The electric vehicle boom and the tremendous attention that Tesla has received made lithium the hottest metal on the planet in 2017. However, the last couple of years have witnessed the lithium boom of 2016-2017 turn into a bust for most lithium explorers/developers. Stocks, such as Wealth Minerals (TSX-V:WML) and Nemaska Lithium (TSX:NMX), have seen their share prices drop more than 90% from their 2017 highs.
For the last two years I have generally avoided the lithium sector, as I felt the headwinds were too strong. Therefore, it took an especially unique project to get me to listen to E3 Metals (TSX-V:ETMC) CEO Chris Doornbos present at a conference two months ago. E3 is far from your typical lithium developer. I believe it represents a compelling investment opportunity, as the company embarks upon critical year that should take it very close to the point of making a project construction decision.
E3 holds the 6th largest lithium resource globally. Yes, that’s right. 6.7 million tonnes of lithium carbonate in a 43-101 compliant inferred resource. To say that Leduc hosts a massive lithium resource would be an understatement. It’s important to note that fifty years ago this reservoir hosted one of the world’s most prolific oil resources, operated by Exxon Corporation at the time. Oil put Leduc on the map, however, it might be Leduc’s lithium resources that delivers an even more significant economic resource than its oil once did. Moreover, E3’s Leduc Lithium Project has the potential to create approximately 1,000 badly needed jobs in the Canadian province of Alberta; a province that has been suffering economic hardships for years because of the oil sector downturn and tougher government environmental policies.
Not only is E3 Metals an intriguing story currently priced at a relatively miniscule valuation, it is the sort of junior mining company that one can’t help but want to see become successful. Leduc could do a lot of good for a lot of people, and more importantly, for the world as a whole as the planet transitions to green energy sources.
With a massive lithium resource already in place, the next step for E3 is to prove that it can economically extract the lithium from the Leduc Reservoir and produce battery grade lithium carbonate. It is this next that E3 is laser focused on in 2020:
The combination of E3’s strategic project location and a joint development agreement with Livent Corporation (NYSE:LTHM) puts E3 in a powerful position to rapidly advance E3’s Alberta Lithium Project, accelerate the development of E3’s proprietary direct lithium extraction process, and overall lithium production processes through two stages of development:
1. Ion Exchange (IX) Project: The first stage will include finalizing the commercial readiness of the ion exchange sorbent. The sorbent is used to produce a high purity lithium concentrate from Alberta brine.
2. Pilot Plant Project: The second stage will include the construction and operation of a custom pilot plant deployed in Alberta for testing the IX Process and further processing of the concentrate into a saleable lithium product at a larger scale. The result of this stage will be a detailed process overview and economic development plan for E3’s Alberta Lithium Project.
E3 already knows that its direct lithium extraction process works, the goal is to now prove it on a much larger scale. More importantly, it will be critical to demonstrate that the process is economic. E3 strongly believes it is economic, but management is limited in what it can say publicly until a PEA has been completed.
Key goals for E3 Metals in 2020:
Brine development plan
Testing on existing wells
Aiming to find high-grade lithium in the areas of the reservoir that have not been affected by human activity
Brine production plan including production well test. By the end of 2020, the goal for E3 is to be well into the process of the construction and design of a pilot plant for producing lithium from the brine at the Leduc Reservoir in Alberta.
An interesting aspect of the agreement with Livent is the valuation embedded in this agreement. Once Livent has invested US$5.5 million in funding and completion of the joint development project, it has the option to convert to a 19.9% equity ownership interest in E3. This represents a US$27.5 million total valuation, or roughly C$36 million at the current USD/CAD exchange rate. This market cap equates to C$1.17 per ETMC share.
At the recent C$.40 share price ETMC shares offer an attractive risk/reward proposition as the company enters a critical year with a steady pipeline of development news flow. Once E3 reaches the pilot plant construction stage (Q4 2020), I fully expect ETMC shares to trade much closer to the C$1.17 per share valuation embedded in the Livent development agreement.
ETMC.V (Daily – One Year)
ETMC shares performed well in 2019, during a relatively challenging year for the lithium sector. And ETMC also boasts a relatively tight share float, with less than 30 million shares outstanding.
One of the only comparable projects in the world that is held by a publicly traded is Standard Lithium’s Arkansas Lithium Project, which is now in the pilot testing stage. Standard Lithium’s (TSX-V:SLL) Project is slated to produce the exact same amount of lithium carbonate per year as E3’s Alberta project (~20,000 tonnes per year which equates to US$200,000,000 in annual revenue at a US$10,000 per tonne lithium carbonate price), yet Standard currently trades at 8x the market cap of E3. This valuation gap is simply due to the fact that Standard Lithium is about 12-18 months ahead of E3 in the project development cycle. I expect E3 to catch up and bridge this valuation gap over the next 12-24 months.
The author of this article has purchased E3 Metals shares on the open market in the last few weeks, and intends to buy more shares on the open market in order to build out a core investment position.
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