European Lithium “at forefront of Europe’s battle for white gold”, Spark Plus reports
European Lithium Ltd (ASX:EUR) (FRA:PF8) has welcomed a research report by Spark Plus Pte Ltd analyst Cyprus Sia who says the company is leading the charge to be among the first few electric vehicle (EV) battery-grade lithium suppliers within Europe by 2023.
The report said that the strong government initiative to support EV demand and securing a domestic supply chain for EV could bode well for the company in securing funding approvals for its Wolfsberg Lithium Project in Austria.
“EU has overtaken China to become the fastest EV growing market in 2020 with 1.4 million EVs sold or 137% YoY.
“EU is expected to continue the growth momentum to achieve its 30 million EVs target by 2030 and secure its local supply chain of battery materials including lithium.
“Efforts to do so include allocating massive incentives for individuals and companies to support the growth of the sector which has seen an influx of investment into the lithium-ion battery supply chain.
“These may bode well for EUR in securing funding or accelerating approvals.”
Demand set to outgrow supply
The report highlights that global lithium demand is expected to outgrow supply beyond 2021.
“The global lithium demand is expected to jump 263% to reach 1 million tonnes lithium carbonate equivalent (LCE) by 2025 from 275,000 tonnes LCE in 2019, mainly driven by the demand for rechargeable batteries in EV.
“In 2019, about 2.2 million EVs were sold and contributed to, an in-house estimated, 43% or 117,000 tonnes LCE of total lithium demand.
“Global EV sales are projected to increase fivefold to 12.2 million by 2025 and more than 12x to 27 million by 2030 making up more than 80% of the global lithium demand.
“In perspective, over 1.4 million tonnes LCE of lithium is needed for EV batteries and an estimated total lithium demand of about 1.8 million tonnes LCE, or a CAGR of 28.1%, is required by 2030.”
European Lithium well placed
Additionally, Europe is expected to have 20 or more lithium battery (LiB) giga-factories, increasing its capacity by about 13x to 368 gigawatt hours or an estimated 312,000 tonnes LCE by 2025 from 28 gigawatt in 2020.
The report stated: “In contrast, the EU produces almost no lithium for EV batteries today and only 88,000 tonnes LCE per annum or 28% of EU’s capacity when aggregating the upcoming (by 2025 and including EUR’s) lithium mines in the EU.
“As such, EUR can benefit from the immediate demand for lithium in the EU and possibly with a higher selling price in its initial years, and before its peers’ start production.”
Undervalued amidst rising prices
Spark Plus said: “Rising lithium prices with an operating margin of about 39% suggest EUR is undervalued.
“Lithium hydroxide (LiOH) price has surged more than 85% YTD on supply deficit concerns.
“The previous time when the market had such concern was in 2016 when LiOH price reached a high of US$23.6K, pointing to more room for upside.
“With the wide adoption of EV a reality today, analysts are forecasting a lithium supply deficit in 2022 and prices to rise by between 30% to 100% over the next 4 years.
“Factoring in a risk discount of 26.7% for a possible one-year delay in production and production miss, we derive a fair value of A$117.9 or some 2.21x the current market capitalisation of A$53.2 million.
The company plans to commence production at the project in 2023.
Wolfsberg DFS underway
A definitive feasibility study (DFS) is underway in hopes to upgrade the JORC compliant resource to 11 million tonnes (+74.3%) at 1% Lithium Oxide (Li2O).
The report noted: “The DFS is being evaluated at an output level of the Accelerated Case basis of the pre-feasibility study (PFS) done in 2Q 2018.
“The annual mine rate is expected to be 800,000 tonnes with a mine life of 10 years and a concentrator feed of above 600,000 tonnes per annum.
“The concentrator can produce an average of 67,000 tonnes per annum of spodumene concentrate which can be converted to an average of 10,129 tonne per annum of lithium hydroxide monohydrate.
“The post-tax net present value (NPV8) of the Base Case is estimated to be US$154.8 million (A$201.2 million) with an IRR of 15.9% and the Accelerated Case being US$202.4 million (A$263.1 million) with an IRR of 18.7%.
“The CAPEX estimated for the project is US$388.6 million (A$498.8 million) in the Base Case and US$423.6 million (A$550.7 million) in the Accelerated Case.”
Outlook compared to peers
While there are 5 other upcoming lithium mines within Europe, EUR is expected to be the first LiOH producer (mine + processing plant) in the EU with a planned production year of 2023.
Spark Plus said: “We do note that EUR’s OPEX of US$8.3K/tonne LiOH (before by-product credits) is about 60% higher than its peers’ average of US$5.1K but still provides a generous operating margin of about 39% at today’s LiOH price of US$13.5K/tonne.
“Furthermore, these mines only have an aggregated resource of 10.6 million tonnes LCE of lithium and an estimated annual production of 88,000 tonnes of LiOH equivalent.
“A domestic supply of 88,000 tonnes supply will not even meet 30% of the lithium demand needed for EV battery production in the EU in 2025 which may drive LiOH prices much higher in the near term.
“As such, we believe the few advantages EUR have over its’ peers are:
- First mover advantage – given the immediate term domestic supply shortage in EU, EUR may enjoy a higher LiOH price in the near term once they start production and before its peers entering the market; and
- Shorter waiting time for shareholders to unlock value – an earlier production date to its peers means shareholders can see returns on their investment much faster as compared to investing in its peers – this will be beneficial in a rising interest rate environment.”