in early Q1 CY23. This note seeks to quantify the financial effects of incorporating the potential resource at Helikon 4 into Karibib’s mine plan.
Lepidico |
Quantifying exploration’s dividends |
Helikon 4 drilling results |
Metals and mining |
6 October 2022 |
Share price performance
Business description
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Analyst
Lepidico is a research client of Edison Investment Research Limited |
Lepidico recently announced a series of impressive drill results at Helikon 4 (including 34.8m at 1.25% Li2O) that extend the zone of mineralisation there both down dip and along strike to the east towards Helikon 3 and Helikon 2. Drilling will continue, with a view to upgrading the mineral resource estimate at Karibib into the measured and indicated categories, which will form the basis of a new mine plan at Karibib, potentially extending the Phase 1 operating life of the project from 14 to 20 years and complementing the company’s chemical plant front-end engineering and design (FEED) process, which is scheduled for completion in November, once procurement optimisation and design refinements are complete. A final investment decision on the project is then anticipated to be made in early Q1 CY23. This note seeks to quantify the financial effects of incorporating the potential resource at Helikon 4 into Karibib’s mine plan.
Year end |
Total revenues |
PBT |
Cash from |
Net cash/(debt)* |
Capex |
06/21 |
4.1 |
(0.3) |
1.0 |
14.7 |
(0.6) |
06/22 |
0.0 |
(7.9) |
(5.5) |
1.0 |
(8.6) |
06/23e |
0.0 |
(3.6) |
(2.7) |
(112.8) |
(172.0) |
06/24e |
0.0 |
(17.5) |
(17.1) |
(307.2) |
(177.3) |
Note: *Includes lease liabilities; historical numbers include Desert Lion Energy convertible.
More production earlier and for longer
As well as extending the life of mining operations, the incorporation of newly intersected material at Helikon 4 into the Karibib mine schedule will defer the cut-back of the Rubicon open pit by six years, while producing higher-grade, higher-margin concentrate for longer for onward processing at Lepidico’s Abu Dhabi chemical plant.
Buffers against potential capex inflation
We estimate that the extension of the mine life at Karibib – with attendant increases in lithium hydroxide equivalent production in Abu Dhabi – will have increased the value of the integrated mine and chemical plant project by 33.6%, or US$128.0m relative to our previous valuation (see our note, Coming in sight of the Rubicon, published on 5 August 2022). This increase is moderated by assumed capex and opex inflation of 50% and 15%, respectively, to result in a final project value of US$379.7m, or A$588.3m (9.0c/share), which is just 0.3% below our previous valuation, but still 71.8% above Lepidico’s May 2020 DFS NPV8 of US$221m.
Valuation: 6.71–7.66 Australian cents per share
On the basis of a mine plan extended by six years, as well as changes to our capex and opex assumptions (among other things), we have revised our valuation of Lepidico to 6.05c/share (5.81c/share with equity dilution performed at the currently prevailing share price of 2.4c) plus a potential, risk adjusted 0.66–1.61c/share (fully diluted) for a conceptual 20,000tpa LCE Phase 2 Plant, to take our total aggregate conceptual valuation of the company to 6.71–7.66 cents per share (cf 7.29–8.21 cents per share previously).
Exploration begets production
On 23 September, Lepidico announced a series of impressive drill results (including 34.8m at 1.25% Li2O) that extend the zone of mineralisation at its Helikon 4 prospect at Karibib in Namibia both down dip and along strike to the east towards Helikon 3 and Helikon 2. Drilling will continue, with a view to upgrading the mineral resource estimate at Karibib in October into the measured and indicated categories and extending the Phase 1 operating life of the project from 14 to 20 years and potentially beyond. The upgraded resource will form the basis of a new mine plan at Karibib that will complement the company’s chemical plant front-end engineering and design process, which is now scheduled for completion in November once procurement optimisation and design refinements are complete. A final investment decision on the project will then be made, with timing expected to be in early CY23. In the meantime, Lepidico is continuing to manage development risk proactively.
