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European Lithium worth up to four-times current valuation says Sydney firm

Published: 09:30 08 Dec 2016 AEDT

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European Lithium is a lithium development company.

European Lithium (ASX:EUR) has received a Buy Recommendation at A$0.18 share price target from Gavin Van Der Wath from the Sydney-based firm EverBlu Research Pty Ltd.

EUR last traded at $0.044, highlighting the potential significant upside. The following is an extract from the report.


European Lithium Limited (EUR) is a lithium development company, currently undertaking a PFS of its 100% owned Wolfsberg Lithium Project (WLP) in Austria.

Value accretion is expected to occur regularly as development programme milestones are met.

We value EUR at AUD64M or AUD0.18 per share based on peer comparison.


Electric Vehicles Lead Demand Explosion

Although the consumption of lithium has experienced exceptional growth since 2000, we believe that demand is expected to burgeon over the next decade as the increasing political and consumer focus on environmental consciousness is expected to drive vehicle demand for lithium-ion hybrids (HEV), plug-in hybrids (PHEV) and fully electric vehicles (EV).

These require large format batteries that require kilos of lithium, rather than the grams used today in portable electronic applications.

This is reinforced by huge investment in electric vehicles by all the major car manufacturers and announcements of investment in battery manufacturing facilities.


Unmatched Strategic Position

Europe has declared lithium to be of strategic value as it is import dependent.

It is the second largest market after China and currently consumes 28% of lithium production. With the current oligopolistic situation in the lithium market, continuity of supply is of paramount importance to incumbent consumers as well as the new battery manufacturing facilities that have been (and are expected to be) announced in Europe.

EUR’s WLP is one of the few advanced European based projects able to fill this niche as well as providing supply diversification. The proximity to markets will also permit by-products (quartz, feldspar and mica) to be monetised.


Management Deliver First Milestone

Managements first objective was to validate the previously declared Inferred Resource of 3.7mt @1.5% Li2O and they have delivered spectacularly with a Measured & Indicated Resource of 6.3Mt @ 1.2% Li2O.

Tonnage is up 75% and contained Li2O is up by 33%. The project’s consolidated land holding of exploration and mining licences is expected to yield a significant lithium resource.

A single drill hole reached a depth of 450m in Zone 1, the Northern limb of an anticline structure, and further drilling to this depth along strike is expected to demonstrate vein continuity and to significantly increase the resource, which remains open at depth and along strike.

Exploration upside also exists in Zone 2, the Southern limb of the anticline, which could have a similar resource to that expected in Zone 1.


Options For Early Production

The operation lends itself to an early production strategy and timeline.

Bulk trial mining has been undertaken and completed and mining permits remain current.

The University of North Carolina has completed metallurgical studies where the primary process and grade recovery was confirmed.

Besides investigating a battery grade lithium carbonate and/or hydroxide plant as part of the PFS, management are also evaluating the fast track production of a spodumene concentrate for the European glass-ceramic market for early cash flow.


Summary

We have used Enterprise Value (EV) per Li2O resource tonne of peer companies as the primary measure of our valuation methodology.

Our valuation and share price target has been based on an expected resource previously reported of 16.9Mt @ 1.27% Li2O.

This results in an EV of AUD59M at an average peer comparison value of AUD275/t, which translates into a market capitalisation of AUD64M after cash of AUD5M added. This is equivalent to AUD0.18 per share.


Peer Comparison

The WLP previously had a JORC (2004) Measured, Indicated and Inferred Resource of 16.9Mt @ 1,27% Li2O for Zone 1, but due to the drill core being lost and supporting primary documentation not being available the competent person revised the resource to an Inferred Resource of 3.7Mt at 1.5% Li2O under the 2012 JORC Code.

EUR has found most of the primary supporting documentation and has completed verification of the initial results.

The current reported Measured and Indicated Resource of 6.3Mt @ 1.2% has exceeded our expectations of the validation of the initial resource.

In addition the company has extended its exploration focus to include the other limb of the anticline (Zone 2).

We believe that within the space of 12 months the original JORC (2004) Measured, Indicated and Inferred Resource will be validated, forming the basis for our valuation.

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