CXOXF - Critical Elements Lithium: Huge Potential Upside Ahead If They Can Make It To Production

Summary

• Critical Elements Lithium is developing their 100% owned Rose Lithium-Tantalum spodumene project in Quebec, Canada. They also have 8 other promising exploration stage projects.
• In 2022, lithium spodumene prices have risen from ~US$2,000/t to US$5,000/t, yet Critical Elements Lithium's stock price is little changed.
• Valuation looks very attractive on a current market cap of only C$302m (US$230m) given the quite advanced stage, current high spodumene prices, and FS result of a NPV8% of US$1.915b.

This article first appeared in Trend Investing on August 1, 2022; but has been updated for this article.

For a background on Critical Elements Lithium [GR:F12] ( OTCQX:CRECF ) (CRE:CA), you can read:

• July 2016 - Critical Elements - A Lithium Miner With An Exceptional Buying Opportunity (TSXV: CRE was at C$0.56)
• August 2021 - Critical Elements Lithium Looks To Be A Potential 2023 Lithium Producer In Canada (TSXV: CRE was at C$1.30)
• April 2022 - Canada Is Building A New Lithium-Ion Battery Supply Chain With Strong Corporate And Government Support

Today's article looks at Critical Elements Lithium valuation, latest news, and why Critical Elements Lithium looks to be a great buy.

Critical Elements Lithium

Critical Elements Lithium 5 year price chart - Price = CAD 1.46, USD 1.12

Critical Elements Lithium YTD chart

Critical Elements Lithium is a Canadian company developing their 100% owned Rose Lithium-Tantalum Project in Quebec, Canada.

They also have 8 other critical elements early stage projects ( Nisk, Arques, Bourier, Caumont , Dumulon, Duval , Lemare, and Valiquette ).

Today's article focuses only on the Rose Project.

Rose Lithium-Tantalum Project

The Rose Lithium-Tantalum Project stands out is for its high purity spodumene, with very low iron and mica content. This means it can sell part of its product into the typically higher priced technical grade market.

The Rose Project is very well advanced with 26.3 million tonnes of Probable Reserves at a grade of 0.96% Li ₂ O Eq. or 0.87% Li ₂ O and 138 ppm Ta ₂ O ₅ .

The location is good in Quebec Canada, with excellent nearby infrastructure, including all-year accessible roads, low-cost power (power line on site tapping into Quebec’s low carbon (93% hydroelectricity)), skilled labor nearby, and a nearby airport.

Critical Elements Lithium's Rose Project location

The Rose Lithium-Tantalum Project June 2022 Feasibility Study ("FS") has an impressive after-tax NPV8% of US$1.915b and after-tax IRR of 82.4% , over a 17 year project life. Initial CapEx is estimated at US$357m. OpEx is estimated at US$540/t.

The FS is based on a technical grade spodumene 6.0% price of US$4,039/t and chemical grade spodumene 5.5% of US$1,852/t. Current spodumene SC6% prices are CNY 35,167/mt (~USD 5,094/mt).

Rose Project Feasibility Study highlights

The Rose Project is forecast to have very good recoveries due to the high purity spodumene resource

Stage of development

The Stage 1 Rose Project is quite advanced with the Feasibility Study (see above) completed as well as Federal permitting approved .

The next steps are the provincial permitting (update here ), off-take, and project funding; to be followed by construction and targeted production in 2024.

Valuation

Critical Elements Lithium's current market cap is C$302m (US$230m) with no debt. Based on US$230m market cap the company is trading at a mere 12% (US$230m/US$1.915b) of the Rose Project NPV8%. Quite extraordinary given the quite advanced stage and prime Canada location.

Yahoo Finance shows an analyst's price target of C$3.62 . Market Screener analyst consensus price target is C$3.84 representing 163% upside.

Based only on the Rose Lithium-Tantalum Project (Stage 1), our updated end 2025 price target is (~225ktpa spodumene production (51,369tpa technical + 173,317tpa 5.5%SC chemical), initial CapEx US$357m, OpEx US$540/t):

• Bear case (assumes selling spodumene selling at an average of US$1,000/t) - C$1.61 (11% higher).
• Base case (assumes selling spodumene at an average of US$2,500/t) - C$8.30 (5.7x higher).
• Bull case (assumes selling spodumene selling at an average of US$4,000/t) - C$14.99 (10.3x higher).

Notes : 51,369tpa will be 6% spodumene concentrate ("SC") technical grade (sells at a higher price to the ceramics & glass market), 173,317tpa will be 5.5%SC which sells at a slightly lower price to 6%SC. We assume production begins in late 2024. Critical Elements Lithium is aiming to achieve first production of spodumene at Rose in 2024 .

