Echelon Capital Markets’ Michael Mueller says “E3 is positioning itself to be a top-tier North American provider of lithium hydroxide monohydrate (LHM).”
Demand for battery-quality lithium should substantially increase before the second half of this decade.
Although Alberta is far better-known for the oil its ground contains or the wheat that grows upon it, Calgary-based analyst Michael Mueller is more excited by a more futuristic source of energy that can be found there.
Mr. Mueller is a chartered financial analyst as well as a professional geologist. He is responsible for covering ESG (environmental, social, governance) companies and the energy transition at Echelon Capital Markets.
The analyst’s ‘top pick’ in 2022’s first quarter, equivalent to a ‘best buy’, is E3 Metals Corp. (TSXV—ETMC), which wholly owns the Clearwater lithium brine project in Alberta.
Mr. Mueller explains, “With demand for battery-quality lithium expected to substantially increase before the second half of this decade, E3 is positioning itself to be a top-tier North American provider of lithium hydroxide monohydrate (LHM).” LHM is one of the main components in lithium-ion batteries for electric vehicles.
The analyst calculates a target share price of $5 for the company. Nevertheless, due to the still-exploratory nature of Clearwater, he also assigns it a “speculative buy” recommendation.
Lithium has become a popular investment
He notes that lithium has been a popular investment theme in recent years, leading to new development projects, mergers and acquisitions, and capital investments such as Koch Strategic Platforms’ US$100-million in Standard Lithium Ltd. (TSXV—SLI; NYSE/Amer—SLI) in November 2021.
“We believe this trend will sustain through 2022 as prices are forecast to remain at multi-year highs, reflecting the tight supply-to-demand picture.”
Clearwater is located about halfway between Red Deer and Calgary. The site, currently at the preliminary economic assessment (PEA) stage, contains inferred resources of 7.0 million tonnes of lithium carbonate equivalent.
The PEA, completed in late 2020, forecasts production of 20,000 tonnes of LHM annually over 20 years assuming an average selling price of US$14,079 per tonne and cash operating costs of US$3,656 per tonne. It estimates US$602 million initial capital costs.
DLE extraction process in development
The company is also developing a proprietary direct lithium extraction (DLE) process in-house.
According to its website, “The E3 DLE process uses an ion exchange process that efficiently extracts lithium from saline formation water and produces a clean lithium concentrate stream with low levels of unwanted ions . . .. Using existing commercial technology, the lithium-rich concentrate can be further purified to produce high-grade lithium products through electrolysis and crystallization.”
The analyst argues that this combination of resource and ability makes it unique among lithium brine peers since it does not have to outsource extraction and dampening the project’s economics.
“We believe E3 is in a position to outperform its peers in the near term after a period of relative underperformance in the second half of 2021 and a number of material milestones (expected) in 2022,” he says.
The milestones that Mr. Mueller anticipates include the company optimizing its DLE technology and commissioning an in-field pilot-project prototype, drilling two or three ‘virgin’ wells in the first half of the year; greater confidence in Clearwater based on the pilot-project and well data; and finally initial LHM production in the second half of 2022 alongside the pilot DLE deployment.
Initial lab prototype tests in December 2021 yielded 97 per cent recovery of lithium.
Market recognition anticipated
“With advancements being made on its DLE prototype and a potential resource update in the near term, the market should begin to ascribe more value to E3’s significant resource base, with E3 currently trading at just $20 per million tonnes versus peers at more than $200 per million tonnes,” says the analyst.
E3 has highlighted the Alberta government’s interest in economic diversification, along with solid infrastructure and a stable resource regulatory environment, as benefits of operating in that province.
In addition, the Koch investment in Standard Lithium will provide funding for the latter company’s planned inaugural commercial DLE facility in Arkansas, Mr. Mueller points out. As such, the analyst says he interprets the investment as a vote of confidence for DLE as well as the feasibility of a “project that closely resembles” Clearwater.
The analyst calculates a $357-million net present value (albeit with a 12 per cent discount) for Clearwater, plus $86.4 million for its Exshaw and Rocky assets. On a per-share basis, that translates to a net asset value of $7.12 for E3, to which Mr. Mueller applies a 0.7 times multiple to account for the inherent risk in junior miners.
This is an edited version of an article that was originally published for subscribers in the March 4, 2022, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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Investor's Digest of Canada •4/7/22 •