It boils down to this: I think the company is lying about its project’s economics.
#1- Canada Lithium somehow has comparable costs to Talison Lithium, another hardrock lithium operation with over three times the grade
CLQ’s Oct 2012 technical report states that the grade is around 1.19% Li2O for Measured & Indicated resources at a 0.8% cutoff. Proven and probable reserves have a grade of around 0.94% at a lower 0.6% cutoff. The initial ore that has been mined has a grade of 0.95% (see press release).
During March 2013, the Company mined approximately 32,000 tonnes of ore at a head grade of 0.95% (as compared with the mineral reserve grade of 0.94%
This could be a bad sign since a grade of 0.94/1.19% requires a lot of ore above that figure. Because it makes sense to mine the most profitable ore first, Canada Lithium should be seeing grades well above 1.19%. To be fair, sometimes you have to mine medium/low-grade ore first to get at the highest-grade stuff. So there may be a legitimate reason why the initial grades are lower than what they should be. Anyways, I will give CLQ the benefit of the doubt and assume that their normal grades should be 1.19%.
Now for Talison (now owned by Rockwood Holdings). According to page 26 of this presentation (PDF) by Galaxy:
- Talison’s Greenbushes operation has a head grade of 3-4% Li2O, which is over three times CLQ’s current grade of 0.95%.
- Galaxy’s Mt Cattlin operation has a head grade of 1.1% Li2O. It is currently shut down, likely because it is not economic. (If it was economic, it would likely still be running…) The grade of its processed ore in 2012 was around 1.22%.
Talison’s EBITDA margin has ranged from 22-28% over the past few years when it still filed on SEDAR. If Canada Lithium’s operating costs are three times those of Talison’s, then there is no way that CLQ can be profitable. EBITDA margins would be around -134% to -116%. (And of course, depreciation and amortization is a very real cost that should be taken into account. Things get uglier for Canada Lithium if you factor that in.)
Comparing Canada Lithium’s project to Mt Cattlin, both operations look comparable though Mt Cattlin has some minor cost advantages. Mt Cattlin has a lower strip ratio (CLQ’s LOM 5.54:1 versus 2.4:1) and higher head grades. In any case, Mt Cattlin was so awful that it has been shut down. The mine wasn’t anywhere close to having positive cash flow. (Galaxy’s annual reports make for interesting reading. There is a massive gap between their past projections and reality.)
I think that Canada Lithium will have the next Mt Cattlin on its hands.
#2 – Assumptions in the latest technical report
The price assumptions in the Oct 2012 technical report are aggressive. For the lithium carbonate price, CLQ incorporates escalations in their price assumptions. That is not how feasibility studies should be conducted. As well, the technical report makes the following strange and aggressive assumption:
The Inferred Resource was within the wireframes created filled by up to three passes but then trimmed by an optimized pit which was run on the Measured, Indicated and Inferred Resources using the Feasibility Study cost parameters but increasing the commodity price by 20%.
In my opinion, this unusual methodology is unprofessional and deceptive. There is no reason to increase the commodity price by 20%!!! This is especially inappropriate since Canada Lithium had to restate its mineral resources in the past and is currently involved in a lawsuit over it. It seems that once again Canada Lithium is playing the inflated technical report game.
#3 – Geological modelling looks aggressive
From what I can tell, the resource modeller simply assumed that the pegmatite dykes extend downwards even though there is no drilling to confirm it. Of course, I could be wrong as I have not seen the entire 3-D model and the technical report doesn’t provide a lot of information.
Shorting Canada Lithium?
I am actually long CLQ since I am own shares of Northfield Capital, which owns shares of Canada Lithium. Northfield’s CEO (Mr. Cudney) sits on Canada Lithium’s board of directors. He liked the stock so much that he bought shares of Canada Lithium in his personal account instead of Northfield shares. Buying Northfield shares could make more sense since his company is selling below liquidation value. However, Northfield shares are extremely illiquid and this may be the reason why he bought Canada Lithium (and Queenston Mining) shares in his personal accounts. If you haven’t figured out already, I do look at what Mr. Cudney is buying to get ideas and to understand why Northfield Capital has such a good track record. I think I understand the case for buying Canada Lithium. The stated IRR of the project is high and one can make the argument that advances in battery technology is going to cause a protracted bull market for lithium. However, I am cynical and think that Canada Lithium’s project will likely be a disaster.
But, I am not shorting it. I don’t understand the borrow on this stock so I am only short 200 shares (which is a meaningless tracker position). I use Interactive Brokers and the software client reports that there is no borrow available most of the time.
My previous posts can be found by searching this blog for the word lithium. It shows what I used to think about the company (I used to be long both NFD.A and CLQ) and what I think about it now.