Extended Phase 1
Lepidico’s current resource at Helikon 4 amounts to 1.5Mt at a grade of 0.38% Li2O in the inferred category, whereas the weighted average grade from the 2022 drill programme is in excess of 0.6% Li2O. By-product (caesium, rubidium and potassium) grades have yet to reported, but are expected to be elevated versus the life-of-mine average and similar to those at Helikon 1. At the same time, a pit optimisation there indicates a strip ratio of less than 2:1, which compares with a life of mine average strip ratio of the project (as per Lepidico’s May 2020 DFS) of 3.8 to one. As such, the inclusion of upgraded mineral resources from the 2022 programme in an updated and modified mine plan holds out the possibility of the project mining and processing an additional 2.5Mt – or six years’ worth – of higher-grade material (Edison estimate, including surface stockpiles) in the earlier years of the project’s execution and delaying the proposed cut-back of the Rubicon pit (hitherto anticipated around year nine of the project). A comparison of the potentially extended mine plan – as conceived by Edison – and the original is as follows, with an additional six years of mining and production indicated between FY29 and FY34, inclusive, effectively interposed between year 4 and year 5 of the original mine plan:
Exhibit 1: Karibib ore and waste mining (extended) |
Exhibit 2: Karibib ore and waste mining (original) |
|
|
Source: Edison Investment Research |
Source: Lepdico, Edison Investment Research |
Exhibit 1: Karibib ore and waste mining (extended) |
|
Source: Edison Investment Research |
Exhibit 2: Karibib ore and waste mining (original) |
Source: Lepdico, Edison Investment Research |
Readers should note the deferral of the Rubicon open pit cut-back from year 9 of the project (CY31 in the original schedule in Exhibit 2) to year 14 (FY39 of the extended schedule in Exhibit 1) as an immediate consequence of incorporating the material implied by Lepidico’s 2022 exploration programme into the Karibib mine plan. In addition, since the additionally mined material will be of relatively high grade, it will be suitable for processing ahead of the expansion in plant capacity and the processing of lower grade ore (originally anticipated in year 5 of the project):
Exhibit 3: Karibib ore processing (extended) |
Exhibit 4: Karibib ore processing (original) |
|
|
Source: Edison Investment Research |
Source: Lepidico, Edison Investment Research |
Exhibit 3: Karibib ore processing (extended) |
|
Source: Edison Investment Research |
Exhibit 4: Karibib ore processing (original) |
Source: Lepidico, Edison Investment Research |
Consequently, the extended mine plan will produce higher-grade, higher-margin concentrate for onward processing in the Abu Dhabi chemical plant for longer:
Exhibit 5: Karibib extended mine plan concentrate production and grade |
|
Source: Edison Investment Research |
While by-product grades for the additional material drilled at Helikon 4 have not been explicitly reported, in as much as they are known (or can be derived from Lepidico’s original DFS in May 2020), the grades of mined caesium and rubidium, in particular, can be seen to correlate closely with the grade of mined lithium:
Exhibit 6: Karibib caesium grade versus lithium grade |
Source: Edison Investment Research |
On the basis of these correlations, we may estimate the output of Lepidico’s Abu Dhabi chemical plant, over the life of the extended project, to be as follows:
Exhibit 7: Lepidico chemical plant forecast production (tonnes lithium hydroxide monohydrate equivalent per annum) |
|
Source: Edison Investment Research. Note: Conversion into lithium hydroxide monohydrate equivalent performed on the basis of May 2020 DFS prices. Note, that Helikons 2 and 3 which, while smaller tonnage (currently), nevertheless offer potential for further, good-quality multi-year additions to either mine life or a Phase 2 project. |
Capex and opex
As has been well documented, the western world in general and the mining world in particular are in the midst of a cost of living crisis, which is manifesting itself in the case of the latter in the form of inflated capital and operating cost estimates. While the extent of this inflation is different from project to project, a brief comparison of recent project feasibility studies would suggest that, in the case of capital costs, it is running in the order of 25–50% relative to prior assumptions. At the time of its DFS in May 2020, capital expenditure for the integrated Karibib mine and chemical plant was estimated at US$139.0m, including a 13% contingency, but excluding lease costs, which were included in C1 cash costs and therefore treated as an operating, rather than a capital, expense. Subsequently, Edison increased its estimate of this capital expenditure by US$10.0m (plus a further US$1.3m contingency) to reflect the adoption of plate and frame filters and enlarged crystallisers in the design scope of the chemical plant (see Big swings and small roundabouts, published on 16 February 2022) to take the total to US$150.3m.
