Epstein Research Report: Critical Elements Corp, Compelling Risk/Reward in Lithium

Critical Elements (TSXV:CRE,OTCQX:CRECF,FWB:F12) is an emerging specialty metals company focused on its Rose Lithium-Tantalum (“RL-T”) project near James Bay, in northern Quebec. Last year the Company signed a strategic Collaboration Agreement with a leading global chemical company that includes 100% take-or-pay off-take for all products produced, at market prices.
Critical Elements Corp.’s (“CEC”) PEA highlights a 99.98% purity, low-cost, hard rock lithium project with a pre-tax NPV(8%) & IRR of C$488 million & 33%, respectively (assuming a US$6k/Mt Lithium Carbonate (“LC”) price). The RL-T project benefits from a source of very low-iron spodumene concentrate, ideally suited for the glass & ceramic markets. Both technical & battery-grade lithium production is planned, with technical grade likely available in 2018 and battery-grade 12-18 months thereafter. If successful, this would allow CEC to generate cash flow to support development and commercialization of battery-grade lithium products. [See: Corp Presentation]
CEC began drilling the RL-T property in late 2009 and has been prudently advancing it towards full Feasibility ever since. Over the years, the Company has been meaningfully de-risked. So much so, that management believes it is within 6 months of nailing down project financing. As part of the above mentioned Collaboration Agreement, CEC’s strategic partner has the option to acquire a 25% interest in the equity capital of the project. A 100% take-or-pay off-take agreement with a large, creditworthy counter-party, should facilitate the Company’s efforts in obtaining debt financing.
Critical Elements Corp (“CEC”) on the Move
If the strategic partner invests at the project level for 25% of the equity, and debt financing is obtained for 60%-65%, that would leave the Company with 10%-15% to fund itself. In May, CEC raised gross proceeds of $6.2 million from a placement that CEO Jean­ Sébastien Lavallée explains went to a group of institutions, led by JP Morgan Management UK. Institutional ownership is key to the story moving forward, both as a vote of confidence in the Company’s progress and as an ongoing source of capital to fund the Company. In addition, CEC continues to pursue a modest non-dilutive cash injection.
This lithium player chart represents my perspective only, I produced the image myself. CEC, with a promising Preliminary Economic Assessment (“PEA”), is in the 2nd tier, “Nearest to Production,” with 5 other prospective producers that are likely, or at least could, commence operations this decade. Among the members of this group, Critical Elements Corp. is perhaps least well known, for example the 5 peer developers have an average market cap nearly 4x the size of CECs.
Assuming that the Company obtains clear evidence of the availability of proper funding, it’s significant discount to peers could shrink. The Company is likely to attract a lot more attention as its business plan unfolds. In my view, CEC has the single best strategic off-take agreement in the developers space.
Its strategic partner has agreed to a take-or-pay arrangement for 100% of production, no matter what’s produced, while paying full market price. The partner is also contributing valuable technical assistance and market intelligence. This is a tremendous deal to sign with a Major global chemical company. A true vote of confidence in the project and management team.
June to date, an average daily trading volume of $1.5 million has traded, compared to $580k in May and $190k in April. Trading volume approaching $2 million/day meaningfully expands the universe of prospective investors.
CONCLUSION
With heavier trading volume, an expanded universe of investors and both positive technical & fundamental catalysts, I believe a new set of (larger) investors is probably accumulating positions. The average share price of late has been between roughly 60c-75c. It seems reasonable that, for the most part, sophisticated investors (not traders) paying 60c-75c/share, are not likely to be sellers below a $1/share. This is not a share price prediction or advice to buy shares, the lithium space is very speculative, so investment hurdle rates are high. Critical Elements Corp. (TSX-V: CRE) (US OTCQX: CRECF) (FSE: F12) offers an attractive opportunity to potentially ride the lithium wave higher, but with less risk of an epic wipeout.
Connect with Critical Elements (TSXV:CRE,OTCQX:CRECF,FWB:F12) to receive an Investor Presentation.