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How much longer can lithium junior Critical Elements Corp. fly beneath the radar?

Peter Epstein, Epstein Research
1 Comment| March 23, 2016

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Critical Elements Corp.(TSX-V: CRE) (US OTCQX: CRECF) is an emerging specialty metals (lithium, tantalum, rare earth) company, focused on its Rose Lithium-Tantalum (“RL-T”) project in Quebec. Management has proven its ability to produce battery-grade lithium (99.98% purity) at lab scale. The team believes it will be able to produce a Metric tonne (“Mt”) of Lithium Carbonate (“LC”), at a cost of US$2,900. This is a preliminary number. Note: All upcoming NPV figures are post-tax.

The Company’s very promising RL-T project is backed by a Preliminary Economic Assessment (“PEA”) [see pages 9-12] and very strong (current) LC prices, up from about US$5,500/Mt in October 2015 to a reported $20,000+/Mt today. Importantly, Critical Elements is no newcomer to the lithium scene, it has been advancing its RL-T project since late 2009. A total of 181 drill holes totaling 26,500 meters have been drilled to date. Out of the 181 drill holes, 175 returned significant mineralized values.

Assuming a LC price of US$6,000/Mt, the PEA highlights a NPV(8%) & IRR of C$279 million & 25%, respectively. The NPV(10%) is C$223 million. The assumed USD/CAD FX rate in the PEA is parity. However, if today’s C$ 0.77 FX rate were to be incorporated, the NPV (in C$ dollars) would be a lot higher. Management points out that it has made solid improvements in recoveries since the PEA. Spodumene recovery is around 90% at a grade of 6.4% Li2O, and a robust 94% recovery on the carbonation process for Li2CO3. The industry average is around 80% for spodumene and 85% for carbonation.

Huge leverage to lithium prices, which have tripled in the past six months

With an assumed LC price of US$8,500/Mt, the NPV(10%) doubles to about C$495 million. With an assumed LC price of US$10,000/Mt, the NPV(10%) triples to roughly C$660 million. A growing number of consultants & analysts believe US$8,500/Mt is a reasonable intermediate-term forecast. Critical Elements offers very compelling leverage to long-term lithium prices. Of course, all emerging projects have upside in a bullish pricing scenario, but many will never see the light of day, or will hit the market a few years too late…

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Critical Elements has three things going for it that global peers don’t. First, the signature of a strategic Collaboration Agreement with a leading, global chemical company that includes take or pay off-take for ALL products. Second, its LC has exceptionally low iron content, making it ideally suited for the Glass & Ceramics industry. Third, the Company is actively pursuing a non-dilutive capital raise. Given these 3 important attributes, the Company could reach production of glass & ceramics grade LC within just a few years. For the reasons cited below, in my view, just my opinion, (I’m not an investment advisor) the current price of C$0.22 might represent a good entry point for investors willing and able to invest in highly speculative stocks.

Low cash burn & possible non-dilutive capital injection could be strong catalysts

Critical Elements’ management & Board is determined to keep equity dilution to a minimum. They appear to be walking the walk, for example, with quarterly cash burn under C$150k. The Company is in discussions with a few funding parties regarding a potential non-dilutive cash injection. To be clear, that’s a Company goal, it’s by no means a done deal. Readers may have noticed that the Company has been trying to land non-dilutive financing for several months. Last week, management reiterated to investors at a big conference in Toronto, that active discussions are ongoing, but that there’s nothing to report at this time.

The Company has 125.7 million common shares outstanding [basic market cap. $21.4 million at 3/16/16 close] + 7.7 million options at a weighted average strike price of $0.21 (range $0.15 to $0.30) + 3.95 million warrants with a strike price of $0.35. Management & family members own about 18% of outstanding shares, and the top five shareholders own 38%.

Cheap valuation and stock price under-performance may not last

As mentioned, Critical Elements’ basic market cap is C$21.4 million. [$21.4 million divided by the PEA’s NPV(10%) of $223 million ] = ~10%. The Company is trading at just 10% of its NPV(10%). Assuming a US$8,500/Mt LC price, the Company is trading at ~4.5% of its NPV(10%).

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This sharp valuation discount is unwarranted given the above-mentioned factors. Shares in the Company offer a compelling investment proposition. Over the past six months, Quebec hard rock peers Nemaska Lithium Inc. & Houston Lake Mining Inc. are up 146% & 94%, respectively, while Critical Elements’ share price is down 8%.

Therefore, I believe that the Company’s stock has tremendous room to run higher, especially if management can lock down non-dilutive funding. Critical Elements Corp.(TSX-V: CRE) (US OTCQX: CRECF) is a company worth watching. The stock price has already begun to move higher, but the valuation is still cheap given the fundamental strength in lithium prices and company specific attributes that make it less risky than global lithium peers at similar stages of development. Critical Elements’ PEA is strong, possibly with room for improvement from a much more favorable FX rate and stronger reported lithium recoveries.

I reiterate my view, just my opinion, (I’m not an investment advisor) that the current price of C$0.22 might represent a good entry point for investors willing and able to invest in highly speculative stocks.

Disclosures: Readers are charged with conducting their own investment due diligence and recognize that small cap stocks can deliver a 100% loss of investment capital. The author or interviewer as the case may be, Peter Epstein, CFA, MBA, believes that he’s diligent and prudent in screening out companies that, for any reasons whatsoever, are unattractive investment opportunities. However, he cannot guarantee that his efforts will be successful. Readers understand that Mr. Epstein cannot be held accountable or responsible for the accuracy of opinions, facts, estimates, forecasts and assumptions conveyed herein, or for investment actions taken.

At the time this interview was published, Critical Elements Corp. was a sponsor of EpsteinResearch.com. Mr. Epstein owns stock options in the Company. He is not a registered or licensed financial advisor. His article(s) and interviews on Critical Elements and other small cap companies should be considered very carefully in this context. Readers are urged to consult with their own financial advisors before making investment decisions. This company, and all small cap companies, are highly speculative, not suitable for all investors.

Any commentary suggesting that a particular stock is, “under valued,” “over-sold,” a “compelling opportunity,” is “de-risked,” could be “re-rated,” or similar words and phrases, are not directed at any individual or group and do not constitute investment advice. Each individual and group must make their own determination regarding the suitability of any stock mentioned herein. Any comparisons between or among stocks are for illustrative purposes only and are not be taken as fact or relied upon. Nothing herein is to be considered explicitly or implicitly a part of full and proper due diligence.




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