CA - Century Lithium: Patience Required

2023-05-31 06:41:55 ET

Summary

• Century Lithium recently reaffirmed its ability to produce battery-grade lithium, but further delayed the feasibility study completion for its Clayton Valley project.
• The delay may not be entirely negative, as releasing the study in a more favorable market environment could lead to a stronger market reaction.
• The company is trading at a fraction of the estimated NPV of its Clayton Valley project, making it a potentially attractive investment.

Century Lithium ( OTCQX:CYDVF ) recently published an update , regarding the new developments related to the Clayton Valley lithium project. It appears that the company reaffirmed its ability to produce battery grade lithium, but further delayed the indicated timing of the feasibility study ((FS)) completion. In this article, I’ll discuss the implications of these recent developments and why the delay may not be entirely negative.

Recent developments

As I’ve covered the company before , I’m not going to make a company overview again, but instead will focus on the new developments. A few days ago, Century Lithium reported that it was able repeat the production process of manufacturing battery-grade Li ₂ CO ₃ . The results indicated 99.875% grade, well above the threshold of 99.5%. The data further demonstrated to the market that the production process of Century Lithium works and the October 2022 initial production of battery-grade lithium carbonate was not by chance.

The same update also included information about the timing of the FS on the flagship Clayton Valley project:

Major areas of the Study are completed and estimates for capital and operating cost estimates received, including those for the chlor-alkali plant portion of the Project. Wood is in the process of consolidating the estimates and reviewing them with Century, along with evaluating further optimization and opportunities for cost reductions. This optimization work will extend beyond the previously estimated mid-year completion date for the Study.

Unfortunately, the indicated timing of the study appears to be pushed yet again further in time. Last year, the completion of the study was expected towards 2022 year-end, which was later pushed into H1’23 and now into the second half of 2023.

FS delay not entirely bad

While the news about delay of the FS has likely disappointed some investors, I think it may have some positives as well, beyond the obvious potential improvement in economics, if cost reductions are realized as a result of the additional work on the study. Looking at the current market environment, interest rates are rising and cost of capital is increasing. This puts pressure on asset prices and generally makes investors more risk averse. If the FS is released now in this environment, a potential positive market reaction could be (partially) supressed.

However, the market is expecting monetary policy shift in the second half of the year and even rate cuts in Q4’23. This could change the current risk-off sentiment and eventually lead to stronger market reaction if the FS is released in a monetary policy easing environment.

Liquidity looks sufficient

Looking at the company’s Q1’23 financials, it had more than CAD$22.8M of cash and equivalents. The vast majority of those funds are invested in GICs, which allowed the company to benefit from the rising interest rates – interest income in Q1’23 was CAD$234.1k, almost 10x YoY.

At the same time, cash burn in 2022 was around CAD$14.2M, when adjusting for the 700k of investment purchased. The Q1’23 cash burn – approximately CAD$3.7M is in line with the burn rate from 2022. With this level of cash burn and available liquidity, Century Lithium should not need to tap equity markets for at least the next 6 quarters.

Lithium price is recovering

Lithium prices were on a steep downtrend from the end of last year to April 2023. However, on the back of optimism from EV sales in China a recovery has begun. The latest lithium carbonate price, converted in US$ is around US$42k/tonne.

This is well above the US$9,500/tonne price, which Century Lithium used in its 2019 PFS and resulted in an estimated NPV of the project of over US$1B. It remains to be seen whether the recovery in lithium prices will continue, but the Clayton Valley project should be economic even at much lower than current prices, so there’s a safety cushion.

Risks

Apart from the macro risks of a recession and potential negative developments on the lithium market as a whole, Century faces some company specific risks. For me, the biggest risk is related to the possible cost inflation as the PFS dates from 2020 and there has been considerable increase in prices of raw materials, equipment and labor since then.

Under the 2020 PFS, expected initial capital outlay is projected at US$493M, while OPEX is forecasted at US$3,329/tonne. To get a guess at what the cost increase could be, one could look into Lithium Americas Corp. ( LAC ) Thacker Pass project. The 2023 FS indicates doubling of the initial CAPEX from the 2018 PFS and about 65% increase in OPEX.

That being said, I find it very unlikely that the potential cost increases at Clayton Valley will lead to inferior economics, compared to the 2020 PFS, given the low assumption for the lithium price that was used then. However, higher initial capital requirement may lead to Century’s shareholders being diluted more than previously expected through either equity offering or giving away larger part of the project to a strategic partner or combination of the two.

Conclusion

The recently reported additional demonstration of Century’s ability to produce battery-grade lithium further increases confidence in the company’s planned production process. While the FS timing delay seems negative, I believe it could be a positive in a way of pushing the release back to a more favorable overall market environment. I remain bullish on Century Lithium, as the company is trading at a fraction of the estimated NPV of its Clayton Valley project.

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