MaterialsCritical Metals: The Hope Is Big Here Mar. 28, 2024 9:08 AM ETCritical Metals Corp. (CRML) Stock1 LikeTim Worstall4.76K FollowersFollowSummary SPACs are becoming less worthwhile as the pipeline of good deals is thinni3 Commentsng out.Critical Metals, a lithium mining company, may not be a good investment due to economic concerns and an arbitrage between markets.The company's assumptions about lithium prices and the feasibility of their mine are overly optimistic, making it a risky venture.OlemediaSome de-Spacs are possibly less worthwhile than othersWe're all aware of how SPACs, special purpose acquisition companies, work. Everyone piles in with $10 a share to set up a company that is a market quotation plus the pile of cash. Then that looks around for a private company to then merge with. For the private company this is a cheaper - possibly - alternative to an IPO as a method of raising capital and gaining a quote.So far so good and really just a formalisation of the old idea of merging into a shell company.There was - as again we all know - a boom in this three and four years back. One conclusion from which is that many to near all of those companies which were on the verge of being good enough to IPO/de-SPAC have now done so and so the pipeline of good deals is gone. Or, at least, a lot thinner than it used to be. I will admit that this is largely my view.But, obviously, we need to check each and every one to see whether that is true in a specific case. For even in a market for not very good companies there will be the occasional diamond in that rough.Critical Metals (NASDAQ:CRML)European Lithium, an ASX quoted owner of a lithium mine in Austria merged with the SPAC Sizzle Acquisitions to become Critical Metals. At which point, well, could be a good idea. We all know there's some excitement about lithium these days. So, worth examination.Just to alleviate any narrative tension no, I do not think this is a good investment. Upon two entirely different grounds. The first is just the state of the lithium mine itself, the price assumptions being made and so on. The second is something that European Lithium itself pointed out - there's something of an arbitrage between markets happening here. And arbitrage, the idea that prices should move into equality, can work either way.The mine itself.The description of the Wolfsberg Lithium Project that we've got comes from the company itself. There are a few technical bits we need to grasp to understand what is really being said here.Yes, there's an actual mine there - old, but it is a mine. Mining permits are in place, at least so we're told. OK, that's good. Trying to do anything in Europe is hamstrung by how difficult it is to gain all the relevant permits.There's an offtake agreement with BMW for production. OK, that's a small agreement ($15 million) and we could think of this as just BMW having a little insurance policy. But that is, still, again a good thing. Offtakes are important in lithium.It thus becomes the economics that matters here.The lithium hydroxide plantThis is the first place that the economics start to look a little odd. The Wolfsberg mine is not, by the standards of the lithium industry, particularly large. It's not tiny either, but not large. However, one of the things about that same lithium industry is that there are large economies of scale in processing lithium concentrate. This is why the industry is constructed in the manner it is.For an efficient processing plant (into hydroxide, say, or carbonate) you need something processing much more than just the one mine's output. This is why the giant Chinese processors have such a lock on the industry. You need many mines to feed a processor. That also means that every mine needs to find a processor. Thus the are strong links between the smaller mines and the large processors.Well, OK, just the way things are. But the suggestion here is that Critical will build the processor themselves - in Saudi Arabia - to process their own concentrate. But it's very hard to see how the processor can be economic if the feed is going to be only from this one mine.Sure, it's possible they've a new chemistry or something. But if they had that they'd be telling us. So the idea of their own processor seems to be locking them into a sub-economic process. That's not a good sign. Sure, we all know that everyone would like to be free of the Chinese processors. But still - being sub-economic while you do that is not one of those guaranteed routes to great profitability."Binding agreement in place to build the first regional Lithium Hydroxide Refinery in Saudi Arabia, funded by a 50:50 Joint Venture with Obeikan Investment Group"As I say, well, yes. But that does at least seem to be running against the base economics of the industry.The ore gradeThis is less than stellar:S-K 1300 Update Completed in 2023 - 12.88m tonnes at 1% Li2Oresource (Li2O cut-off 0%) measured in Zone 1This is spodumene, a well-known lithium mineral. And the thing is we generally measure it rather differently. Something that's 0.2, 0.3% (just as examples) LiO2 is not economic in the slightest. The costs of extraction, crushing and liberation are vastly higher than the value of the lithium concentrate extracted. There's no hard and fast here but grades of 0.6 and 0.7% are around and about economic (Here). As a rough thumbnail guide these days we'd be hoping for 1% to 1.3% Li in a spodumene find. That's not hard and fast by any means, that really is just a hairy eyeball guess at something being interesting.Someone telling us their Li content from 1% down to 0%? The very fact that the larger number is only 1%, then they're reporting with that cut off of zero is, well, it's not normal. And people reporting numbers on a not normal basis need a little more scrutiny.Resources not reservesWe've a little technical detail here. So, a mineral deposit is just that - there's some of this stuff in the ground. A mineral resource is where we've done some exploratory work and can show that there's at least this some amount of that mineral there. Which is great, it's a vital part of developing a mine of course. But that's the stage they're at here:To achieve JORC Code compliant Measured, Indicated and Inferred resources, historic drill core, primary data and QA/QC protocols were not immediately available from the original drilling programs. The Company proceeded to locate and recover primary data from relevant authorities archives to assist in the upgrade to be JORC Code (2012) compliant.