Lepidico — Alvarrões continues to deliver

Lepidico (ASX: LPD)

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Market capitalisation

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Research: Metals & Mining

Lepidico — Alvarrões continues to deliver

Since Edison’s last note, Lepidico (LPD) has announced the assay results of an additional six exploration holes at Alvarrões in Portugal. The holes confirm lepidolite mineralisation over 900m along strike and 500m down-dip. Significantly, in our opinion, hole ALVD018 extends the known mineralisation by more than 200m down-dip from the current mining face in Block 3 and is indicative of continuity between Blocks 1 and 3. As a result, whereas we had previously estimated a resource at Alvarrões in the order of 0.7-2.3Mt of mineralised material at a grade of 1.10-1.13% Li2O, with an in-situ value (on achieving JORC-compliance) of US$0.5-1.6m (see our note, Drilling tees up Q3/Q4 mineral resource estimate, published on 11 September), this has now increased to 0.7-4.4Mt at 1.13%, with an in-situ value of US$0.5-3.1m, with increased confidence in the higher number. Note that a formal mineral resource estimate for Block 1 is expected from Alvarrões later this month.

Lord Ashbourne

Written by

Lord Ashbourne

Director of Content, Mining

Metals & Mining

Lepidico

Alvarrões continues to deliver

Exploration update

Metals & mining

4 October 2017

Price

A$0.011

Market cap

A$23m

A$1.2768/US$

Net cash (A$m) at end June 2017

3.3

Shares in issue

2,036.0m

Free float

66.68%

Code

LPD

Primary exchange

ASX

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

0.0

(15.4)

(29.4)

Rel (local)

0.4

(15.9)

(31.8)

52-week high/low

A$0.0

A$0.0

Business description

Lepidico provides exposure to a portfolio of lithium assets via its wholly owned properties, JVs and IP in Australia, Canada and Europe. Uniquely, it has successfully produced lithium carbonate from non-traditional hard rock lithium bearing minerals using its registered L-Max® (hereafter L-Max) process technology.

Next events

Alvarrões resource estimate

Mid/late Oct 2017

Separation Rapids resource estimate

Late Oct 2017

Feasibility study process design

End 2017

Feasibility study report

Q218

Analyst

Charles Gibson

+44 (0)20 3077 5724

Lepidico is a research client of Edison Investment Research Limited

Since Edison’s last note, Lepidico (LPD) has announced the assay results of an additional six exploration holes at Alvarrões in Portugal. The holes confirm lepidolite mineralisation over 900m along strike and 500m down-dip. Significantly, in our opinion, hole ALVD018 extends the known mineralisation by more than 200m down-dip from the current mining face in Block 3 and is indicative of continuity between Blocks 1 and 3. As a result, whereas we had previously estimated a resource at Alvarrões in the order of 0.7-2.3Mt of mineralised material at a grade of 1.10-1.13% Li2O, with an in-situ value (on achieving JORC-compliance) of US$0.5-1.6m (see our note, Drilling tees up Q3/Q4 mineral resource estimate, published on 11 September), this has now increased to 0.7-4.4Mt at 1.13%, with an in-situ value of US$0.5-3.1m, with increased confidence in the higher number. Note that a formal mineral resource estimate for Block 1 is expected from Alvarrões later this month.

Year end

Total revenues (A$m)

PBT*
(A$m)

Cash from operations (CFO) (A$m)

Net (debt)/
cash (A$m)

Capex

(A$m)

06/16

0.1

(2.3)

(1.0)

0.7

(0.1)

06/17

0.1

(5.4)

(3.6)

3.3

(0.9)

06/18e

0.0

(3.4)

(5.7)

14.0

(23.6)

06/19e

0.0

(5.4)

(1.6)

(10.8)

(23.2)

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles and exceptional items.

