CRE Review as of May 2012 As an investor the following review and analysis of the facts presented through this BB and by the market represents CRE's state of affairs as it stands today. The level of irrational exuberance of what CRE's stock price should be that is being suggested by these BB posts is comical at best and sad at its worst, as it shows a complete lack of understanding of the market for these commodities. The economy that we use to know won't be back for another 10 years or more, as we are embarking on a very long drag out decline and slow growth model that will result in continued revaluation of these stocks as it is right now.
Ricks Rule also warned: “The thing that’s really on my mind today is the state of the junior equity markets. John Kaiser recently published in his newsletter that something like 60% of the junior equities, on the TSX Exchange (in Canada), are selling at half of their 12 month highs, at less than 25 cents a share, and have less than six months of working capital in their treasury.
That’s a different way of saying that more than half of the TSX is headed for extinction if the market doesn’t change. It’s difficult for people to get their heads around the fact that they bought a stock for a dollar and it’s selling for a quarter. They don’t want to sell it until the price goes back up, but the price is not going to go back up.
Those of you who are consistently in denial will wake up way to late and will hang on to the bitter end. It's a classic mistake as I state my opinion below in such unequivocal terms troubles me. I do not base my conclusions on make believe projections posted because no one likes to be the harbinger of negative thoughts. The future is uncertain, but I can reach no other conclusion that the world as we know it is heading for a major upheaval. My current portfolio is being deployed to take advantage of the great buys in gold and silver for the next bull leg in precious metals that represents 83% of my investments. So please review and take the time to read my detailed analysis of CRE as I have given this significant thought and time to prepare this document with references to source material. I wish you all the best of luck in your future investments.
CRE Review as of May 2012.
Given my last post of March 16, 2012 stating I would not post until May unless we have news that mattered. Since we have had no news of significance I have prepared a detailed review of CRE based on the industry, PEA of December 10, 2011, news releases and BB posts.
Let us first start with my reasons why the 99.9% PR of 25 April 2012 was negative on the stock was simple, read the details. The 99.9% is no different than what a car sales person, realtor and politician do daily, feed the masses with what they want to hear and gives them that sugar rush they need. The methods describe in the PEA are not simple to achieve 99.9% Li2CO3 and this analysis will be explained in detail in subsequent paragraphs. The PEA document was based on such a low level of tantalum recovery 50% they were going to beat that (ref PEA pg 180 section 17.4 Tantalum recovery) however we need to obtain a recovery rate near 90% and current industrial production methods to achieve that level are very costly and difficult (ref PEA pg 304 section 26 Mineral Processing point 2).
If your read "Rose Project Potential Schedule - From PEA to Pre-production" (ref PEA pg 305 Figure 26-1) states Feasibility completion is T2-T3 2012, we are in T2 now. If you look at the date for Pre-feasibility was T4 2011 - T1 2012, date long since passed. So CRE jumped directly to a Feasibility study. That is abnormal and inconsistent with normal mineral development processes. How can we trust a management team that works in such an opaque manner. This reflects poorly on the management team showing a complete disregard to the investor that it is unable to plan effectively and then takes the unusual step to skip a pre feasibility study. They will miss this date too, as confirmed by DenisLemire BB post May 11, 2012 titled " Talk Paradox - Resume" as noted in his point number 1 ("This is the feasibility study is scheduled for late 2012 or Q1 2013 if there is a delay.") as they are already hedging their bet. This date states scheduled, not started or complete just a vague reference. Also notice that the original Feasibility Study has slipped again by 6 months from the original PEA.
Now let's look at CRE money situation, DenisLemire BB point 8 states less than $1.5 million in the coffers. Juxtapose that with the stated PEA projected costs (ref PEA pg 306 Table 26-1) and we have a total expenditure of $2.365 million to go from PEA to Pre-feasibility, but let's review that. Since CRE jumped from Pre-feasibility to Feasibility Study, mining research studies show that feasibility costs for development of projects in excess of $250 million show that the average estimated project cost at time of completion (excluding of all costs incurred to that stage) are approximately 2.3 percent for all mine types of the total estimated project cost. Since this is a classical Greenfields project it will cost more than that of a Brownfield's project. Given that we are a Greenfields open pit mine we use 1.2 percent (ref PEA pg 268 section 21.1 paragraph 1) of $268.6 million. That gives us a cost of $3.2 million to complete all aspects of the feasibility study based on industry standard estimates. The opportunity for CRE to get financing is DOA as the market for any new capital for this type of project is gone so this is a bold face lie from management that money is easy to obtain as they stated during the last AGM.