• The results of a program of underground twin hole drilling and channel sampling undertaken by the Company in November 2016 have supported the previous owner's earlier resource estimates, which were subsequently used to deliver an upgraded resource estimate reported in compliance with JORC Code (2012) standards in December 2021.JORC is the set of evidence rules you've got to be able to meet as an Australian quoted company to claim resources, reserves and so on.They've got resources here. The crucial part of that distinction is that they have not yet proceeded to the point of showing that this is economic to mine. Sure, there's spodumene there, there's lithium, but will it be profitable to extract?Proving reservesIt's the definitive feasibility study, the DFS, which tells us whether it's in fact worth doing. That's also what converts a resource into a reserve. And the crucial point here is that a DFS has to use "current market prices". At least, it darn well should. Critical's assumption (page 25) is that current prices are an anomaly and that prices will rise again.Sure, they could be right too. But their assumptions are built on the idea that lithium hydroxide goes for a little over $28,000 a tonne and rising gently into the future. As opposed to a current market price of $14,000. A polite response here is that they're being hopeful about future prices. An impolite one would be they'll not manage to complete a DFS at current prices.No, really:Lithium hydroxide production @ US$26,800/t x 10,500 tpa Lithium hydroxide x 20 years Interim NPV6 = A$862 million (US$635 million)It's not wholly obvious - to say the least - that the NPV is currently positive, not using current market prices.Now, this is a guess and should not be taken as anything more than a guess. But it's not obvious that they will in fact gain a positive value on the deposit with European production costs and at current lithium prices.We can't check this because that's the whole point of the DFS - the DFS that hasn't been done yet - to check these numbers. But the assumptions do look - being polite - very bullish indeed.The arbitrageThere's another part to this story. Pages 19 and following. The company itself is pointing out - wholly correctly - that recently lithium miners have been more highly valued on NASDAQ than they have been on the ASX. This is also true for the TSX and NASDAQ. So, take an ASX listing and get onto NASDAQ: increase the valuation. This is wholly correct.But, but - the ASX and TSX have a lot of junior miners on them. That's therefore where we'd expect to see decent objective valuations of junior (the word means "not yet producing") miners. So, it's entirely possible that it's the NASDAQ valuation that is out of line, not the ASX one.Now, arbitrage is a good thing. It's what equalises prices over time. But us as shareholders being on the receiving end of an arbitrage is not as exciting as use being the people crossing the arbitrage. Being on the end of one could mean that we end up holding the mispriced end of the deal while prices converge.And there's an interesting comment about that from AFR (approximately the Australian equivalent of the Wall Street Journal or Financial Times - but with a lot more mining expertise):The interesting thing will be what happens to the SPAC's share price when it becomes CMC.European Lithium's share price has hovered at around 8¢, giving it a market cap of about $109 million on the ASX. Sizzle's share price is close to $US11. Sage says that if European Lithium owns 80 per cent of a Nasdaq company trading at that price, the ASX share price would have to move towards 90¢.SPAC prices typically drop sharply after the merger is completed, but even at, say $US3, that would be quite the arbitrage play.Well, yes. But what if it's the CMC price that declines to meet the ASX one?My viewAs I've long been saying here I think the run up in lithium prices was wildly overdone. We've now reverted to prices about what they were before it started. 6% concentrate running at $900 a tonne, that sort of level. That's also the sort of level at which even newly opened mines are being put on care and maintenance as with Core Lithium. That doesn't bode well for someone trying to finance a new mine, like Critical. It also means there's considerable slack in potential production if prices should move up at all.My view - and it is only a view - is that the boom is over. Which does rather mean that I'm really very unsure about whether Critical has a positive NPV at all at present. From AFR again:Consultants DRA Projects found the mine could yield 8800 tonnes a year of battery-grade lithium hydroxide monohydrate for 14.6 years. The project's estimated capex was $US866 million, for a post-tax net present value of $US1.5 billion.Halve the price of the output and what is that NPV then?My view therefore becomes that this is something of a triumph of hope and exuberance over objective reality. As such we should all go play elsewhere.No, I do not recommend shorting, not for the individual investor. And while there is, logically, the arbitrage of being short the NASDAQ stock and long the ASX that's again something more than we mere individual investors should be trying.Why I'm wrongClearly, I could be wrong about the future lithium price. It's possible that the European Union will shower Critical with money for being a mine within the EU. But, well, leave aside those and I can't see that I am wrong. This really does seem to be a marginal lithium mine and marginal mines don't do well at times of low prices.The investor viewWell, clearly, I'm not recommending the bull case for Critical Minerals. There's always that point that NASDAQ seems to value lithium more highly than other markets do. So short term movements, well, who knows? But in the medium to long term I'm not sure this project is even going to advance to actual mining, let alone make a profit if it does.So, better to be elsewhere, doing something else with our money.One final thought. Sure, if the lithium price soars then Critical looks much, much, better. But then so too do other lithium miners like the above mentioned Core Lithium. If Li soars then that mine will come off care and maintenance and go into production. Happy Days. Without the risk of a mine that's not even constructed as yet. That is, Critical isn't even a good speculation on the Li price itself as there are better ones of those out there Do something else.
This article was written byTim Worstall
EUR Price at posting:
7.0¢ Sentiment: None Disclosure: Held
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