L-Max geological risk declines

Upstream lithium mica feed to Lepidico’s planned Phase 1 L-Max plant in eastern Canada (currently the subject of a feasibility study) is to be provided from as many as three lepidolite deposits – namely Alvarrões (via an ore offtake arrangement with Grupo Mota), Separation Rapids (via a concentrate offtake arrangement with Avalon Advanced Materials) and/or the PEG009 deposit at Pioneer Dome (subject to 75% farm-in by Lepidico). Of at least as much significance as the direct value of the in-situ resources being drilled, therefore, is the fact that exploration to date appears to demonstrate an extensive system of lithium-mineralised pegmatites of sufficient scale (>1Mt) and quality to provide long-term lepidolite concentrate feed for LPD’s Phase 1 L-Max plant for well in excess of 10 years.

Valuation: 63% premium to current share price

We estimate that execution of the L-Max Phase 1 PFS according to the operational parameters contained therein will result in free cash flow to Lepidico of A$26.7m pa once steady-state production has been achieved. Assuming US$30m (A$38.3m) of equity financing at the prevailing share price, this implies a valuation for Lepidico of A$0.0196/share currently (up from A$0.0185/share previously). This rises to A$0.0287 in FY22, based solely on discounting our estimate of (maximum potential) future dividends to shareholders derived from the Phase 1 plant at a rate of 10% pa (fully diluted), ie no value is yet ascribed to the development of the Phase 2 plant or other development options (see our initiation note, Masterful metallurgy, published on 4 July 2017).

Diamond drill hole locations

The map below provides the location of the individual holes drilled by Lepidico at Alvarrões. All holes intersected mineralised, lepidolite-bearing pegmatites.

Exhibit 1: Alvarrões diamond drill hole location

Source: Lepidico

As a result of the exploration work undertaken by Lepidico, the lithium pegmatites at Alvarrões have been shown to extend at least 900m along strike (ALVD19 to ALVD10) and 500m down-dip (ALVD15 to ALVD19). Note that the assay results from ALVD19 are not yet known but, depending on grade and width, have the potential to double our resource estimate once again. In all but five holes, the true width of the intersection was reported to be the same as the down-hole interval, indicating that the drill hole intersected the sill at right angles (as desired). All of the holes intersecting at right angles were drilled at a dip of 90°, indicating that the sills are essentially flat-lying. The system remains open in all directions.

Under the terms of its agreement with Grupo Mota (announced on 9 March 2017), Lepidico was required to undertake development expenditure of at least €250,000 over an 18-month exclusive period at Alvarrões with the goal of defining a JORC-compliant mineral resource of >1Mt at a grade of 1.5% Li2O. This expenditure has now been met. In return, Lepidico will have an exclusive/pre-emptive right for three years in which to effect a commercial relationship with Grupo Mota regarding the supply of ore/concentrate from Alvarrões to Lepidico and/or the right for Lepidico to develop and operate a lithium mica mining and concentration project there. To this end, the drill programme was scheduled to be completed by the end of August, with final assay results anticipated by mid-September ahead of a maiden JORC code-compliant mineral resource estimate at Block 1 in October.

Exhibit 2: Financial summary

Accounts: IFRS, Year-end: June, A$000s

 

 

2015

2016

2017

2018e

2019e

2020e

PROFIT & LOSS

Total revenues

 

 

9

116

0

0

0

18,531

Cost of sales

 

 

0

0

0

0

0

(15,982)

Gross profit

 

 

9

116

0

0

0

2,549

SG&A (expenses)

 

 

(455)

(617)

(617)

(617)

(617)

(617)

Other income/(expense)

 

 

0

0

0

0

0

0

Exceptionals and adjustments

Exceptionals

 

(16)

(415)

0

0

0

0

Depreciation and amortisation

 

 

(5)

(6)

(4)

(1,689)

(3,787)

(4,783)

Reported EBIT

 

 

(467)

(923)

(621)

(2,307)

(4,404)

(2,851)

Finance income/(expense)

 

 

(18)

(5)

3

17

77

(970)

Other income/(expense)

 

 

(559)

(448)

(504)

(504)

(504)

(504)

Exceptionals and adjustments

Exceptionals

 

0

(888)

0

0

0

0

Reported PBT

 