Given that the estimated costs was $500,000 (ref PEA pg 305 Figure 26-1) for a pre feasibility and that the key feature of the feasibility study is to refine the optimal operating scenario defined by the prefeasibility study, it by definition will be more expensive. Therefore, I reference two companies to get a ball park estimate for this undertaking using Nemaska Lithium ($1+ million) and American Vanadium $975,268 as of December 2011 (note these are cost to date and not the final total). The definitive feasibility study should provide the basis for the decision on whether in fact further study is required and if the project is worth pursuing and advancing the project to the design and construction phase. Establishing a feasibility study requires a multi-phased, iterative evaluation process and the most influence on the project outcome is during the study phase.
That study process needs to be of the highest quality in order to deliver the maximum value to the investor. Since no cost has been attached to this process management is keeping us in the dark with empty words of no substance in the hope that some mother goose will lay a golden egg for them. Based on this, CRE does not have the approximate $3 million in finances to complete the steps as proposed in the PEA and go directly to a feasibility study. If capital is not forthcoming in the next few months, the whole project schedule will go out the window. If someone has the balls to shout BNT to the rescue, I rest my case. That is the equivalent of the blind leading the blind. How can we proceed to the next stage when so many unknowns exist (ref PEA pg 201 section 18 Constraining Factors). Management continues to insult my intelligence with all the BS NR's that are void of any substance that counts. My take is CRE management skipped the Prefeasibility study as they missed the date, did not want to spend the money and now they want us to believe this change was based on altruistic motives. Delay is the new modus operandi and mantra for CRE.
What I take as a NR of substance and I use the example for ARGEX mining, when I learned they posted a NR that they had an agreement with the Quebec Innu signed to develop the mine I bought the stock on May 24, 2010 and sold it February 15, 2011 for a 4 bagger. This was key news in my books that counted and got the ball rolling.
As noted previously, to achieve 99.9% Li2CO3, using the CRM mineral process for this mine states it is not an industry norm, that is a red flag in my book. This will require large annual sodium carbonate supplies and CO2 and that will be costly to ship (ref PEA pg 180 section 17.3.1-2). Lets factor other unknowns, the concentrator that is industry standard that is positive, but as such the SAG mill and the ball mill have long shipping delivery delays (ref PEA pg 201 item 2). Another item, the Bicarbonatation Plant (ref PEA pg 201 item 4) is a custom process, expensive and variable on its final cost. Next is transportation, this is major concern, roads in the north are hard on equipment and in this case CRE will encounter high variable costs for transportation of key supplies to operate mine (ref PEA pg 201 item 5). Who is going to maintain and pay for the required maintenance of the roads as they were not designed to handle the additional traffic. The closest railroad service to the property is found in Chibougamau, 265 km south of the property (ref PEA pg 203 section 18.1 Railroad). To my knowledge we have no agreement with the native population and Hydro to move power lines just empty political promises from management.
Let's look at another component, water is both a curse and a blessing, in CRE's case this complicates matters for the permitting process (ref PEA pg 298 section 25-2 Sub section Environment Paragraph 4) and ultimately lead to delays. This potential mine and the numerous water area's around CRE's site will be impacted from two water basins, so flooding is a distinct concern also. Weather in this region is brutal on people and equipment and the mining industry time and again underestimate the true costs, so I have little faith in the projected G&A estimates as being accurate. Given the strong historical evidence that for major projects, we have a record of failure in the industry to meet cost estimates. A quarter of all projects had a 25 percent or more in overruns, one-tenth had cost overruns of 50 percent or more. Further, half had time overruns of 25 percent or more and approximately 33 percent had time and cost overruns of 50 percent or more. That is why you need to take PR in the same vane as a politician or car salesman, the truth is buried in the detail or obfuscated entirely from the investor. So CRE is currently missing on both time and cost overruns.
If we take a look at a miner like Rincon for example that has a mine life of 400 years at half the price of potential North American competition, it is hard to see why massive capital expenditure would go towards hard rock vs. preference to advancing the easier and cheaper option of the brine lakes. We also have disruptive technology using brine extract from geothermal for future supply. It's frightening that the lithium mining industry proclaiming estimated consumption that heads toward the stratosphere when countries such as Germany have been actively pursuing the development and approval of recycling technologies for lithium batteries. This is a natural extension of the lithium life cycle no different than that of lead batteries. The end result being once we reach critical mass of lithium-ion batteries the demand usage we create will reach a relative stasis in lithium usage growth. This will take under 10 years from 2012 and its well under way, but this fact is a major consideration. Given that if CRE makes it to the mining stage, with the projections of a 17 year mine life comes into conflict with this development and as with any longer term investment we must incorporated this in the planned ROI. Since CRE did not, the market will do it for them as it has for all the lithium stocks.
