Drilling at Clayton Valley Lithium project, Nevada
1. Introduction
Despite negative sentiment in commodities and especially lithium of late, Cypress
Development Corp. (CYP:TSX.V; CYDVF:OTCQB; C1Z1:FSE) keeps delivering the
goods at its Clayton Valley Lithium project in Nevada at high speed. A
Preliminary Economic Assessment (PEA) was announced at September 6, 2018, and the resulting
economics were impressive. An after-tax NPV of US1.45 billion at an 8%
discount rate and an after-tax IRR of 32.7% (LCE price of US$13,000/t)
indicate the large size of Clayton Valley, making it a potential buyout or JV
target for one of the major players like nearby Albemarle. This is exactly
the kind of growth CEO Bill Willoughby had in mind when he signed up with
Cypress Development, as he saw the potential for the large assets of Cypress
one day gaining serious attention. Let's have a look where Clayton Valley
stands at the moment, after this PEA.
All presented tables are my own material, unless stated otherwise.
All pictures are company material, unless stated otherwise.
All currencies are in US Dollars, unless stated otherwise.
2. PEA
The new PEA wasn't just an impressive study in itself, as it beat my
expectations for NPV (my hypothetical NPV7.5 @US$12,000 would come in at
US$966 million vs the PEA NPV8 of US$1,260 million; on the other hand the
hypothetical IRR at 33.8% was slightly better vs the PEA IRR of 29%), Cypress
Development also updated its resource statement. Notwithstanding the first
NI-43-101 compliant resource estimate of 6.5Mt LCE that was already world class,
the company now has almost 9Mt LCE (see green markers):
Again, as a continuous reminder, examples of world class sized LCE
deposits in each category are brine projects like Cauchari/Olaroz (Orocobre
6.4Mt LCE, SQM/Lithium Americas 11.7Mt LCE), clay projects like Sonora or
Thacker Pass (Bacanora: 7.2Mt LCE/Lithium Americas: 8.3Mt) or hard rock
projects like Whabouchi (Nemaska: 4.06 Mt LCE). Although Cypress doesn't have
reserves yet, for size it is the largest clay-hosted deposit in the Americas
at the moment.
For the PEA the company has elected to use only the high-grade portion to
the east of the deposit (see red marker), with an average grade of plant feed
ore of 1012 ppm Li. This is a viable option as the deposit is so big that
high grading it results in a life of mine of 40 years at an annual production
of 24,000t LCE anyway.
In order to discuss the PEA metrics a bit further, it is always useful to
see those metrics lining up with the data of other peer projects. In this
case there are three clay-hosted projects (although Rhyolite Ridge of Global
Geoscience has low clay content), of which Bacanora's Sonora is hectorite
clay, which means it can't be leached by acid at all, and needs very
expensive roasting. Thacker Pass of Lithium Americas seems to have non
hectorite bearing host rock (smectite and Illite clay) but sample material is
called hectorite by metallurgical description, nevertheless it still can use
acid leaching, and Rhyolite Ridge of Global Geoscience can use acid leaching
as well. This last project is the only one without a completed economic
study, but some work has been done already for a small (end target is a 30y
LOM project) PFS study, and Australian companies can report these findings
easier than Canadian ones, so some metrics are already available for the
audience. On a side note: Global Geoscience has hired Amec Foster Wheeler for
its upcoming PFS, and I consider Amec the single best engineering firm out
there by a country mile, so in my view this study could become a future
reference for likewise projects. Here we go:
*estimates by Global Geoscience
I have normalized the post-tax NPV and IRR for a lithium carbonate
equivalent (LCE) price of $10,500/t, which I deem a reasonable and fairly
conservative lithium product price. As we can see in the next chart, these
prices have been much higher for the last two years or so, but the long-term
contract prices are hovering around $13,000/t now, and as far as I am
concerned this is the market where serious producers are doing business, and
not the much smaller spot market, where prices are much more volatile:
Source: Presentation Lithium Americas
I can see this bottoming easily at $10,000–11,000/t so $10,500/t seems
like a realistic midpoint to me. The very bearish Morgan Stanley report was
timed to perfection in itself, but I don't see, for example, SQM bringing
online the projected 500kt LCE anytime soon, resulting in the dreaded
oversupply from the end of 2019 onwards, as the company already has big
issues expanding modestly as it is. It might be the case that the trade war
between the U.S. and China is putting the brakes on the world economy, and in
turn this could have an effect on electric vehicle (EV) demand, which means
less demand for batteries and thus lithium, but as I don't have a good grasp
on the machinations of the lithium spot market, I don't really have a good
explanation on why lithium product prices dropped off so sharply over there
the last six months or so. Maybe the negative commodity sentiment influenced
small traders working with the most risky metals the most. Enough about the
lithium price, let's continue with the PEA.
