It will become a lot easier to see $2 or $4 valuations when there is greater clarity on the capital cost and that ESS has all necessary approvals to mine Cade and Davy.
Including current options ESS has 275.8m shares on issue.
$2 is fairly easy (if Spod prices remain very high)Lets assume the capital cost is $150m and that could be raised by issuing 474m shares at a net of fees 31.6c price. ESS would now have 750m shares on issue. We know from CXO that a nearing production company expecting to deliver 175-200kt pa can have a $1.5b market cap. $2 * 750m = $1.5b. This would obviously require ESS to complete the various steps along the way - a scoping study, submitting mining approvals, raising the capital, off-takes, FID and securing suitable contractors to build everything necessary. These are all things that are somewhat within the control of management. It would also need Spod prices to be at a level where $1.5b is sensible for 175-200kt and to receive mining approval.
Its possible if not probable that some of CXO's market cap is an expectation that Spod prices will stay high enough for long enough for CXO to get some really strong cashflow in 2023 but not necessarily maintain that same strength for all of 2024, 2025 and beyond.
What does a LTR valuation approach look like?ESS doesn't have anything like the resource size of LTR but across the later 2020's it could be looking at 1/3rd of LTR's production volumes. LTR's currently got a $2.24b market cap but it has been much higher. A third of this is $750m and 750m shares would be $1. There's enough chatter on LTR & CXO threads about their relative valuations that this isn't needed here. LTR's is either dirt cheap or spod prices are coming down massively by the time ESS may be in production.
What if the capital raise was at a better price?This is how you start to get $2-$4 valuations using even LTR pricing. ESS completes its scoping and DFS. It gets an off-take. These don't require massive capital but can show the future value. $150m is raised, but at say $1.20/share so a further 125m shares are issued for 400m in total. A $1.6b valuation on 400m shares is $4. An LTR type valuation would put the price at $1.88, although suspect LTR will increase as it as work on the ground for getting into production occurs giving ESS $2+ on this comparative.
Other permutationsThis can be a bit of a chicken and egg situation. If the market clearly sees ESS as getting into production, the price will be much higher so capital raising to complete the task of getting into production can be at a correspondingly higher price.
One circuit breaker is if ESS can show a non-equity raise pathway to gaining the cash need to get into production, the share price will start to assign a much higher probability of getting into production because raising the finance is less of an issue. This in itself will assist even if standard pathways of debt/equity raising etc are used and the project reverts to your standard mine and concentrate at site proposition.
Who knows what alternatives exist but scoping them should help. For example:
- Could any of the non-lithium projects be sold at a good price?
- Are US Government loans a possibility now the US is changing their laws to allow critical mineral investment outside of the US?
- Are spod prices high enough to mean a direct shipped ore operation could work on some of the low-capex surface material from Cade?
- Could Davy be sold with a suitable off-take arrangement so that ESS buys the ore and processes it with the sale proceeds from Davy substantially funding concentration plant at Cade?