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Last close As at 26/05/2023
-4.61
▲ 0.20 (4.54%)
Market capitalisation
338m
Research: Metals & Mining
Rock Tech Lithium’s (RCK) strategy is to leverage its novel proprietary processes, robust European network and PEA-stage Georgia Lake lithium project to become a fully integrated, low-cost and sustainable supplier of lithium chemicals. To this end, the company is pursuing a ‘dual location’ strategy, producing technical-grade products in Canada that will become cost-effective feedstock for battery-grade lithium hydroxide production in Germany to serve the burgeoning European electric vehicle market.
Rock Tech Lithium |
Georgia (Lake) on my mind |
Mining prospects |
Metals & mining |
12 June 2020 |
Share price performance
Business description
Next events
Analyst
Rock Tech Lithium is a research client of Edison Investment Research Limited |
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Rock Tech Lithium’s (RCK) strategy is to leverage its novel proprietary processes, robust European network and PEA-stage Georgia Lake lithium project to become a fully integrated, low-cost and sustainable supplier of lithium chemicals. To this end, the company is pursuing a ‘dual location’ strategy, producing technical-grade products in Canada that will become cost-effective feedstock for battery-grade lithium hydroxide production in Germany to serve the burgeoning European electric vehicle market.
Year end |
Revenue (C$m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/16 |
0.0 |
(1.2) |
(5.8) |
0.0 |
N/A |
N/A |
12/17 |
0.0 |
(3.3) |
(11.8) |
0.0 |
N/A |
N/A |
12/18 |
0.0 |
(3.4) |
(10.1) |
0.0 |
N/A |
N/A |
12/19 |
0.0 |
(1.0) |
(3.0) |
0.0 |
N/A |
N/A |
Note: *PBT and EPS are normalised, excluding exceptional items.
Georgia Lake standalone PEA
In October 2018, RCK announced the results of a preliminary economic assessment (PEA) at Georgia Lake. Compiled by international mining consultants, DMT, the study envisaged producing 1.1Mt of 6.2% Li2O chemical-grade spodumene concentrate over 11 years at a rate of 96,000tpa for an initial capital cost of C$65.3m to generate annual steady-state EBITDA of C$64.2m, a pre-tax IRR of 62.2%, a post-tax NPV8 of C$210m (equivalent to C$5.41/share) and a 3.5-year payback.
Six gigafactories in development in Germany
At least six battery gigafactories are at various stages of development in Germany, including plants commissioned by industry leaders such as Tesla, Volkswagen and Opel. Within this context, RCK’s advisory board, composed of leaders from business, politics and academia, is a competitive advantage for its downstream ambitions. In time, it is envisaged that RCK’s production facilities will become a hub for the conversion of lithium feedstock sourced from all over the world (eg Australia and Brazil).
Recent cash raising bolsters cash position
RCK had net cash of C$1.7m at 31 December 2019, since which time it has raised a further C$1.6m, such that it had net cash of C$1.8m at end March 2020 cf a cash burn rate of C$2.2m pa in FY18 and C$1.3m pa in FY19.
Valuation: Trading at 10.0% of NPV8
RCK’s current enterprise value of C$21.1m equates to 10.0% of its Georgia Lake PEA NPV8 of C$210m. It also equates to US$43.60 per resource tonne of lithium carbonate equivalent (LCE), which is at a small discount to a sector average of US$53.84/t LCE for non-Western Australian spodumene explorers, as calculated in our report, Gold stars and black holes, published in January 2019.
Strategic thinking
RCK’s strategy is to leverage its novel proprietary processes, robust European network and PEA-stage Georgia Lake lithium project in Canada to become a fully integrated, low-cost and reliable supplier of lithium chemicals to the European electric vehicle market.
Current (conventional) processing
Currently, the majority of lithium produced from hard rock sources is derived from the mineral spodumene (LiAlSi2O6), the lithium content of which is approximately 3.7%. Conventional processing of spodumene involves froth flotation and/or gravity separation to generate a concentrate of c 6% lithium content followed by either roasting and acid leaching (typically) or carbonate leaching (less typically) to form lithium sulphate, from which either lithium carbonate or lithium hydroxide may then be synthesised. The price differential between the concentrate and the final products is material:
Exhibit 1: Lithium carbonate and hydroxide prices vs spodumene concentrate price
Product |
Price |
Multiple of concentrate price |
Spodumene concentrate |
430 |
1 |
Lithium carbonate |
7,350 |
17 |
Lithium hydroxide |
10,750 |
25 |
Source: Benchmark Minerals, Fastmarkets, Rock Tech Lithium, Edison Investment Research
Alternative RCK processing
In contrast to the conventional process flow route, RCK’s concept is to use its Georgia Lake project in Ontario, in the first instance, to provide technical-grade feedstock for its battery-grade lithium hydroxide production plant in Germany. The immediate advantages of such a ‘dual location’ strategy are the availability of subsidies in Germany for such value-added manufacturing, and the materially reduced transportation costs and emissions engendered by completing significant raw material upgrading close to the mine site. Conceptually, lithium sulphate would then be transported to a refinery in Western Europe for onward processing in Germany.