Further potential upside to the above price targets if Critical Elements Lithium makes it to Stage 2 production (~50ktpa spodumene + ~24ktpa LiOH).

Critical Element Lithium's latest key news

• August 11, 2022 - "Critical Elements complete positive Engineering Study for a Lithium Hydroxide Monohydrate Plant......The Engineering Study for a Lithium Hydroxide Monohydrate plant is based on a yearly production of 30,670 tonnes of high-quality battery grade lithium hydroxide monohydrate from 220,587 tonnes of spodumene concentrate purchased solely on the world market on long term contract basis. The study does not rely on or is not based on any purchases of spodumene concentrate from the Corporation’s Rose Lithium-Tantalum project."
• August 2, 2022 - "Critical Elements Lithium Announces appointment of Mr. Yves Perron as Vice-President Engineering, Construction, and Reliability..... Mr. Perron has over 25 years of experience in project management in the industrial sector within major international firms."
• July 25, 2022 - "Critical Elements Lithium announces the continued strengthening of its Board of Directors with two new appointments"....of Ms. Maysa Habelrih and Ms. Vanessa Laplante.
• July 19, 2022 - Critical Elements Lithium commences summer exploration program. "A diamond drill rig has already been mobilized to the Rose project and drilling is underway. The Corporation plans to drill up to 25,000 metres" with the goal to extend the Rose Project mine life.
• June 13, 2022 - "Critical Elements announces a Positive Feasibility Study for the Rose Lithium Project generating an after-tax NPV at 8% of US$1.9 B and an after-tax IRR of 82.4%."
• May 17, 2022 - "Critical Elements successfully produces battery grade lithium hydroxide in pilot plant testing."
• Feb. 17, 2022 - Corporate Update

Why Critical Elements Lithium looks to be a great buy

Based 'only' on the Rose Lithium-Tantalum Project (Stage 1) the June 2022 FS revealed a NPV8% of US$1.915b based on reasonable cost and pricing assumptions. If we were to assign a 20%-30% of NPV value range to Critical Elements Lithium due to their advanced stage Rose Project (Proven Resource, FS completed, no final permit, no project funding) it results in a valuation of US$383-575m, or C$492-740m; compared to the current market cap of just C$302m (US$230m), or very roughly a 50% discount.

Or if we compared 'market cap' to some spodumene peers that are about 2 years ahead with funding achieved and in construction (Sayona is a re-start project owning 75% of NAL), we see the potential of where Critical Elements Lithium could potentially be in 2 years from now all going well (need to adjust for initial CapEx costs of US$357m):

• Sigma Lithium [TSXV:SGMA] ( SGML ) - C$3.039b
• Core Lithium [ASX:CXO] ( OTCPK:CXOXF ) - A$2.363b .
• Sayona Mining [ASX:SYA] ( OTCQB:SYAXF ) - A$2.34b .

Risks

• Global, China, Europe, USA slowdown resulting in less EV sales, therefore less demand for batteries and hence lithium.
• Falling lithium prices.
• The usual mining risks - Exploration, permitting, funding, production, partner, environmental risks. Critical Elements Lithium is at an advanced stage, but still needs provincial permitting and to raise project funding and make it to production. CapEX is higher than some other spodumene plays, partly due to the higher 7:1 strip ratio. Project delays. The lithium supply chain including spodumene conversion is still developing in Canada right now.
• Business risks - Management, liquidity, debt, and currency risk.
• Sovereign risk - Low in Canada.
• Stock market risks - Dilution, lack of liquidity (best to buy on local exchange), market sentiment.

Further reading

• Critical Elements Lithium website

• Feb. 2022 - Critical Elements Lithium - Equity Overview with Rodney Hooper (video)

Critical Elements Lithium highlights

Conclusion

Critical Elements Lithium remains an under the radar lithium spodumene play in Quebec, Canada. Provincial permitting, off-take, and project funding are all potentially just around the corner in 2022, and if successful should ideally lead to production by late 2024.

Valuation looks very attractive on a current market cap of only C$302m (US$230m) (only 12% of NPV) given the quite advanced stage, current high spodumene prices, and FS result of a NPV8% of US$1.915b. Analyst consensus one year price target is C$3.84 representing 163% upside and our base case end 2025 price target is C$8.30 (5.7x higher). Further upside potential with Rose Stage 2 (may include a Lithium Hydroxide Monohydrate plant) and other projects owned by the Company.

Risks revolve mostly around Critical Elements Lithium advancing their flagship Rose projects towards production. Please read the risks section.

We view Critical Elements Lithium as a great buy, suitable for a 5-year plus time frame, especially if you are positive on the outlook for well valued junior lithium spodumene companies in Canada.

As usual all comments are welcome.

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