Rating E3 Metals Stock A Buy, Seeks To Tap A Legendary Oilfield

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E3 Metals (OTCPK:EEMMF), an aspiring entrant to the white-hot lithium market, offers the potential for sufficiently large investment returns to justify the inherent risks posed by any pre-production mining company.

An Emerging Technology to Extract Lithium

A certain irony surrounds E3’s story. It seeks to mine lithium from Alberta’s Leduc aquifer, which was the site of a mid-20th century oil discovery that marked the beginnings of western Canada’s booming petroleum industry. Many now believe that lithium is poised to become the “oil of the 21st century” because of its indispensable role in electric vehicle batteries.

Lithium is a plentiful element that does not naturally exist in its pure state, posing a challenge to those seeking to mine it. It has historically been extracted either from brine or spodumene rock. Some are now looking to derive it from clay.

Most lithium brine operations are in the high deserts of Chile and Argentina, which are among the world’s driest places and offer its richest lithium sources. At those projects, underground brine is pumped into ponds the size of small cities and left to evaporate for months or years, eventually leaving deposits of lithium behind.

E3 Metals intends to extract lithium from the brine in the Leduc aquifer. But Alberta’s atmosphere is too wet and the aquifer’s lithium content too thin for an evaporation strategy to work. Instead, E3 is pursuing a promising but unproven method known as Direct Lithium Extraction, or DLE, which uses a chemical process to isolate lithium.

E3’s DLE module takes in brine consisting of trace amounts of lithium and turns out a 60 percent lithium concentrate, the company says. E3 plans to refine that concentrate into a 99.9 percent pure battery-grade product.

There are several types of DLE technologies. E3 Metals’ approach is called ion exchange, which has long been used in other applications, including water treatment and uranium extraction. E3 likens its process to those in home water softeners in which beads attract oppositely charged calcium and magnesium ions. E3’s proprietary beads, or sorbents, are designed to hunt for lithium.

Although no pure DLE system has yet been brought into commercial service, major lithium producer Livent (LTHM) has for two decades used a hybrid system at one of its projects that relies on a combination of DLE and evaporation ponds. As it happens, Livent partnered with E3 Metals for a time on the Alberta project before exiting the deal in 2020, citing internal capital and resources shortages.

DLE promises many advantages including the ability to:

• extract lithium in minutes-to-hours versus the months-to-years required for evaporation;

• recover a much higher percentage of the lithium contained in the source;

• consume a tiny fraction of the land taken up by evaporation ponds; and

• preserve brine, a cousin of groundwater, as the brine can be returned it to its underground source after being stripped of lithium.

For those looking for more information on DLE and its aspiring practitioners, see this 2021 piece by Seeking Alpha author Matt Bohlsen.

Test Results Purport to Show That E3’s Technology Works … in a Lab

In late 2021, E3 began testing a laboratory pilot in Calgary that processes brine trucked in from the Leduc aquifer. The company says that test results have met or exceeded expectations in terms of lithium recovery, consistency of performance and durability of the sorbents.

E3 is aiming to implement an onsite pilot module by the end of 2022 or early 2023.

The full-scale project that E3 plans to build is considerable. It will entail laying miles of underground pipelines to transport brine and natural gas, building a natural gas power plant and, possibly, creating a lithium hydroxide processing facility.

The company hopes to begin commercial operations between 2025 and 2027.

The Company Holds Rights to Massive Resources

E3 has obtained about 80 Metallic and Industrial Minerals permits from the province of Alberta to explore lithium in the Leduc reservoir. Those permits can later be converted into mining leases. (See page 33 in E3 Metals’ preliminary economic assessment for a map showing the Leduc reservoir and the company’s permit areas.)

The concentration of lithium in the Leduc brine is infinitesimal, just 75 milligrams/liter. But across the vast expanse of the reservoir, which extends about 300 kilometers from Calgary to Edmonton, those milligrams add up to enormous quantities.

The company estimates that 7 million tons of battery-grade lithium could be derived from three regions of the aquifer that it has already analyzed. Furthermore, E3 says that those regions account for just one-third of its permit areas.

