Canada Lithium improves Quebec Lithium’s economics

Canada Lithium (CLQ-T) has raised its game with an updated feasibility study for its Quebec Lithium mine, showing the project is on track to start producing in 2013 and could rake in better returns, triggering analysts to lift their price targets.

The study, released Oct. 11, confirms the proposed mine on the hard-rock lithium deposit near Val d’Or, Que., should be in commercial production in less than six months.

“The project is still on schedule and on budget for commissioning at the end of 2012 to produce first lithium carbonate in early 2013, and then first commercial shipment in March 2013,” says Peter Secker, the company’s president and CEO, in an interview.

Despite the start-up capital remaining at US$207 million, the study shows better returns by including revenues from lithium hydroxide and sodium sulphate co-products that were not part of the previous feasibility study.  

The latest assessment calculates a pretax net present value (NPV) of US$318 million, up from US$190 million previously, based on an 8% discount rate and lithium carbonate price of US$5,875 per tonne. The internal rate of return has moved to 32% from 22%, while the payback period dropped slightly from four years to less than four years.

The operating cost to produce a tonne of lithium carbonate after netting out the byproduct credits falls to US$2,328 from US$3,194.

When incorporating less conservative lithium price projections by Roskill, a U.K.-based independent marketing consultant, the NPV improves further to US$456 million and the IRR goes to 37%. Roskill forecasts lithium prices gradually climbing from US$6,000 per tonne in 2013 to US$7,750 in 2020. 

The current spot price for battery-grade lithium carbonate is US$6,600 per tonne in China, whereas battery-grade lithium hydroxide commands a price of US$7,500 per tonne, and sodium sulphate, which is employed as filler in the detergent industry, can fetch up to US$150 per tonne in the U.S., the company says.

Annual production at Quebec Lithium remains at 20,000 tonnes a year of battery-grade lithium carbonate, with the potential to generate another 2,000 tonnes of battery-grade lithium hydroxide and up to 30,000 tonnes of sodium sulphate a year in late 2014. The mine has an estimated 14-year life.   

The Toronto-based junior plans to invest another US$20-million to construct a lithium hydroxide circuit in mid-2014, so it could start reaping the benefits of the co-products.  

The co-products are estimated to bring in another US$20 million a year in earnings before interest, taxes, depreciation and amortization.  

The improved prospects have led Matt Gowing, an analyst at Mackie Research Capital, to bump up his price target to $1.05 from 74¢.

“Our increased price target of $1.05 reflects the higher value from lithium hydroxide and sodium sulphate by-products, and also incorporates the impressive pricing gains of approximately 20% achieved year to date for lithium compounds. Together, these adjustments lift our estimate for average annual profit per lithium carbonate tonne to $4,000, up from our previous estimate of $2,525,” he writes in an Oct. 12 note. 

While co-product production is anticipated to start in late 2014, the plant should begin processing lithium carbonate in 2013 at a rate of 13,000 tonnes a year before ramping up to 20,000 tonnes a year in 2014, explains Secker, adding that the company has all the financing and major permits in hand to march ahead.

Commenting on the project’s start-up date, Dundee Capital Markets analysts write in a note that the company “is entering production at a time when there is tight supply/demand balance in the lithium market and as such, may surprise us on the upside.

“CLQ’s stock has performed relatively well over the past 3 months – up 25%. As the remaining milestones come through, we believe investors looking for exposure to lithium will increasingly flock to CLQ as a pure-play lithium producer.”

Secker says the company is focused on delivering what it said it would, with the construction of the plant, which is 70% complete, on track to be commissioned within the coming months.

Canada Lithium is also looking to further boost the project’s returns by producing lithium metal and spodumene as byproducts. It estimates commissioning a spodumene circuit by year-end, and completing a preliminary economic assessment on a 2,000-tonne-per-day lithium plant in late 2013. The potential benefits of these byproducts were not considered in the study.

Following the updated feasibility, Dundee Capital analysts have raised their target price from 70¢ to 85¢, reiterating a “buy” on the stock.