Canada Lithium inks off-take agreement

Two months after signing an off-take agreement with one of China’s largest commodities traders, Canada Lithium (CLQ-T) has sealed a second deal with one of Japan’s largest commodities trading companies, Marubeni Corporation.

The three-year off-take agreement gives Marubeni the right to distribute Canada Lithium’s battery-grade lithium carbonate in Japan for an initial three-year period starting this year and the option to extend the agreement for another three years in 2016. The Japanese commodities trader will purchase a minimum of 2,000 tonnes of lithium carbonate in 2013 and also has the option to increase that amount to 5,000 tonnes by 2015.

Marubeni will purchase the lithium products Free on Rail from Val-d’Or in Quebec starting in July.

News of the deal sent Canada Lithium shares up 8.6% or 6¢ to 76¢ apiece and at presstime were trading higher at 77¢ a share within a 52-week range of 34¢-81¢. The company has 341 million shares outstanding.

“It is certainly positive for Canada Lithium as investors gain comfort on estimated top-line revenue,” Jonathan Lee, Byron Capital Markets’ battery materials and technologies analyst, wrote in a research note. “We now have good visibility to top-line revenue with 70% of the product called for with a potential of up to 95%.”

He also noted on the upside that execution is one of the company’s strengths and that the agreement means there is even “less risk in executing its strategy to put the mine into production and to grow its revenue through the installation of a lithium hydroxide plant in 2014.”

Kerry Knoll, Canada Lithium’s chairman, was co-founder of Wheaton River, Glencairn Gold, and Thompson Creek Metals, while president and chief executive Peter Secker has developed three mines in Australia and two in China. Chief operating officer Charles Taschereau developed the US$450 million Essakane open-pit project for Iamgold (IMG-T)

Lee estimated that Marubeni will take a discount from market prices, “much like other traders typically do, anywhere from 5% to 10% off spot” and “with current prices at $6,500 per tonne, we believe a sale price of $6,100 per tonne is a reasonable net realized sale price, with company estimated cash costs of roughly $3,200 a tonne.”

In November, Canada Lithium signed a five-year off-take agreement with China’s Tianjin Products and Energy Resources Development for a minimum annual commitment of 12,000 tonnes of battery grade lithium carbonate starting in 2013. The Chinese company can also trigger a clause that will allow for an additional 20% off-take in 2014. The first shipment of lithium carbonate under the agreement is scheduled for the end of March.

Canada Lithium produced its first spodumene concentrates from its flotation plant at the end of December and commissioning of the flotation plant and the hydrometallurgical sections of the processing plant are underway. The 20,000-tonne-per-year lithium carbonate processing plant is scheduled to complete ramp up to full production in the fourth quarter of this year.

The company has a debt facility of $75 million and has drawn down about $35 million so far.

In terms of downside risk, Byron Capital Markets’ Lee noted that the company has roughly $30 million in working capital to get to cash flow positive, “or less than 10,000 tonnes of production especially since ramp-up costs will be greater than the expected $3,200 per tonne cash cost)” and that “if there is a delay in getting to production and generating cash, this could cause downward action and potentially add the need for a capital raise.”

He also remarked that at $3,200 per tonne he believes Canada Lithium “is the high-cost and marginal supplier of lithium in the industry” and as a result “any large downtick in pricing could be detrimental to the company.” However, Lee added that he doesn’t believe it likely given current market conditions.

In a January power point presentation, Canada Lithium estimated that its product will make up about 12% of the world’s 160,000 tonnes of lithium sales in 2014.

According to an updated feasibility study last year, the open pit mine will have a payback in less than four years.