Wednesday, 26 March 2014

The Howard Group Welcomes Critical Elements Corporation

TSX-V: CRE
OTCQX: CRECF

A sub-headline on this introductory blog could have been, “A Thrifty Approach To Fast-Tracking A Project”.

We’d like to relate a key point from a very recent conversation we had with a senior Toronto based resource analyst who told The Howard Group that, “Critical has accomplished so much, so fast and on so little money”.

The comment arose from a discussion about Canadian companies in the lithium sector and how long and how much it has cost many of them to reach a similar position to Quebec based, Critical Elements.

In just a few years and on a thrifty $6 million budget, Critical Elements discovered, drilled, initiated environmental work, signed a pre-development agreement with the Cree community of Eastmain, completed metallurgy work and a Preliminary Economic Assessment (PEA).

The reader should look at peer companies in the sector and not be surprised to see expenditures in the $30 million range to reach the same stage as CRE.    

Below are key project highlights for the Rose Lithium-Tantalum Deposit, which is owned 100% by Critical.

  • Average net operating income of $81.4MM/year over 17 years,
  • High purity battery grade lithium material at 99.9%,
  • Life of mine of 17 years,
  • Infrastructure is in place with a nearby airport, 100 ton capacity road, rail, power and ample labour in the area,
  • Pre-Tax NPV 8 of $488MM
  • Pre-Tax IRR of 33%

The above points are the foundation for what the company is looking to ultimately achieve in the second half of 2016, which is the target for going into production:
  • Annual output of 26,600 tons of lithium carbonate and 206,000 pound of tantalum pentoxide, 
  • Positions CRE to be a 1st tier low cost producer with a cost per ton expected to be in the range of $2650, which is $1000 below the industry average for 99.9% purity (battery grade) and the first new industrial scale tantalum producer.

In management’s view, the metrics will make the Rose Project the largest economic lithium-tantalum deposit in the world in current development. 

The tantalum is what will give Critical an additional edge over its peers.  Tantalum is a critical element and is in large part supplied by African countries that have less than stellar human rights records.

In a news release last September, CRE reported on an “optimization metallurgical program underway at SGS Canada” that saw tantalum recoveries up to 84% with an average of 77.6%. Click here to read the news release.

Also that month, the company reported that metallurgical tests confirmed lithium recovery rates slightly greater than 90%. It would be advantageous for the reader to look at these recovery rates compared to companies within the peer group. Click here to read the news release.

With the recent results from the metallurgical optimization program, management anticipates a reduction in the cost of producing a ton of Lithium Carbonate and also an increase in the amount of tantalum that can be produced. The metallurgical testing proved a recovery rate that was 50% greater than originally stipulated in the PEA.

Tantalum is an element found in our everyday lives. We are surrounded with the mineral in our smart phones, tablets, and computers. About half of the world’s production of the rare element is used in capacitors that can be found in each of these products.  There are only a handful of very large companies that build the millions of these capacitors and finding a reliable, economic source for the needed element would be a competitive advantage.

It is all well and good to keep one’s eye on the prize but the big question remains, how do you pay for an estimated $250 million production facility and not be awash in new shares, presuming that the market would give you that much in equity?

It’s little wonder that the market is taking a wait and see attitude to the company. The stock is currently in the $0.18 to $0.20 range with a market cap of $20 million. It is almost impossible to calculate a per share value if one does not know how many more shares over and above the current 120 million shares may be issued to realize on the goal of obtaining production.

While the company’s presentation materials indicate an annual after tax profit figure in excess of $81 million as contained in the PEA report, how projects at this stage find the capital needed to get into production is what separates the next potential up and comer from many of the others.

In our discussions with management it has been made abundantly clear that it wants to eliminate or minimize further dilution by securing the necessary funds through a “strategic alliance”.

It has been in active negotiations for over six months with leading industry end-users with the objective of securing a “strategic alliance”. Should the company be successful,  many questions would be answered about not only future working capital requirements but how much of the capital cost of the project would be covered up to the point of production.

We stress that the negotiations could result in an agreement, next month, next quarter or maybe never. What isn’t in doubt is should management be successful, CRE’s status will move up many levels in the public market.

Within several months, the company plans to provide lithium samples to end-users following completion of a large scale pilot plant. It has a price tag of $1.5 to $2 million. This is an important step in the quest to reach off-take agreements, and complete the bankable feasibility study.

The ability to fund the plant, which might be tied to a successful alliance, is the second item that the market should keep an eye on as it would be a major positive step for Critical.

It has become abundantly evident that management is the key to a successful company. We like to keep an eye on the management of junior resource companies that continue to rack up large G & A but provide little in the way of progress. One measure is to look at G & A and Professional & Consultant expenses, which is what we did in the case of seven companies. Capital expenditures were excluded. Of seven companies, Critical had the second lowest operating expenses of the seven companies for 2012 and the last three month reported period of 2013.

Currently, Critical is spending about $250 thousand a quarter on G & A. This figure does not include professional and consultant fees that will be incurred from time to time for studies, reports, testing etc.  We looked at the G & A of five other companies for their last reported quarter and the numbers ranged from $438 thousand to $1.8 million. The lowest G & A was $83 thousand and that company has a market cap of $6 million.

We’d also like to point out that management and the board is very much aligned with the interests of shareholders. President & CEO, Jean-Sebastien Lavallee and his family own 12 million shares or 10% of the company. Vice-President, Jean-Francois Meilleur owns 2 million shares and directors another 2 million.

For the sake of brevity, we will not get into a long discussion about lithium at this time. Suffice to say that there are many variables to consider in the world of lithium and batteries but a read of Elon Musk’s plans for Tesla and a new super battery facility to accommodate production of 500 thousand vehicles a year says much about where the market is heading.

Also, not all lithium is created equal and that is a point for another day.

By way of disclosure, the Insight LP II, which is associated with The Howard Group, recently purchased 300 thousand shares of Critical Elements.

To register to receive ongoing information about Critical Elements, please email: info@howardgroupinc.com


Shares Issued: 120.7 million
Fully Diluted:    127 million