DGWA, the German Institute for Asset and Equity Allocation and Valuation, has provided analysis on the company. The following is an extract from their report.
In recent months, European Lithium Limited (ELI) shares used to trade within a narrow price range between €0.03 and €0.04 and consolidated trading volumes remained regularly below €100,000 on all European stock exchanges.
Since mid-November, however, prices have exploded by 600% within only few weeks (peak level) and trading volumes (€) are in the upper one-digit million range.
This has caused market capitalisation (fully diluted, including all options) to soar from €25m to currently €100m (including capital measures).
In early 2017, the company retained the acclaimed British mining-engineering company SRK to evaluate the technical and economic viability of the Wolfsberg project and subsequently announced the results.
At present, a pre-feasibility study for the mining operation is being conducted on behalf of ELI.
Based on the geology underlying the rock formations, ELI geologists assume that the existing resources find their reflection on the other side of the mountain.
The company is also considering to formally relocate its head office to Austria.
Price movement analysis
Independently of all fundamental developments, a price increase by 600% is always an indicator of short-term corrections.
In terms of chart technology, a price increase by approximately 50% may or should be considered as healthy.
In the case of ELI, this would be within the €0.12 to €0.14 range.
The significant increase in trading volumes and ticket sizes is an indicator of growing interest from institutional investors.
The valuation of an exploration company relies on the following key factors: the size of the resources, the production costs, and - notably - the price of the produced mineral.
In contrast to most other explorers, ELI can rely on the SRK study of April 2017 for independent and robust figures; these figures - in combination with current lithium prices - allow to draw up a number of valuation scenarios.
SRK assumes a net present value (NPV) of approximately €75m (US$94.8m) based on the following parameters:
- Lithium carbonate price of US$10,500
- Production volume of 100 tpa at Wolfsberg
- Discount rate of 10%
Furthermore, the study contains the following additional assumptions:
- NPV sensitivity 100% at 10% change of lithium carbonate price
- Production ramp-up potential of 11,000 tpa
- Discount rate of 8% likely to be achieved through grants etc.
This results in the following valuation scenarios:
|Li2CO3 / US$||10500||11500||12500||13500||14500||15500|
|Production / tpa|
All figures indicated in US$; as can be seen, our scenario calculations result in an NPV between approx. €75m and €720m, based on a discount rate of 10%.
If potential grants are combined with the standard discount rate of 8%, the NPV is expected to further increase by 25%, the SRK study concludes.
In the below diagram, the mine, its proposed expansion and previous exploration activities are illustrated.
Due to the geology, it is not unlikely that the resources find their reflection on the back side of the mountain.
Apart from the hitherto known potential, which is depicted in the above table, there is also an exploration potential of similar magnitude.
The company is currently considering a relocation of its head office to Austria.
The company claims that large parts of its free float are located in Europe; and trading activities in Australia and Europe suggest that this ratio will be further shifted towards Europe in the future.
Moreover, the project receives much attention and support from various political and industrial levels in Europe.
Once the company is based in Austria, negotiations concerning subsidies, offtake agreements and other cooperation opportunities will be further simplified.
The company promises that this step would be implemented 1:1, on a neutral basis for its shareholders.
We expect the results of the newly commissioned pre-feasibility study to be similar to those of the SRK study.
Any delays in context with mine ramp-up are expected to remain within limits common in the industry.
The biggest risk factor is the lithium price; but according to our scenario calculations and considering the production volume potential, we can already now rely on a convenient risk buffer.