2023-04-24 01:15:11 ET
Summary
- Vulcan Energy Resources is down 44% since I looked at it 13 months ago. That makes the price now more attractive, of course.
- We've also much greater clarity on their numbers. They're looking good actually.
- But there's still that thing about the lithium price - the buying point will be important.
A falling stock price increases the attraction of a proposition
Or perhaps that should be a fallen share price increases the attractiveness of an investment proposition. We're buying into the same numbers at a cheaper price. Some 13 months back I had a look at Vulcan Energy Resources (OTCPK: VULNF). It wasn't, by any means, a full throated recommendation. Rather, a walk through the basics of what they're trying to do - geothermal energy plus lithium from German brines - and an agreement that there's good sense in it.
As far as I knew then the technology worked, the base idea was sensible, that sort of thing. I did point out that the location, Germany, really wasn't important, transport costs just aren't a significant issue with processed lithium - too trivial a portion of the value.
So, what's happened since then? My reading of this is that Vulcan has become much more attractive as an investment today. To the point that to my mind there's only the one question left and that's one of timing. I think Vulcan is a buy but the biggie is exactly when is it so? That, I think, depends upon the lithium price itself. As when I discussed Piedmont , I'm still a bear on lithium itself. This is less of a conceptual problem at Vulcan and more of a timing one. Assuming they go into production then I think Vulcan would survive a full on bear lithium market. Thus it's a matter of what price we're willing to buy in at. As opposed to many spodumene adventures which, in a full on bear market would actually close.
As an aside
In this past year my normal process of having chats with people - what some people might call research - has been continuing. The whole idea of using varied membrane technologies to extract lithium from brines seems to be validated. I'd not say that's 100% proven at full production scale, not in that sense of proof. But within the industry the general assumption is now, yes, that works, and?
Whether that quite means that Vulcan's implementation will definitely work at scale, well, everyone can get application wrong. But the general idea is that yes, on those basic terms, this is an idea that works. As an analogy, think cars for a moment. It's still possible for someone to make a really bad car engine (a certain Renault diesel is one that I hate at present for example) but we're very definitely in a world where the internal combustion engine is agreed to be something that works.
Numbers
We have more numbers from Vulcan and they look good to me. Just a small selection as there are only a couple that I think are important. The project is to do two things. One, create energy from geothermal waters. Secondly, to extra lithium while doing so. Energy :
That's actually not very good. A usual rule of thumb for an internal project is an 8% IRR hurdle. That they're not meeting that post-tax, well. Note that's already with the fixed feed in tariffs (wildly above market price) for geothermal power in Germany, so that's post-subsidy.
So I'd not buy in on that alone. However, I can imagine some decent part of the capital necessary coming from somewhat subsidised debt. Sparkassen perhaps, Landesbanken, that sort of field. Possibly green development bank, not that Germany specifically has that. Every slice of that debt cost adds to the return to equity. So, it could work just on the power. Add in the heat energy that they can also offer and I think we're at a stage where we might have a nibble.
Not as some speculation, but at the right price we might think about tucking some away for a decade in order to end up with an income. That sort of investment horizon.
Lithium
The lithium numbers are what make this:
Those look lovely, of course they do. Except I'm really not sure that I believe them. Because they're - have to be - based upon an assumption about the lithium price:
Don't believe that for a moment. Now this is something I can't prove but is inherent in everything I've written about lithium - heck, minor metals - around here. I just keep insisting that there's much more of it out there than people think. The only possible shortage is of people actually extracting it and with the capacity to do so. The effect of this is that we get cycles in minor metals and I expect one in lithium too. I expect the price to be back down in that medium to long term future not up at all.
This isn't a killer for Vulcan though. They do have at least two (possibly, with the heat, three) revenue streams and the production cost of the lithium probably is, as they say, right at the bottom of the price spectrum.
It's not a killer, in that they'd still be able to produce, profitably, their lithium at a much lower price. This is something that might well not be true - probably won't be true - of the inherently higher cost spodumene mines.
So, a lower lithium price doesn't kill Vulcan, it just cuts the margins.
My view
At which point we can build my view. I think the tech is proven. Vulcan's numbers add up. But The assumption about the future lithium price looks too high to me.
Even at a lower lithium price Vulcan still looks like it works. I expect - note expect - the lithium price to continue to decline . I expect the Vulcan share price to decline with it. But at some point, Vulcan becomes attractive. That combination of guaranteed power prices plus lithium which will survive a bear market becomes so.
Exactly where that price is, well, that's the unknown. But I would put Vulcan on the list of who to buy when we think the Li price is bottoming out.
Of course, I could be wrong.
A truly plunging lithium price could mean Vulcan won't be able to finance production. But I don't think that's likely to be true - Germany doesn't work like that in my experience. But that is the risk that I see.
The investor's view
There's some point at which Vulcan becomes attractive. I think that'll be around the bottom of this lithium price cycle. I'd expect the Vulcan share price to follow, but lag, that lithium price. So, if and when we see the Li price turn - and I think it's going to go a lot lower before it does but that's my opinion, not a supportable fact - then Vulcan becomes a stock to buy into. Moderate amounts, to hold for the long term, not a trade but an investment for future income given that power generation side.
For further details see:
Vulcan Energy Resources: Price Down, Numbers Clearer, This Looks Good