In order to be relatively conservative therefore, in the light of recent developments, Edison has opted to increase its estimate of pre-production capital costs by an additional 50%, from US$150.3m, to US$225.4m. We have also increased our operating cost estimates by 15%.
Valuation
Assumptions
In addition to the changes in operational and financial assumptions detailed above, we have made the following adjustments to our financial model of Lepidico:
■
We have delayed the implementation of the project by six months to reflect the delay in the company’s making a final investment decision on the project from September 2022 to early Q1 CY23.
■
We have brought forward chemical plant capex into FY23 (from FY24) so that the mine and chemical plant are developed, to all intents and purposes, concurrently, in anticipation of concentrator commissioning in mid-CY24 and chemical plant commissioning in late CY24 and ramp-up to full production throughout FY25.
■
We have maintained the size of Lepidico’s presumed FY23 equity financing at US$41.8m (or A$64.7m at the current forex rate). We have assumed that this will take place at an unchanged share price of A$0.028/share, given that any Phase 1 development equity will be raised after debt finance is arranged, which might reasonably be expected to lead to a re-rating of the company’s shares. Note that a sensitivity analysis of Lepidico’s valuation to changes in the assumed price of equity funding is provided in the Sensitivities section on page 7 below.
■
We have updated our forex rate from A$1.4391/US$ to A$1.5494/US$.
Project valuation
Lepidico’s DFS (see 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$342m (5.3c/share) on a pre-funding basis at the current foreign exchange rate of A$1.5494/US$. At that time, we valued the project at US$210.4m using the same inputs as the DFS, or US$205.8m using our own input assumptions (including a 20% minority interest in the Karibib mining operation). After a number of adjustments – most particularly relating to the long-term lithium price (see Big swings and small roundabouts, published on 16 February 2022) – at the time of our last update note (Coming in sight of the Rubicon, published on 5 August 2022), we valued Lepidico’s integrated project at US$380.8m, or A$590.0m (9.1c/share), before funding. On the basis of the extended mine plan alone, this valuation increased by a further 33.6% to US$508.8m, or A$788.3m (12.1c/share), before being moderated by capex and opex inflation to a final value of US$379.7m, or A$588.3m (9.0c/share) – almost exactly in line with our previous valuation, but still 71.8% in excess of Lepidico’s May 2020 DFS NPV8 of US$221m. A bridge chart of the evolution of the project’s valuation by component part over time is as follows:
Exhibit 8: Karibib project valuation bridge, July 2020 to October 2022 (US$m) |
Source: Edison Investment Research. *Includes 20% minority interest in Namibian mining and concentration operation. |
Company valuation
Our valuation of Lepidico’s equity varies from our value of the integrated Karibib mining and chemical plant project, among other things, on account of the following:
■
Our valuation of the project is conducted on the basis of discounted cash flows (DCF) at a discount rate of 8% (to be consistent with the original DFS), whereas our valuation of the company is based on the present value of future dividends potentially payable to shareholders in Australian dollars, using a discount rate of 10%.
■
Our valuation of the company automatically takes into account anticipated changes in working capital requirements (based on assumed creditor, debtor and stock days), which is also excluded from our DCF valuation model.
■
Our equity valuation of the company is necessarily stated after debt interest payments, which is not the case for our DCF valuation of the project, where the cost of debt is implicitly embedded in the discount rate applied to cash flows.
■
Our company valuation assumes ongoing corporate costs in the order of A$3.1m per year.
