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Analyst targets 130% upside for Vulcan Energy following PFS


Published 08-OCT-2020 10:40 A.M.


5 minute read

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Hamburg-based Alster Research analyst Oliver Drebing has just updated his coverage of Vulcan Energy Resources (ASX:VUL | FRA: 6KO), reaffirming his buy recommendation and upgrading his price target from $2.45 to $2.55 (€1.45 to €1.55).

Vulcan is developing Europe’s biggest Lithium resource using its world first, IP protected “Zero Carbon LithiumTM” extraction process to produce both renewable geothermal energy and battery quality lithium hydroxide, from the same deep brine source.

Drebing’s view on the stock comes with a good degree of credibility given he has been covering it since March, just three months after the company dual listed on the Frankfurt Stock Exchange, the world’s third largest exchange trading market behind the NYSE and the NASDAQ.

Drebing initiated coverage with a buy recommendation and a price target of €1.45 (A$2.45) at a time when the company was trading at €0.16 (A$0.24).

While Vulcan may only be about halfway towards achieving that target (now trading at €0.66, or A$1.11), his support demonstrates a keen knowledge of the company’s operations, and at the end of the day a share price gain of around 350% in six months would have his clients feeling fairly chuffed.

Northern Hemisphere analysts ‘’get’’ Vulcan type companies

Not only do Northern Hemisphere analysts tend to better understand stocks with unique operations in niche markets, but they are also better placed to appreciate the regional industry conditions, an important factor for Vulcan as it aims to distribute its Zero Carbon LithiumTM products into the burgeoning electric vehicle battery manufacturing sector.

Having attended the Mines and Money London conference and several others in Australia and other international markets, the one distinguishing factor is that it isn’t a forum for spruiking highly speculative stories to get overnight share price spikes.

The conferences are attended by high profile institutional investors and capital markets representatives who are looking for the next big thing, often a company that has been overlooked because it is too complex for retail investors to get their head around.

Consequently, the conference tends to cater for well credentialled investors with deep pockets and companies that have a genuine long-term outlook, but potentially are looking for financial support in the capital markets arena.

Alster has strong ties with prominent European institutional investors

Alster Research’s confidence in Vulcan bodes well for the future when management will be looking to finance latter stages of the Zero Carbon LithiumTM Project as it should assist in providing ease of access to European capital markets.

On this note, it is also worth remembering that Vulcan presented the project to the European commission and a European investment bank in May with the Vice President of the former saying, “I’m absolutely convinced that the owners of electric vehicles want a ‘full story’.

‘’They want to know that the product, the car, has been manufactured to the highest environmental standards, and that the raw materials have been extracted in a sustainable way.”

He committed to setting up a dedicated alliance to remove bottlenecks in the critical raw materials supply chain, commenting that Europe will need 18 times more lithium by 2030.

Drebing sees Vulcan as vastly undervalued based on peer valuations

With Vulcan controlling Europe’s largest JORC-compliant lithium resource at its geothermal brine field in the Upper Rhine Valley of Germany, the heart of the European Union’s auto and lithium-ion battery industry, there is little doubt it will receive strong regulatory and financial support in that jurisdiction.

Commenting on the resource, Drebbing said, “With 1.42 million tonne LCE added due to the inclusion of the “Taro” Exploration Licence at the end of August 2020, the estimated resources of the Upper Rhine Valley Project of Vulcan have now reached a total of approximately 15.37 million tonnes LCE in JORC-compliant terms (Inferred and Indicated Mineral Resource, not Mineral Reserve).

‘’This is an outstanding magnitude, which is likely to attract increasing attention among investors.’’

Drebbing highlighted the upcoming results of Vulcan’s prefeasibility study and subsequent test work as key near-term share price catalysts saying, ‘’Peer valuation shows that other companies pursuing Direct Lithium Extraction from deep brines, such as Standard Lithium (TSXV:SLL, FRA: S5L, current market capitalisation: C$142 million, respectively A$150 million), have seen serious re-ratings after the release of financial data from similar studies.

‘’It needs to be emphasized that Vulcan holds a larger, higher grade resource, which has the processing advantage of readily available heat than its peer.’’

‘’Following the ramp-up phase (2022 to 2023), which will be characterised by high capex, with a four-year payback period, we have modelled estimated surpluses in cash inflows for 2024 to 2027 of US$960 million (A$1.34 billion), which would cover capital expenditure of US$846 million.

‘’Concerning investors’ perception, the PFS will be the signal to elevate Vulcan onto a much more prominent position.

‘’When the PFS is presented (scheduled for the end of 2020), we can likely assume an equity valuation of at least US$125 million on the capital markets.

‘’We have set a price target of €1.55 (equivalent to AU$2.55) for shares in Vulcan Energy Resources, retaining our buy recommendation.’’

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