Source: Peter Epstein for Streetwise Reports 06/08/2020
Peter Epstein of Epstein Research discusses the Nevada lithium project and potential paths that the company could take.
Cypress Development Corp. (CYP:TSX.V; CYDVF:OTCQB; C1Z1:FSE) owns 100% of a giant, leachable, lithium-bearing claystone-hosted resource, the Clayton Valley Lithium Project (CVLP), adjacent to Albemarle Corp.’s Silver Peak brine operations in Nevada. The company has an Enterprise Value (EV) {market cap + debt – cash} of C$17.5 million.
On May 19th, management delivered a highly anticipated press release summarizing its Pre-Feasibility Study (PFS) on the CVLP. Let me start by saying…. It was worth the wait. Cypress adopted a low long-term price of US$9,500/tonne (t) of Lithium Carbonate Equivalent (LCE). The price used in a dozen other brine or clay-hosted (sedimentary) project reports (PEA, PFS or DFS) in the past three years ranged from US$11,000 to US$13,950/t and averaged US$12,558/t.
Cypress Development Corp. PFS a high-quality, serious report
Admittedly, lithium prices have been falling since 2018, but peer Nevada lithium and boric acid project developer ioneer ltd. announced (20 days before Cypress) a Definitive Feasibility Study (DFS) with a US$13,200/t LCE price assumption.
Hard rock juniors are pursuing lithium hydroxide, but brine projects have lithium carbonate in their plans. Cypress plans to make battery-quality lithium hydroxide. In Cypress’ PFS, nameplate capacity is 27,400 tonnes LCE/year. However, it takes less lithium to manufacture hydroxide than to make carbonate. If the CVLP project were to deliver 100% hydroxide, it would be operating at an average of 31,141 tonnes /year.
Some investors might be wondering why management didn’t use a higher long-term lithium price. I believe there are two reasons. First, that’s not how CEO Bill Willoughby rolls. Dr. Willoughby is a PhD in Mine Engineering and Metallurgy, making him the polar opposite of a Vancouver promoter, and the best choice imaginable to be leading Cypress.
Second, I suspect that Cypress is in talks with entities led by serious engineers, metallurgists and experienced mining experts like Dr. Willoughby. A detailed, highly accurate PFS was called for. Please note, management has never revealed to me a name of anyone they’ve spoken with in the past or presently.
Cypress is very attractive in peer comparisons and in valuation
Unlike peers, Cypress did not incorporate by-/co-products in the economics. By contrast, Lithium Americas’ Thacker Pass project includes 11% of gross annual revenue from the sale of excess electricity and sulfuric acid. Cypress might also have excess sulfuric acid to monetize, but management did not use it in the model.
Rare Earth Elements (REEs) [scandium, dysprosium and neodymium] are present at the CVLP, but zero credit was ascribed to these potential cash flows. If recoverable, the un-discounted value of the REEs is in the hundreds of millions. REEs will be studied and reported on in the Definitive Feasibility Study (DFS).
By-/co-products are included in the economics of some peer company projects. I mentioned Thacker Pass (electricity and sulfuric acid). Bacanora proposes to produce potassium sulfate (SOP) alongside lithium carbonate.
In order to more accurately compare projects, I adjusted the lithium price assumption in the CVLP PFS. Taking the midpoint between the base case of $9,500/t and the “upside” case of US$14,250/t, I interpolated key metrics at an implied LCE price of US$11,875/t, (5% lower than US$12,558/t peer average).
Cypress’ PFS compares quite well to the projects shown below. The average cap-ex was C$874 million vs. C$661 million for CYP.V, capital intensity; C$26,500/t vs. C$24,128/t for CYP.V, ratio of after-tax NPV(8%) to upfront capital; 2.3x vs. 3.3x for CYP.V., and IRR; 28.7% vs. 33.5% for CYP.V.
Again, these comparisons were done with a US$11,875/t price for Cypress. One last thing, the CVLP has a strip ratio of just 0.15 to 1. The other sedimentary projects have strip ratios ranging from 1.6 to 7.0 to 1, averaging 3.7 to 1.
Is Cypress a takeover candidate?