When we look at the peer comparison, it will be clear that Thacker Pass
comes closest to Clayton Valley, as both projects use acid tank leaching, and
the ore is claystone hosted, although the ore from Thacker Pass seems to have
slightly hectorite characteristics as mentioned. To what extent isn't really
clear, but what is clear is that opex and the capex/tpd ratio of Thacker Pass
are significantly influenced by this, as both are much higher than the
numbers for Clayton Valley. One of the reasons is that Thacker Pass needs
about triple the amount of acid per tonne ore. Acid consumption is by far the
biggest opex item for Cypress, as can be seen here:
And the acid plant isn't cheap either:
When we look at the PFS of Thacker Pass, we see relatively equally high
costs for utilities and reagents, and raw materials for the acid plant accounted
for this: reagents are $18.14/t, raw materials for the acid plant $22.18/t,
mining costs are $7/t, so this adds up pretty quickly, resulting in much
higher opex compared to Clayton Valley. On a side note, a further item in the
Thacker Pass PFS that I found to be interesting was the dewatering pump
capacity with a peak of 340m3/hour, which is substantial. This might even
influence the processing of mined claystone, as wet ore behaves differently.
The absence of hectorite ore at Clayton Valley is another reason that CEO
Willoughby was excited to join Cypress. As he mentioned to me: "Early
on, I saw leach tests from surface samples on Cypress' property which showed
the lithium was soluble in water and dilute acid. This was a good indication
the lithium wasn't present in hectorite." I asked him if he didn't think
10% contingency on opex was on the low side, and acid consumption could
increase after further testing, and the answer was he even thinks they can go
from 125kg acid/t ore to 100kg acid/t ore, which would shave off another
estimated $1.5–2/t of opex, increasing after-tax IRR with an estimated 2–3%
and the after-tax NPV8 with an estimated $40–60 million.
In case you wondered what the item Indirect Capital Costs stands for, as
it isn't really the margin for error, have a look at the indirect costs of
Thacker Pass:
As Thacker Pass has more substantial stripping costs because of a higher
strip ratio, Cypress has almost no stripping/pre-stripping as mineralization
frequently begins at surface at Clayton Valley.
As no blasting or drilling is required, mining is very simple. Engineering
firm GRE evaluated four options for mine equipment and mill feed
transportation, and selected an in-pit feeder-breaker with slurry pumping for
the base case.
Feeder breaker; Source
The only major piece of mobile equipment is a front-end loader to feed the
in-pit feeder-breaker:
Front end loader; Source
Such earth-moving monsters are capable of scooping up 40-70t in one move,
meaning one front-end loader could feed the processing plant at nameplate
capacity. Waste mining is minimal, amounting to a total of 6Mt over the 40
year mine life, resulting in the very low strip ratio of 0.025:1.
The plant design of Clayton Valley includes agitated tank leaching, and a
multi-stage thermal-mechanical evaporation system for concentrating leach
solution. Slurried feed is transported to the mill where lithium extraction
is achieved through leaching at elevated temperatures with dilute sulfuric
acid. The sulfuric acid concentration is targeted at 5%, with the addition of
concentrated acid delivered from the on-site 2,000 tpd acid plant. Steam from
this acid plant will be used for heating in the leaching and evaporation
stages of processing.