As a consequence, changes in the project valuation are dampened when applied at the company level
In our last note on the company, we calculated a value for Lepidico’s shares of 6.45c plus 0.22c 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 6.66c/share. In the wake of the changes discussed above, our discounted valuation of Lepidico’s future (maximum potential) dividend stream to shareholders is now 5.67c/share, rising to a peak of 9.26c/share (cf 8.58c/share previously) on the cusp of the company’s (assumed) first material dividend in FY29, as shown in the chart below:
Exhibit 9: Edison estimate of future Lepidico EPS and (maximum potential) DPS |
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Source: Edison Investment Research |
To this valuation of 5.67c/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 now estimate at 0.38c/share (fully diluted), to result in a total value for Lepidico’s shares of 6.05c/share (cf 6.66c/share previously), based solely on its Phase 1 project. A bridge chart, showing the major components in the evolution of the valuation from 6.66c/share to 6.05/share is provided in Exhibit 10, below.
Exhibit 10: Lepidico valuation bridge, August 2022 to October 2022 |
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Source: Edison Investment Research |
To this valuation of 6.05c/share may then be added a potential risk-adjusted 0.66–1.61c/share (fully diluted) for a conceptual 20,000tpa LCE Phase 2 Plant (see our note, Phase 2 coming into view, published on 18 June 2021), to take our total aggregate conceptual valuation of Lepidico to 6.71–7.66 cents per share (cf 7.29–8.21 cents per share previously).
Sensitivities
The three principal risks to which our valuation of Lepidico is exposed are: 1) the long-term price of lithium hydroxide; 2) the price at which it raises future equity; and 3) capex inflation. The effects of variations in the long-term price of lithium hydroxide from the one currently assumed (US$18,000/t) are shown in the table below.
Exhibit 11: Lepidico valuation sensitivity to the long-term price of lithium hydroxide (US$/t)
Lithium hydroxide price (US$/t) |
18,000 |
20,000 |
25,000 |
30,000 |
35,000 |
40,000 |
45,000 |
50,000 |
Lepidico valuation (Australian cents per share) |
6.05 |
6.80 |
8.65 |
10.50 |
12.36 |
14.21 |
16.07 |
17.92 |
Change cf ‘base case’ (%) |
u/c |
+12.4 |
+43.0 |
+73.6 |
+104.3 |
+134.9 |
+165.6 |
+196.2 |
Source: Edison Investment Research
At the same time, our financial model assumes that Lepidico will raise US$41.8m/A$64.7m (gross) in FY23 at an unchanged share price of 2.8c (cf Lepidico’s prevailing share price of 2.4c at the time of writing) and Exhibit 12 demonstrates the sensitivity of our valuation to variations in this equity price:
Exhibit 12: Lepidico valuation sensitivity to future equity funding price (Australian cents per share)
Equity funding price |
1.50 |
2.00 |
2.40 |
2.50 |
2.80 |
3.00 |
3.50 |
4.00 |
5.00 |
6.00 |
7.00 |
7.14 |
Lepidico valuation |
4.97 |
5.50 |
5.81 |
5.88 |
6.05 |
6.16 |
6.37 |
6.55 |
6.80 |
6.99 |
7.12 |
7.14 |
Source: Edison Investment Research
Readers should note that it is also possible that Lepidico may choose to source all (or a portion) of this future equity funding requirement from a strategic partner after debt funding has already been secured, in which case it is possible/likely that a higher equity price could be supported.
