Owning tomorrow’s production assets as a new resources boom unfolds

Joshua Baker

Capital H Management

Some commentators suggest the world is on the cusp of another resources super-cycle, given the endless billions being thrown at decarbonisation efforts in the West and China on top of general economic recovery policies. These stimulus measures, in addition to continued supply disruption risks from COVID-19, have seen the bull cycle continue into 2021.

I’m not game enough to call this new cycle “super”, yet. 

Although, I do believe there is a high probability the world will experience a period of 'higher-for-longer' commodity prices further into this decade, as heightened demand looks set to outpace a tight production base. My favoured commodities are those exposed to the EV thematic as well as those used in broad economic recovery demand such as nickel, copper, lithium and as readers may note, last year I was bullish on iron ore and the investment potential from high cost leveraged assets.

However, as commodity prices have risen, so too have the share prices and valuations of those most leveraged to immediately higher prices, which are the established producers. Going forward, I believe better value and risk/reward potential from a higher for longer commodity price environment will come from those developing tomorrow’s production assets. This may come from companies progressing new recent discoveries or those that dust off older projects which were too late to participate in the prior resources super cycle and have been forgotten by investors.

I believe I have found one of each such opportunity, with Jindalee Resources (JRL) delineating a new lithium clay project whilst Carvel Minerals (CVV) is “dusting off” an existing copper project that was too late for the last cycle.

Jindalee Resources (JRL)

*N.B. JRL is in a trading halt for a resource upgrade at the time of publishing.

JRL is a project generator style company that has been listed since 2002. Amongst the company’s suite of projects, the current focus is on the development of their McDermitt Lithium Project, which is located on the Oregon (USA) side of the McDermitt Caldera. This is the same caldera which hosts Lithium America’s (LAC) Thacker Pass project.

The company has a long history as a project generator, building up and flipping projects with a few small-cap raises in their history. The share base is small and tightly held with Lindsay Dudfield, Executive Director, holding 26.8%. Given the current dynamics in the lithium market, JRL has committed to progressing the McDermitt project to maximise value for investors. This has seen further drilling to expand the resource, met testing, lease acquisitions and progression of feasibility work, which is all supported by the recent $9m cap raise.

Clay assets are commercially unproven and were not seriously considered as a potential source of supply until the late 2000s when Western Lithium picked up Thacker Pass (eventually taken over by LAC in the late 2010s) and put thoroughly assessed their economic potential. There are three leaders in the space being LAC, INR and BCN who have conducted extensive testing and feasibility which suggests they will work and likely work very well from an economic standpoint.

Although it is early in the project development lifecycle, with only an initial JORC resource established so far, JRL’s project has what potentially looks to be the 3rd best clay project in the US, particularly given the recent breakthrough in metallurgical processing via the use of attrition scrubbing to “clean” the clay prior to going into the leaching circuit. Whilst further bulk testing is required to confirm the initial tests, the use of attribution scrubbing has the potential to transform the project from an ordinary asset into a tier 1 asset. Attrition scrubbing is not a new process as it has been used by minerals sands miners who process deposits with a high slime content. However, it is relatively new in its application to lithium clays.

In JRL’s application, attrition scrubbing is used to remove larger sized carbonate and analcime (zeolite) minerals from the clay ore. These minerals types don’t contain lithium, with the majority of it hosted in the smectite minerals which is of a smaller particle size. The scrubbed minerals are also acid consuming in the leaching process, hence it is ideal to remove them prior to leaching. Overall, the initial test work showed up to a 60% uplift in head grade and a 26% reduction in acid requirements with 90%+ recovery rates. This has the effect of reducing both capex and opex intensity per LCE of output.

Without the scrubbing, the project might be around an NPV of $500m with an NPV/Capex ratio of ~1 (which is okay for a long life asset), whist with the scrubbing, it could push the NPV to $1b+ with a NPV/Capex ratio of 2+ (good for a long life asset). The size of the resource base, which is likely to continue to expand through ongoing exploration, would support multiple expansions down the line.

Despite the strong performance of JRL’s shares this year, it is still on a fully diluted EV of less than $100m. The risk/reward is skewed materially to the upside for investors even when we consider future dilution for advanced feasibility work and project equity funding. If we assume this future dilution sees the share base go from ~52m to ~182m, a $1b+ NPV would equate to $6/sh+ against a share price of ~$1.85 today.

The US market is short domestic lithium supply with US based battery plants being planned and built faster than they have so far secured raw material supply. There was a similar experience in the EU over the last few years and the battery makers and autos eventually scrambled for supply. In addition, the EU incentivises and supports domestic production of key EV minerals such as lithium. Recent developments in the US include multi-billion dollar support for the US to “win” the EV race which includes should filter down to domestic raw material supply.

Source: LAC corporate presentation, December 2020

Given the way the EU and China are locking up supply across key lithium producing regions, it will be important for the US to secure supply in which domestic production sources, such as incentivising the development of clay deposits will be a key part of the mix. Should JRL go on to prove their project is tier 1 quality, I think it will be of interest to majors given its strategic position as a potential large scale domestic supply source in the US battery supply chain.

As such, I believe this makes a lithium clay asset, like that of JRL's McDermitt project, highly strategic and important in the development of the US domestic raw material supply chain. It is also one of the very few ways to play this aspect of the EV thematic on the ASX and represents a high conviction position in our resources exposure within the Capital H Inception Fund.

