Lack of News Impacting Stock PriceFrom Eight Capital yesterday
• Yesterday, CRE closed at S1.65/sh - which is the lowest price it has closed at since October 2022. We believe the price weakness reflects the lack of news surrounding CRE's strategic initiatives. Investors will recall that earlier this year, CRE management indicated that it would have a strategic partner for the Rose Lithium-Tantalum Project in place by the end of April 2023. To-date, there has been no announcement. Management has stated that the process is taking longer than originally anticipated, in part because they are attempting to conclude three agreements concurrently. This includes a strategic partner for the Rose Project, a spodumene off-take agreement, and the debt financing required to put Rose into production.
• Although management has indicated that they are making progress on these initiatives and that there is interest from various different parties, they do concede that the process has taken longer than originally anticipated. Management has not provided an updated timeline other than to say that project construction will not be impacted. We interpret this to mean that news surrounding the strategic initiatives could be released any time between now and the end of August 2023.
• The lack of news is disappointing and is likely causing some investors to exit the stock. Having said this, we continue to believe that CRE should be able to achieve its strategic goals given the on-going tightness in the North American lithium market, the near-term nature of the Rose Project (full production in 2026) and its relatively modest cap-x (S464mm).
• Although we do recognize that our S4.00/sh target price might be aggressive, we would note that spot Australian spodumene prices continue to strengthen, having appreciated by 14% since mid-May (from USS3,250/tonne to USS3,700/tonne). Moreover, the May 2023 Chinese EV sales of 717,000 units are the strongest YTD sales recorded, which is encouraging given that China accounts for 55% - 60% of the global EV market.
• While we concede that there could be a S0.50/sh delta surrounding our target price, at current levels the stock is not reflecting any significant upside potential. The investment decision at this juncture revolves around investor confidence in management's ability to successfully conclude its strategic initiatives.
Target Price Valuation Methodology:
• Our CRE NAVPS of $5.30 is derived from a DCF that incorporates a USS1,500/tonne chemical grade spodumene price, a USS3,000/tonne technical grade spodumene price, project capex of S464mm, project opex of 5736/tonne, and a 9% discount rate. Our target price of 54.00/sh is derived by applying a 25% discount to our NAV. As our target price represents a 141% total potential rate of return, we continue to rate CRE as a BUY. Risks to our rating and target price include execution risk, commodity price risk, and capital risk.