In simple terms, one tonne of 5% spodumene concentrate contains 23.3kg of lithium metal, which is sufficient to produce 183.3kg of pure, intermediate lithium sulphate, which can itself then be converted into 123.2kg of pure lithium carbonate with a market value of US$906 (at the prices in Exhibit 1) or 139.8kg of pure lithium hydroxide monohydrate with a market value of US$1,503 (assuming no processing losses). On this basis, using lithium sulphate as an intermediate feedstock for the industry is feasible (note: on a profit & loss, rather than a return on capital, basis) as long as purchase and processing costs, combined, do not exceed US$2,597 per tonne of lithium sulphate for supply to lithium carbonate producers or US$5,854/t for supply to lithium hydroxide monohydrate producers.
SWOT analysis
An initial SWOT analysis of RCK’s concept is as follows:
■
Strengths: low production costs, materially reduced shipping cost and emissions, and more affordable subsequent processing into lithium hydroxide.
■
Weaknesses: a new process, which will need to undergo pilot plant and industrial-scale testing before becoming generally acceptable.
■
Opportunities: subsidies currently available in Germany for the development of the lithium-ion battery. If successful, the lithium hydroxide manufacturing plant in Germany could become a hub for the upgrading of additional feedstock, sourced from Europe and around the world, as well as Georgia Lake material.
■
Threats: competing technologies; weaker than expected demand growth.
Georgia Lake background
In 2018, RCK announced an upgraded mineral resource estimate at Georgia Lake of 13.29Mt at a grade of 1.09% lithium oxide (at a relatively conservative 0.65% cut-off grade), of which 49% was in the measured and indicated categories. Note that management believes there is at least a further 2.5–3.0Mt of lithium-bearing pegmatite mineralisation in the prospect, representing material defined in historical resource estimates, but yet to be drilled to NI 43-101 standards, plus new discoveries.
Later in the year, on 2 October, the company announced the results of a preliminary economic assessment (PEA) at Georgia Lake. Compiled by international mining consultants, DMT, the highlights of the PEA were pre-production capex of C$65.3m, annual steady-state EBITDA of C$64.2m, an 11-year mine life, a pre-tax IRR of 62.2%, a 3.5-year payback period and a post-tax NPV8 of C$210m.
The PEA envisaged producing 1.1Mt of 6.2% Li2O chemical-grade spodumene concentrate over 11 years at a rate of 96,000tpa. However, it excluded any production from additional inferred resources on other areas of the property, which could increase the mine’s life further. In the meantime, power sources and grid access are also located in the immediate vicinity of the project with a transcontinental rail station and deep-sea port less than 200km away, providing options for product delivery to end-users.
Valuation
RCK’s current enterprise value of C$21.1m equates to 10.0% of its Georgia Lake PEA NPV8 of C$210m.
It also equates to US$43.60 per resource tonne of LCE, which is at a small discount to a sector average of US$53.84/t LCE for non-Western Australian spodumene explorers, as calculated in our report, Gold stars and black holes, published in January 2019.
Financials
RCK had net cash of C$1.7m at 31 December 2019, since which time it has raised a further C$1.6m via the sale of 3.6m units of one share plus one half warrant each at a price of C$0.45/unit. This compares with a cash burn rate of C$0.18m per month in FY18 and C$0.110m in FY19.