Caravel Minerals (CVV)

CVV is a copper developer that is flying under the radar and likely glossed over by the crowd that generally thinks “grade is king” is the only thing that matters in assessing a resources project. The company’s flagship asset is the Carvel Copper Project, which hosts a massive at-surface copper porphyry deposit just ~150kms North East of Perth. The existing resource contains ~662Mt at 0.28% copper with moly, gold and silver by-products. The bulk of the resource is hosted within the Bidi deposit.

The deposit was initially discovered in 2010 after the analysis of an extensive sampling database collected by Dominion Mining and was delineated predominately between 2013 and 2016 after the assets were divested from Kingsgate Consolidated to CVV in early 2013. The work between 2013 and 2016 culminated in the initial JORC resource and a scoping study which detailed an economic mining operation. This work was done under a JV with First Quantum Minerals, who later walked away from the JV.

In 2019, under a new board and management who are material shareholders in the company, the scoping study was refreshed to include the work done since the first version which included a larger resource, additional met work, etc. The updated study highlighted a large scale and low cost mining operation. The key outputs are detailed below and are based on $3/lb copper price and an FX rate of $0.72.

Source: CVV scoping study report, May 2019

So, why can this project work despite the low grade of the deposit?

  • The ore bodies comprising the project are large and homogenous, which supports low cost bulk, open pit strip mining methods.
  • The orientation of the Bindi ore body is favourable and supports a low strip ratio. The initial strip ratio is quite low at 0.5 and averages 1.1 over the life of mine. If CVV, successfully delineate additional economic ore at depth (ideally with a grade uplift), the orientation means that the incremental strip ratio of a deeper open pit will be low as well.
  • The metallurgy is very clean, with copper hosted only in course grained chalco with little to no deleterious elements. The ore floats relatively easily, with high recoveries (90%+) and delivers a concentrate of around 25% (potential to be higher).

These factors drive the relatively low processing costs (in the low $2/lb range after by-products) and maximised payabilities despite the “inferior” grade of the deposit. The quality of the concentrate will likely make it highly sort after as well ensuring favourable offtake terms.

I note there are multiple operating mines of similar resource tonnage and grade which operate quite successfully and profitably through the price cycle. Two such examples are the Copper Mountain and Gibraltar mines, both of which are located in Canada. With multiple examples of existing operating mines with very similar characteristics to the Caravel Copper Project, its gives confidence that CVV’s prior scoping numbers are relatively robust and accurate.

With the opex covered, readers will probably note the capex bill is quite high at ~$480m, particularly against the current EV of ~$65m. Whilst the project appears “unfundable” on that basis, I believe the share price will continue to re-rate despite the company being in the least favourable part of the Lassonde curve. The catalysts I think will help re-rate the share price, thus removing doubts of the potential to fund the mine are:

  • Continued exploration successes which can drive a step change of the economics in the upcoming PFS (Due Dec 2021 qtr) through either a deeper open pit at Bindi or additional deposits that can extend LOM.
  • Further details on securing a strategic partner for the project that can help with project development. Partnering with a large group (i.e. another miner, trading house or smelter group) is a common approach that juniors have used in prior resource booms in WA to develop large scale projects.
  • The longer the copper price stays higher, the more likely investors will look further down the market cap and project development curve for leveraged assets. This is essentially a play on the recency bias behavioural factor whereby investors will progressively apply higher price assumptions when analysing projects and investment opportunities. I note that using the spot price, the project has a post-tax NPV of ~$2b on upfront capex of $481m, which is quite compelling. Assuming similar future dilution assumptions as per JRL above, this implies a fully diluted value of up to $1.50/sh, which is a high case scenario.
  • Post the recent cap raise, CVV has also commenced exploration on other regional prospects across the South West Yilgarn Terrane, with the main focus on the Toolbrunup prospect. This prospect hosts Ni-Cu-PGM mafic style targets. Whilst the small market cap of CVV seems to be an impediment for project development, it conversely means it remains highly leveraged to a second discovery.

If none of these catalysts sufficiently re-rate the share price such that it was still too low to support funding, it would likely end up a target for a major that could build it.

Overall, I think CVV has been under appreciated, yet compelling large scale copper asset that can be in a position to enter production during what is now expected to be a multi-year bull market in copper, whilst it also has punchy exploration prospects that can keep things interesting as the company goes through the “boring” feasibility. This gives investors in CVV dual levers to generate multi-bagger returns with relatively low risk given the small market cap of the company and with $12m cash on hand, the runway to create such value. This is why CVV is a high conviction position in our resources exposure within the Capital H Inception Fund.

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Disclaimer: Any information contained in this article is limited to general information only, whilst the opinions and views detailed are those of the author only, and as such does not constitute advice or a recommendation in any capacity. The information contained in this article has not taken into consideration your specific financial needs, goals or objectives, so please consider consulting a licenced adviser before considering acting on this information. The Capital H Inception Fund holds shares in JRL and CVV at the time of publishing.

1 topic

Joshua Baker
Portfolio Manager
Capital H Management

Joshua has worked as an Investment Analyst across different verticals of the financial sector for 9+ years. Experience includes equities research (long/short), manager research and multi-asset portfolios.

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