Could Tesla be looking at acquiring Cypress? With an EV of C$224.4 billion (12,824 times that of Cypress) it could easily afford to. However, I have no idea if Tesla is interested. I imagine that a few auto and/or Li-ion battery makers are kicking the tires. More importantly, I suspect that lithium and specialty chemicals giant Albemarle Corp. will be carefully reviewing the PFS.
Why would a C$15 billion company like Albemarle care about tiny Cypress? Simple. In a much larger company’s hands, the CVLP would be worth a lot more than C$17.5 million. A larger company could comfortably afford the initial cap-ex of C$661 million. Financially strong players can borrow at low interest rates.
With substantial financial wherewithal and unrivaled, decades-long, expertise in specialty chemicals & lithium, Albemarle could bring a sedimentary project, one adjoining its own Silver Peak brine operations, to fruition faster than Cypress ever could. Silver Peak has been in operation since the mid-1960s. Assuming its current 6,000 tonnes LCE/year capacity, Albemarle says it has ~20 years of remaining mine life.
Think about the synergies that could be gained by adding the CVLP to Albemarle’s neighboring lithium complex. Silver Peak has all manner of industrial/chemical property, plant and equipment, and, of course, lithium processing facilities. Equally important, it has 50+ years of expert knowledge and experience with lithium compounds and local/state permitting.
Adding 27,400 tonnes/year LCE (or 31,141 tonnes/year hydroxide) to Albemarle’s 6,000 tonnes LCE/year would move the needle for Albemarle. Cypress does not include EBITDA in the summary press release of its PFS, but the op-ex is US$3,329/t. So, at an interpolated lithium price of US$11,875/t, the operating margin before taxes would be $8,546/t.
Therefore, 31,141 tonnes hydroxide, multiplied by a US$8,546/t operating margin, equates to ~C$346 million in cash flow/year. Compare that C$346 million to Albemarle’s trailing 12-month EBITDA of C$1.235 billion. All else equal, Albemarle’s EBITDA margin could jump from 27.1% to ~31.3% by acquiring Cypress. Can these two companies find a way to combine resources?
There are not that many lithium producers (of meaningful quantities), and SQM and Albemarle are not pure-play lithium investments. In the chart above, I show that EV/EBITDA multiples are fairly strong even with lithium prices at less than half 2018’s highs. Although there’s still a lot or execution risk, imagine what a potential cash flow stream of C$346 million/year for 40 years might be worth? A 15.4x multiple times C$346 million = C$5.3 billion. Discounting that figure back six years (from 2026) at a 20% discount factor, it’s still C1.78 billion.
Next Steps
The authors of the PFS recommend additional testing and studies be done in the areas of processing, mining, permitting and infrastructure. Further work is needed to confirm the flow sheet and determine recovery and reagent consumptions. A confirmation of the process and equipment in the leaching and filtration functions is sought and there’s further work to do to enhance solid-liquid separation to further reduce acid consumption.
Management must determine if there is any lithium or acid losses in the processing plant design and optimize lithium solution handling. Another important step will be to assess the economic viability of potassium, magnesium, REEs or other elements.
Drilling/limited test-mining is required to obtain material for metallurgical testing. Regarding permitting, a field program will be necessary to determine if any protected species of plants or animals are present, and to gather environmental and other data to prepare a mine Plan of Operations.
Finally, infrastructure: Feasibility-level designs for the mine, plant and tailings storage areas can now begin. A better understanding of power and water supply is needed. These are big ticket items that need to be sorted out over the next 12–18 months, before a DFS can be completed.
Capital will have to be raised to fund a pilot plant, various reports and studies and a DFS. Importantly, funding need not come solely from equity raises. I suspect that a farm out or JV is possible as soon as this year. Management is confident that these and other critical factors can be addressed. Readers should remember that first commercial production is probably not until 2025; there’s plenty of time to address any challenges.
CONCLUSION
There are simply not that many 25,000+ tonne/year lithium hydroxide projects in the world at PFS-stage or more advanced, that could be in production in 2025, or perhaps 2024 if a company like Albemarle were to get involved.
Once car & battery makers see lithium projects get acquired, or have their production capacities tied up by off-take agreements away from them, there might be a rush of M&A activity. Cypress Development Corp. (TSX-V: CYP) (OTCQB: CYDVF) (Frankfurt: C1Z1), with a world-class project in a world-class location, an EV of just C$17.5 million and a project with cap-ex