Lithium Breakdowns:
Lithium Sulfate 99.0% cheapest to produce
Lithium Carbonate 99.5% battery grade
Lithium Carbonate 99.9% high battery grade
Lithium Carbonate + 99.99% expensive to produce and outside the scope of current PEA and would require new and separate mine facilities for which no costing exists or has been planned (PEA pg 366 section 19.1.5.4 Paragraph 2-3). There are currently only a few facilities of significance in the world that produce this grade that I have been able to source and only do so because they have the capital from existing lithium business and years of production. So spouting off $15K/T is ludicrous and irresponsible to post on this BB.
Demand for Tantalum is being easily increased as shown by Canadian company Cabot which shut down production in 2009 and restarted in May 12, 2011 resulting in prices declining from $150/lb to around $100-120/lb. These prices are a moving target and based on metal events international Tin and Tantalum conference (ITTC) set the pace for 2012 tantalum market of falling prices. The high cost have taken a toll on the market and anything north of $100/lb, the capacitor market cannot absorb that cost and grow long term.
Lithium carbonate prices have increased from 2011, but given large number of proposed mines only a select few will make it. The major suppliers FMC, Chemetall (part of Rockwood Holdings) and SQM can easily scale production to meet demand at low costs. The select few that have agreed to off take agreements must be considered lucky as they did this early on. Manufacturers who take the off take agreement route require steady price models, therefore any lithium company that takes this route also limits profit growth by locking in. BB posts using the high end of current lithium prices are spot quotes, lithium users establish long term contracts using much lower average prices, again BB posts disregard this fact.
Why did CRE on NR of February 2, 2012 adopt a shareholder rights plan? My take is they attempted negotiations, off take agreements, third party and discovered they had some potential interest. However they were low ball, do you blame them. Give me the low ball offer any day. This is the same as selling a house in the US, people sit thinking the house is worth $250K since that is what they paid for it, when reality on the ground is its only worth $100K. That is what CRE's mind set is and the BB, who are all in denial. Reality is a B itch and those who ignore it will end up broke or in foreclosure.
Another topic for discussion is the recent expiration of warrants. Everyone on this board was all excited over the expiration as if this would magically improve the SP. Well let us consider that expiration of warrants are a source of revenue for the continued operation of the company. When they expire we lose out on a potential source of funds that would have contributed to the cash balance of the company. Even though they would have diluted share holder value, they would have shown the company had value to dilute. So having them expire worthless is a negative, hence another reason we are under .15 cents. Between Nov 2011 to Apr 2012 we had 20,343,306 warrants expire that would have had the potential to generate over 8 million in cash (ref CRITICAL_MDA_2011_05_31 final.pdf pg 22). The purpose of the warrant is to entice investors into buying the security. The warrant can also increase a shareholders confidence in a stock, provided the underlying value of the security actually increases over time. Therefore all the expired warrants collectively say to the market CRE is not a stock you want or should invest in.
Last topic, BB post ratings, not that it matters but I find it amusing and so obvious when your rate yourself a 5. Then you wine over and over that someone lowered your rating. To rate yourself a 5 would have to be inside information, otherwise let the crowed determine what they think of your post. So few rate posts as they realize it is not important, it's the flow of information that counts.
Let me close this BB post with a history of EFG. First it started as a gold stock, then lithium and tosses in some rare earths to add more flavor to the pot. What is that saying, 'Jack of all trades, master of none' gave EFG an identity crisis resulting in a name change to CRE. To make matters worse we are connected to BNT and given the last NR extension April 12, 2012 read the key note "Under the terms of the Agreement, Blue Note now has until May 31, 2012, or such other later date as mutually agreed by Blue Note and Critical Elements" is now open ended, priceless. Bottom line CRE is too late to the lithium scene as the boat has set sail without CRE as one of the passengers and is surplus to the market. Hope for the best, plan for the worst. My take is this is an investment you need to avoid and look for any opportunity to exit as the likelihood of CRE becoming a mine is looking dubious at best as the passage of time is not in its favor. There’s too much production. Too many projects. Too many promoters.
BTW, I didn't mean to offend everyone though I probably have. Truth tellers have been known to lose their heads. Finally to all the conspiracy theorist out on this BB, the only games being played are the ones of self deception. Oh and for those who attempt to trash my analysis, you should think clearly before making a reply and be able to back up your claims with verifiable data that pertains to CRE rather than some pie in the sky Technicolor dream supplied by the PR team.