Finally, our valuation of Lepidico is sensitive to any further changes in capex above and beyond those already assumed to the following extent:
Exhibit 13: Lepidico valuation sensitivity to capex variations (Australian cents per share)
Pre-production capex estimate (US$m) |
180.3 |
202.9 |
225.4 |
248.0 |
270.5 |
Change cf US$225.4m central assumption |
-20% |
-10% |
u/c |
+10% |
+20% |
Lepidico valuation (Australian cents per share) |
6.70 |
6.38 |
6.05 |
5.73 |
5.41 |
Change cf central assumption (%) |
+10.7 |
+5.5 |
- |
-5.3 |
-10.6 |
Source: Edison Investment Research
Exhibit 14: Financial summary
Accounts: IFRS, year-end: June, A$’000s |
|
|
2018 |
2019 |
2020 |
2021 |
2022 |
2023e |
2024e |
PROFIT & LOSS |
|||||||||
Total revenues |
|
|
171 |
2 |
47 |
4,137 |
10 |
0 |
0 |
Cost of sales |
|
|
0 |
0 |
0 |
0 |
0 |
0 |
(3,619) |
Gross profit |
|
|
171 |
2 |
47 |
4,137 |
10 |
0 |
(3,619) |
SG&A (expenses) |
|
|
(5,284) |
(4,006) |
(4,904) |
(3,398) |
(4,796) |
(3,146) |
(3,146) |
Other income/(expense) |
|
|
0 |
0 |
0 |
0 |
0 |
0 |
0 |
Exceptionals and adjustments |
|
(2,171) |
(1,150) |
(2,740) |
(338) |
(2,275) |
0 |
0 |
|
Depreciation and amortisation |
|
(6) |
(8) |
(1,208) |
(713) |
(411) |
(411) |
(411) |
|
Reported EBIT |
|
(7,290) |
(5,162) |
(8,805) |
(311) |
(7,472) |
(3,558) |
(7,176) |
|
Finance income/(expense) |
|
70 |
57 |
17 |
0 |
(392) |
5 |
(10,313) |
|
Other income/(expense) |
|
0 |
0 |
0 |
0 |
0 |
0 |
0 |
|
Exceptionals and adjustments |
|
0 |
0 |
(2,026) |
0 |
0 |
0 |
0 |
|
Reported PBT |
|
|
(7,220) |
(5,105) |
(10,814) |
(311) |
(7,863) |
(3,552) |
(17,490) |
Income tax expense (includes exceptionals) |
|
|
0 |
0 |
696 |
593 |
(78) |
0 |
(285) |
Reported net income |
|
|
(7,220) |
(5,105) |
(10,118) |
283 |
(7,941) |
(3,552) |
(17,774) |
Basic average number of shares, m |
|
|
2,624 |
3,272 |
4,568 |
5,218 |
6,247 |
7,593 |
8,679 |
Basic EPS (c) |
|
|
(0.0) |
(0.0) |
(0.0) |
0.0 |
(0.0) |
(0.0) |
(0.0) |
BALANCE SHEET |
|
|
|||||||
Property, plant and equipment |
|
|
27 |
20 |
1,904 |
1,669 |
8,591 |
180,175 |
357,057 |
Goodwill |
|
|
0 |
0 |
0 |
0 |
0 |
0 |
0 |
Intangible assets |
|
|
19,027 |
22,925 |
23,870 |
24,631 |
29,065 |
29,065 |
29,065 |
Other non-current assets |
|
|
730 |
27,469 |
42,798 |
44,058 |
47,396 |
47,396 |
47,396 |
Total non-current assets |
|
|
19,783 |
50,414 |
68,573 |
70,358 |
85,052 |
256,636 |
433,519 |
Cash and equivalents |
|
|
4,860 |
13,660 |
4,793 |
14,738 |
8,043 |
8,043 |
8,043 |
Trade and other receivables |
|
|
712 |
1,869 |
1,767 |
244 |
2,204 |
0 |
0 |
Total current assets |
|
|
5,572 |
15,529 |
6,560 |
14,982 |
10,247 |
8,043 |
8,043 |
Non-current loans and borrowings |
|
|
0 |
3,276 |
5,215 |
0 |
6,744 |
120,583 |
314,943 |
Other non-current liabilities |
|
|
0 |
0 |
10,055 |
9,283 |
9,669 |
9,669 |
9,669 |
Total non-current liabilities |
|
|
0 |
3,276 |
15,271 |
9,283 |
16,413 |
130,252 |
324,612 |
Trade and other payables |
|
|
804 |
10,940 |
565 |
968 |
1,986 |
259 |
556 |
Current loans and borrowings |
|
|
0 |
0 |
0 |
0 |
280 |
280 |
280 |
Other current liabilities |
|
|
51 |
86 |
108 |
140 |
179 |
179 |
179 |
Total current liabilities |