The retention time of pregnant solution in the leach circuit is estimated
at 4 to 6 hours with acid consumption estimated at 125 kg per tonne of feed
as mentioned. This is an advantage compared to the cheaper vat leach method
which Global Geoscience intends to use, which takes much more time (days) and
would need a much bigger plant for the same production. Net recovery of
lithium throughout processing is estimated at 81.5%. Tailings are aimed to be
dry stacked, which will improve permitting procedures.
Process water for the operation will be obtained by recycling barren leach
solution after treating in a reverse osmosis plant, and by introducing fresh
make-up water, estimated at 345 m3/hour and delivered via pipeline from a
well field located off-site. Reducing fresh water needs as much as possible
is also an advantage in Nevada, which is known for its water rights that can
be owned by private individuals, and complicated permitting around using
these water rights.
3. Next steps
The biggest issue for Cypress Development is the viability of the recovery
method. Preliminary test results continue to be positive, according to
management, but the company has to prove its method at a commercial scale at
one point. When discussing this, and the potential need for a pilot plant,
with CEO Willoughby, he answered that a pilot plant wasn't needed to complete
a PFS, this was only needed for a FS. The company is already looking at
acquiring an existing pilot plant for this purpose. At the same time, he
indicated that he wasn't convinced Cypress would have to get a PFS first
before going towards a FS.
In his view the recently completed PEA was already at the level of a PFS
with respect to cost estimates; only some more drilling and metallurgical
work would be needed for a PFS. He would rather see that Cypress would spend
money on a FS in that case. Such an advanced study would be scheduled for
completion by next summer by his estimates. As the treasury contains just
C$500k at the moment, the company needs to raise sufficient cash in order to
complete permitting and the FS. This means it has enough money to do
additional met work as recommended by GRE. Cypress intends to proceed with
this recommendation as soon as possible, beginning with the collection of
representative sample material.
Share price 1 year time frame; source tmxmoney.com
The release of the PEA caused an unexpectedly fierce liquidity event,
causing the share price to drop over 25% in a few days. Unexpected, as the
PEA economics are robust, and the share price had held up strongly compared
to almost all lithium competitors, who already shed 25–60% in the last few
months, after overall- and lithium sentiment turned negative. It is possible
that investors expected or hoped for a lower capex, as it would be a hugely
dilutive event to finance capex by itself, at such a tiny market cap of
C$19.8 million. But in my view a US$482 million capex is below average for
the usual lithium project, as these are big ventures, and at some point
Nemaska and Orocobre were tiny too.
A PEA is still early stage as a development stage, so it usually gets
discounted quite a bit until it advances further, depending on the various
parameters and economics of the project. With Cypress, the recovery method
needs proof so I can imagine the markets are still willing to assign an
increased discount to this as long as the method hasn't been proven on a
commercial scale. When Cypress manages to achieve success in this regard, the
re-rating should be pretty significant, as the conservative NPV8 @US$10,500/t
Li is about 62 times the current market cap.
4. Conclusion
The resource update for Clayton Valley ranks this project as the largest
lithium clay deposit in the Americas, and the accompanying PEA indicated
robust economics, holding up well at 20% lower lithium product prices. This
comes in handy, as lithium prices are having a hard time these days. After
this PEA, Cypress Development will probably start to appear on the radar of
most major lithium producers/processors, and management already indicated it
received interest from several of those parties to talk business. An
important part of convincing others is proving up recovery at a commercial
scale, and it is up to CEO Willoughby, who has a PhD in mining engineering
and metallurgy, to lead this effort. Management is deciding now whether it
wants to proceed with a PFS or a FS, which will determine the financing needs
and timeline. I am curious what its next steps will be, as an interested
shareholder.
Lithium bearing claystones at Glory project; Clayton Valley, Nevada
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Disclaimer:
The author is not a registered investment advisor, and has a long position
in this stock. Cypress Development is a sponsoring company. All facts are to
be checked by the reader. For more information go to Cypress
Development Corp. and read the company's profile and official documents
on Sedar, also for
important risk disclosures. This article is provided for information purposes
only, and is not intended to be investment advice of any kind, and all
readers are encouraged to do their own due diligence, and talk to their own
licensed investment advisors prior to making any investment decisions.
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