Offtake agreement to fund EUR’s Wolfsberg project

In a major development for Austrian based emerging lithium producer, European Lithium Limited (ASX:EUR) has entered into an agreement with Shandong RuiFu Lithium Co., Ltd (Shandong) for the offtake of spodumene concentrates from its Wolfsberg project (Offtake Agreement) pursuant to a binding terms sheet (Terms Sheet).

In terms of the agreement, EUR will be supplying Shandong with up to 50,000 tonnes per annum of 6% spodumene concentrate produced at the company’s Wolfsberg project.

While pricing of the product hasn’t been agreed upon, there are some benchmarks that could be applied. Galaxy Resources (ASX:GXY) announced in December 2016 that its shipment of 120,000 tonnes of 6% lithium concentrate was priced at US$905 per tonne (FOB Esperance).

Conservative pricing implies annual revenues in excess of $40 million

However, this would appear to represent the sweet spot in the cycle. Analysts at Beer and Company Equity Research ran the ruler across Altura Mining (ASX: AGM) in February. The broker suggested that a conservative price out to 2021 would be US$650 per tonne with the possibility of a slight premium between 2017 and 2019.

Using US$650 per tonne as a long-term price which could be applied to the proposed EUR offtake agreement, this would equate to annual revenues of US$32.5 million, representing circa AU$44 million.

This is equivalent to approximately 80% of AJM’s projected 2017-18 revenues (as per Beer & Co forecasts), a company with a market capitalisation of circa $220 million. Given these metrics, it appears that EUR’s market capitalisation of $8 million doesn’t do justice to the revenue generating capacity of its assets.

However, using AJM as an example, one would expect a discounted market capitalisation. As at June 30, 2015 AJM’s market capitalisation was less than $20 million.

By June 30, 2016 it had increased more than ten-fold. Even using AJM as an example though, it could be argued that EUR’s market capitalisation is underdone given it has a relatively clear line of sight to development and the security of an offtake agreement which is also beneficial in terms of negotiating the financing stage of a project.

Early cash flow to assist in project development

In satisfaction of the terms of the agreement, Shandong will commence testing samples of Wolfsberg ore at its concentrate plant and a formal Offtake Agreement will be entered into within 90 days of signing the Terms Sheet.

The generation of early revenues is extremely important for EUR in terms of funding the Wolfsburg project. As can be seen below, there are a number of relatively near-term milestones which will require capital investment, and to be able to partly fund those through material cash flows assists in derisking early stage development initiatives.

Shandong a major supplier of raw materials and products to Chinese battery industry

Having a high profile industry participant such as Shandong is a particularly positive development as it provides certainty around contract arrangements, and the fact that the company is a major supplier of lithium products and raw materials to the rapidly growing battery industry in China indicates that it will need substantial volumes of raw materials to meet demand from manufacturers.

Shandong has already flagged its anticipated need for lithium base products, having secured off-take agreements with Australian based, ASX listed lithium producers, Galaxy Resources and Pilbara Minerals.

Commenting on this development, EUR’s Chairman, Tony Sage, said “Securing a Chinese offtake partner for concentrate from Wolfsberg is a major milestone for the company, and early cash flows generated from concentrate sales will support the company’s strategy to fast track the development of Wolfsberg.”