|
|
856 |
11,026 |
672 |
1,108 |
2,445 |
717 |
1,014 |
Equity attributable to company |
|
|
24,500 |
53,252 |
52,404 |
68,314 |
70,037 |
127,306 |
109,436 |
Non-controlling interest |
|
|
0 |
(1,610) |
6,785 |
6,636 |
6,404 |
6,404 |
6,499 |
CASH FLOW STATEMENT |
|
|
|||||||
Profit for the year |
|
|
(7,220) |
(5,105) |
(10,118) |
283 |
(7,941) |
(3,552) |
(17,774) |
Taxation expenses |
|
|
0 |
0 |
(696) |
(593) |
78 |
0 |
285 |
Depreciation and amortisation |
|
|
6 |
8 |
1,208 |
713 |
411 |
411 |
411 |
Share based payments |
|
|
2,138 |
520 |
1,027 |
338 |
1,823 |
0 |
0 |
Other adjustments |
|
|
2,066 |
664 |
4,716 |
(497) |
837 |
0 |
0 |
Movements in working capital |
|
|
(28) |
410 |
(1,509) |
201 |
(689) |
477 |
297 |
Income taxes paid |
|
|
0 |
0 |
696 |
593 |
0 |
0 |
(285) |
Cash from operations (CFO) |
|
|
(3,038) |
(3,504) |
(4,676) |
1,037 |
(5,483) |
(2,665) |
(17,066) |
Capex |
|
|
(3,057) |
(6,251) |
(7,452) |
(550) |
(8,631) |
(171,995) |
(177,294) |
Acquisitions & disposals net |
|
|
110 |
0 |
416 |
0 |
0 |
0 |
0 |
Other investing activities |
|
|
0 |
0 |
0 |
0 |
0 |
0 |
0 |
Cash used in investing activities (CFIA) |
|
|
(2,947) |
(6,251) |
(7,036) |
(550) |
(8,631) |
(171,995) |
(177,294) |
Net proceeds from issue of shares |
|
|
7,555 |
18,462 |
3,523 |
14,707 |
7,432 |
60,821 |
0 |
Movements in debt |
|
|
0 |
0 |
0 |
(5,176) |
0 |
113,839 |
194,360 |
Other financing activities |
|
|
0 |
0 |
0 |
0 |
0 |
0 |
0 |
Cash from financing activities (CFF) |
|
|
7,555 |
18,462 |
3,523 |
9,531 |
7,432 |
174,660 |
194,360 |
Increase/(decrease) in cash and equivalents |
|
|
1,570 |
8,707 |
(8,190) |
10,017 |
(6,681) |
0 |
0 |
Currency translation differences and other |
|
|
(17) |
93 |
(678) |
(72) |
(14) |
0 |
0 |
Cash and equivalents at end of period |
|
|
4,860 |
13,660 |
4,793 |
14,738 |
8,043 |
8,043 |
8,043 |
Net (debt)/cash |
|
|
4,860 |
10,385 |
(422) |
14,738 |
1,019 |
(112,820) |
(307,180) |
Movement in net (debt)/cash over period |
|
|
1,553 |
5,525 |
(10,807) |
15,160 |
(13,719) |
(113,839) |
(194,360) |
Source: Company sources, Edison Investment Research
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Ultimovacs’ lead therapeutic vaccine candidate, UV1, continues to display positive signs of clinical efficacy, this time in the form of long-term patient survival from the ongoing Phase I (NCT03538314) study in advanced unresectable and metastatic malignant melanoma patients. The trial is investigating UV1 in combination with Merck’s immune checkpoint inhibitor (ICI) pembrolizumab (Keytruda) in the first-line setting. The three-year overall survival (OS) rate from patients in cohort one of the study was 71% (12/17). This result builds on the consistently high OS rates already observed from the trial: 85% (17/20) after one year and 80% (16/20) after two-year follow-up. We believe these latest data not only highlight the clinical utility of UV1 in melanoma patients, but also provide encouraging signs for further indications which UV1 is being investigated in the clinic. We continue to value Ultimovacs at NOK7.2bn or NOK209/share.
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