 

(1,044)

(2,263)

(1,122)

(2,794)

(4,832)

(4,325)

Income tax expense (includes exceptionals)

 

 

0

0

0

0

0

0

Reported net income

 

 

(1,044)

(2,263)

(1,122)

(2,794)

(4,832)

(4,325)

Basic average number of shares, m

 

 

178

465

1,883

3,684

5,332

5,332

Basic EPS

 

 

(0.0)

(0.0)

(0.0)

(0.0)

(0.0)

(0.0)

BALANCE SHEET

 

 

Property, plant and equipment

 

 

9

4

0

18,538

37,823

43,000

Goodwill

 

 

0

0

0

0

0

0

Intangible assets

 

 

0

16,204

18,676

21,868

21,868

21,868

Other non-current assets

 

 

1,485

715

3,187

6,379

6,379

6,379

Total non-current assets

 

 

1,494

16,922

21,863

46,785

66,070

71,247

Cash and equivalents

 

 

53

666

3,300

15,302

15,302

15,302

Inventories

 

 

0

0

0

0

0

1,544

Trade and other receivables

 

 

4

3,870

0

0

0

1,523

Other current assets

 

 

0

0

0

0

0

0

Total current assets

 

 

57

4,537

3,300

15,302

15,302

18,369

Non-current loans and borrowings

 

 

0

0

0

0

24,117

35,372

Other non-current liabilities

 

 

0

0

0

0

0

0

Total non-current liabilities

 

 

0

0

0

0

24,117

35,372

Trade and other payables

 

 

105

614

92

92

92

1,406

Current loans and borrowings

 

 

115

0

0

0

0

0

Other current liabilities

 

 

40

33

33

33

33

33

Total current liabilities

 

 

260

647

125

125

125

1,439

Equity attributable to company

 

 

1,292

20,812

25,038

61,962

57,130

52,805

Non-controlling interest

 

 

0

0

0

0

0

0

 

 

 

 

 

 

 

 

 

CASH FLOW STATEMENT

 

 

Profit for the year

 

 

(1,044)

(2,263)

(1,122)

(2,794)

(4,832)

(4,325)

Taxation expenses

 

 

0

0

0

0

0

0

Depreciation and amortisation

 

 

5

6

4

1,689

3,787

4,783

Share based payments

 

 

450

40

0

0

0

0

Other adjustments

 

 

(451)

1,036

(2,472)

(3,192)

0

0

Movements in working capital

 

 

(10)

148

3,348

0

0

(1,754)

Interest paid / received

 

 

0

0

0

0

0

0

Income taxes paid

 

 

0

0

0

0

0

0

Cash from operations (CFO)

 

 

(1,050)

(1,033)

(242)

(4,297)

(1,045)

(1,296)

Capex

 

 

(9)

(63)

(2,472)

(23,419)

(23,072)

(9,959)

Acquisitions & disposals net

 

 

0

32

0

0

0

0

Other investing activities

 

 

(563)

(80)

0

0

0

0

Cash used in investing activities (CFIA)

 

 

(572)

(111)

(2,472)

(23,419)

(23,072)

(9,959)

Net proceeds from issue of shares

 

 

1,505

1,872

5,348

39,718

0

0

Movements in debt

 

 

100

(115)

0

0

24,117

11,255

Other financing activities

 

 

0

0

0

0

0

0

Cash from financing activities (CFF)

 

 

1,605

1,757

5,348

39,718

24,117

11,255

Increase/(decrease) in cash and equivalents

 

 

(18)

613

2,634

12,002

0

0

Currency translation differences and other

 

 

0

0

0

0

0

0

Cash and equivalents at end of period

 

 

53

666

3,300

15,302

15,302

15,302

Net (debt) cash

 

 

(61)

666

3,300

15,302

(8,815)

(20,071)

Movement in net (debt) cash over period

 

 

(61)

727

2,634

12,002

(24,117)

(11,255)

Source: Company sources, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Lepidico and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitati
on to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Lepidico and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitati
on to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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