Exhibit 2: Financial summary
C$'000s |
2016 |
2017 |
2018 |
2019 |
||
December |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||
Revenue |
|
|
0 |
0 |
0 |
0 |
Cost of Sales |
0 |
0 |
0 |
0 |
||
Gross Profit |
0 |
0 |
0 |
0 |
||
EBITDA |
|
|
(1,191) |
(3,276) |
(3,442) |
(1,048) |
Operating Profit (before amort. and except.) |
(1,194) |
(3,279) |
(3,445) |
(1,049) |
||
Intangible Amortisation |
0 |
0 |
0 |
0 |
||
Exceptionals |
45 |
3 |
0 |
0 |
||
Other |
0 |
0 |
0 |
0 |
||
Operating Profit |
(1,149) |
(3,276) |
(3,445) |
(1,049) |
||
Net Interest |
0 |
0 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
(1,194) |
(3,279) |
(3,445) |
(1,049) |
Profit Before Tax (FRS 3) |
|
|
(1,149) |
(3,276) |
(3,445) |
(1,049) |
Tax |
0 |
0 |
0 |
0 |
||
Profit After Tax (norm) |
(1,194) |
(3,279) |
(3,445) |
(1,049) |
||
Profit After Tax (FRS 3) |
(1,149) |
(3,276) |
(3,445) |
(1,049) |
||
Average Number of Shares Outstanding (m) |
20.7 |
27.8 |
34.0 |
35.0 |
||
EPS - normalised (c) |
|
|
(5.8) |
(11.8) |
(10.1) |
(3.0) |
EPS - normalised and fully diluted (c) |
|
(5.8) |
(11.8) |
(10.1) |
(3.0) |
|
EPS - (IFRS) (c) |
|
|
(5.5) |
(11.8) |
(10.1) |
(3.0) |
Dividend per share (p) |
0.0 |
0.0 |
0.0 |
0.0 |
||
Gross Margin (%) |
N/A |
N/A |
N/A |
N/A |
||
EBITDA Margin (%) |
N/A |
N/A |
N/A |
N/A |
||
Operating Margin (before GW and except.) (%) |
N/A |
N/A |
N/A |
N/A |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
2,008 |
2,989 |
3,542 |
3,840 |
Intangible Assets |
1,995 |
2,978 |
3,533 |
3,833 |
||
Tangible Assets |
14 |
11 |
9 |
7 |
||
Investments |
0 |
0 |
0 |
0 |
||
Current Assets |
|
|
3,242 |
2,959 |
1,299 |
1,731 |
Stocks |
0 |
0 |
0 |
0 |
||
Debtors |
150 |
62 |
72 |
80 |
||
Cash |
3,087 |
2,898 |
1,227 |
1,651 |
||
Other |
5 |
0 |
0 |
0 |
||
Current Liabilities |
|
|
(306) |
(344) |
(292) |
(243) |
Creditors |
(306) |
(344) |
(292) |
(243) |
||
Short term borrowings |
0 |
0 |
0 |
0 |
||
Long Term Liabilities |
|
|
0 |
0 |
0 |
0 |
Long term borrowings |
0 |
0 |
0 |
0 |
||
Other long-term liabilities |
0 |
0 |
0 |
0 |
||
Net Assets |
|
|
4,944 |
5,605 |
4,548 |
5,328 |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
(689) |
(1,218) |
(1,703) |
(1,037) |
Net Interest |
2 |
0 |
0 |
0 |
||
Tax |
0 |
0 |
0 |
0 |
||
Capex |
(461) |
(854) |
(477) |
(287) |
||
Acquisitions/disposals |
121 |
7 |
0 |
0 |
||
Financing |
3,972 |
1,876 |
509 |
1,747 |
||
Dividends |
0 |
0 |
0 |
0 |
||
Net Cash Flow |
2,944 |
(189) |
(1,671) |
424 |
||
Opening net debt/(cash) |
|
|
(143) |
(3,087) |
(2,898) |
(1,227) |
HP finance leases initiated |
0 |
0 |
0 |
0 |
||
Other |
0 |
0 |
0 |
0 |
||
Closing net debt/(cash) |
|
|
(3,087) |
(2,898) |
(1,227) |
(1,651) |
Source: Company sources, Edison Investment Research
|
|
Research: TMT
FY19 revenues of €2.0m were weaker than management expected due to a small number of material contracts failing to materialise by year-end. However, those contracts did not disappear and investment in sales in FY19 led to a strong start to H120 (management estimates H120 revenues will exceed €1.5m) with momentum expected to continue in H220. Recent trading has highlighted the benefits of a flexible, diversified business, with the security segment (DACH-focused, government contracts) benefiting, while uncertainty is higher in the broadcast segment (international, private sector clients), despite market share gains following the exit of Verizon Volicon. However, COVID-19 uncertainties make forecasting difficult, particularly for Q420, typically the strongest quarter. With net cash of €0.5m, artec remains sufficiently capitalised and, if management can build on a strong H120, we believe there is significant upside to the shares.
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