Thesis:
•Management (Francis 21%, Horst 1%, Gavin 7.5%) has a high ownership in the company with lots of recent insider trading.
•Passionate management - Francis has stated he’s enjoying waking up everyday to pursue his passion and his dream.
•Honest and talented management – they’re hiring the right people and need to keep doing so – 2 Phds (Dr Francis Wedin and Dr Kreuter) and are honest with their admission of possible risks and future dilution/cap raising requirements
•Management compensation: unknown
•Dual revenue generation: sell zero carbon lithium hydroxide and sell geothermal energy back to grid – dual revenue de-risks overall operation
•Serves customers across economy, markets, and geography (throughout Europe)
•Stable environment – largest lithium resource in Europe and one of largest in world and is large enough to be Europe’s primary source of battery quality lithium hydroxide. Demand for product with big push towards EV (electric vehicles) in Europe.
•Possess moat/first mover – world’s first and only zero carbon lithium process, located in centre of fastest growing market removing dependence on China for raw materials. Only other known geothermal field with similar lithium grades and flow rate is in California.
•Can fast track production d/t existing infrastructure and agreement with geothermal operator.
•Possible pricing power - lithium hydroxide produced free of CO2 emissions in a core industrial region of Europe will benefit from a relevant premium on the reference price calculated for Asia. European battery industry will have strong incentives to use the raw material mined by Vulcan Energy Resources.
•Profitable business model – lower opex compared to traditional brine extraction – can extract in hours instead of months, not weather dependent, consistent product, no water stress (environmentally friendly)
•Vulcan’s negligible distance to market is a cost advantage as well as a carbon advantage.
•Regulatory tailwinds - 42 stakeholders from EV battery supply chain (BMW, Daimler, Renault, Volkswagen, Umicore) joined the Responsible Minerals Initiative and the World Economic Forum’s Global Battery Alliance to demonstrate their commitment to creation of a sustainable Battery Value Chain by 2030. As well as EU’s push to limit carbon emissions – other lithium mining produce 13-15x CO2/LiOH H20 (hard rock) and 5x CO2/LiOH H2O (traditional lithium brine); Vulcan – negative carbon impact.
•Unknown/misunderstood – results from scoping study likely to gain investor interest this year, specifically the magnitude -approx. 13.9 million t LCE in JORC-compliant terms (inferred mineral resource, not mineral reserve) – many websites still incorrectly list it as a copper and zinc exploration company.
•Potential for high future ROE/ROIC - Following the ramp-up phase (2022 to 2023), which will be characterised by high capex, the investment will have paid for itself within a four-year period.
•Speculating – possible future government subsidies being zero carbon footprint technology
•Strong balance sheet with no current debt and a healthy current ratio.
•However; capital raising required for stage 1 - $55M (cash on hand currently = $3M); stage 2 - $425M for Oretenau region.
•Potential is massively undervalued - according to Alster DCF valuation = Enterprise value of $769M USD ($1.3B AUD) as of March 2020; assuming dilution valued at $2.45/share.
•Long-term hold - not forecast to be profitable for 2-3 years.
Risks:
•Incorrectly siting production wells and not achieving desired flow rate
•Consistency of lithium grade and potential dilution where re-injection fluids come into contact with production brine
•Possibly falling prices d/t increased market supply
“Given the strong pedigree of Vulcan’s geothermal team expertise in Germany, as well as the quality of Vulcan’s lithium experts and external geological engineering consultants, the Company is confident it can satisfactorily address the potential risks. Analyst consensus points to a lithium hydroxide supply deficit by the mid-2020s, and Vulcan’s diversified revenue stream with geothermal energy and low OPEX provides further protection against a lower price environment.”
Why I would sell:
Not hiring well - talented management essential
Management isn’t aligned with shareholders (unlikely considering how passionate Francis is as well as management ownership b/w 10-35% - not too high or low)
Pilot Plant/PFS fails
Permitting, demo plant, DFS fails
Permitting, financing construction fails
Staged commercial operation fails
Strong competitor enters EU market with similar zero carbon lithium product, similar or better operating costs and is capable of overtaking Vulcan
Lithium hydroxide demand disappears and/or price tanks (predicted undersupply in mid 2020's would have opposite effect)
Disclaimer: I own a small position in this company.