Appealing Initial Projections With Stratospheric Potential

E3 Metals initially plans to produce 20,000 tons of lithium hydroxide annually. A preliminary economic assessment (PEA) published in 2020 concluded that the 20,000 ton project would cost about $600 million to develop and about $3,700 a ton to operate. The PEA assumed a sale price of $14,200 per ton of lithium hydroxide, netting profits of about $10,500 per ton. It forecast annual EBITDA of more than $200 million and arrived at a post-tax net present value of $820 million at an 8 percent discount rate.

As of the writing of this article, E3 Metals’ market capitalization is about $125 million, meaning that the company’s valuation is about 15 percent of the value that the PEA ascribed to its initial project.

The PEA’s NPV determination was likely lower than it would be if it were issued today. The spot price of battery grade lithium has risen several hundred percent in the past 18 months, from less than $10,000 to more than $60,000 a ton in some markets. Analysts believe that some degree of elevated prices will remain throughout much of this decade because automakers are planning to increase electric vehicle production faster than miners are ramping up lithium capacity, presaging supply shortages.

E3 Metals will not likely realize the stratospheric sums quoted in recent spot-market reports because producers typically accept lower prices in long-term contracts in exchange for predictability. But the industry consensus is that the prices in negotiated contracts also will rise. E3’s CEO recently estimated that the long-term selling price of battery-grade lithium would be in the range of $25,000 per ton, more than 75 percent above the price used in the company’s PEA.

While rising lithium prices should give E3’s stock a boost, the company’s ultimate plans offer the potential for much bigger gains.

E3 has expressed a goal of producing 150,000 tons of lithium hydroxide annually, which the company says is feasible based on the scalable nature of its DLE modules and the extent of resources for which it holds permits.

Fully executing that vision would make E3 Metals one of the largest lithium mining companies on earth and send its valuation into orbit. Multiplying the $820 million net present value in E3 Metals’ PEA by 7.5 – representing the difference between 20,000 and 150,000 tons of annual production – would yield a net present value of more than $6 billion.

Valuations of Comparable Companies Offer Promising Signs

There are many junior miners seeking to cash in on the lithium rush, and a significant number of them are pursuing DLE solutions.

In the short to midterm, E3 will likely welcome their success. Lithium providers need their compatriots to succeed in order to feed the green revolution. Furthermore, success of any DLE firm should assist the others in the space simply by demonstrating that the DLE story is not a fairy tale.

The cases of two aspiring DLE firms provide some helpful context regarding E3’s prospects.

Canadian company Standard Lithium (SLI) is exploring the Smackover formation, a petroleum and brine reservoir that stretches 1,000 miles from Texas to Florida. Standard has established a pilot DLE plant at its flagship site in Arkansas. The firm is partnering there with German chemical company Lanxess, which currently derives bromine from that site.

This project might be the most direct corollary to E3’s endeavor because it also involves extracting lithium from a North American brine reserve that is already used for mining. Additionally, the brine that Standard is plumbing has a relatively thin lithium concentration, as is the case for E3 Metals.

A PEA Standard issued for its Lanxess project arrived at nearly $1 billion in net present value. The company also released a PEA reporting nearly $2 billion in NPV for a separate project that it owns exclusively. The firm has received a $100 million investment from Koch Strategic Platforms, the investment arm of petrochemical giant Koch Industries.

Standard has reported promising test results from its onsite pilot project that stop short of conclusively proving that its technology will ultimately deliver.

Lake Resources (OTCQB:LLKKF), an Australian company, is pursuing brine projects in Argentina. Lake is using DLE technology furnished by Lilac Solutions, whose investors include BMW and Bill Gates-chaired Breakthrough Energy Ventures.

So far, tests of Lake Resources’ system have been conducted at Lilac’s California labs. Lake announced in early March that Lilac had shipped off a prefabricated pilot plant to be installed at its primary project site Argentina.

An April 2020 prefeasibility study issued by Lake Resources envisioned annual production of 25,000 tons of battery-grade lithium production, resulting in a net present value of nearly $750 million. Since that report’s publication, Lake has steadily increased its projected output, eventually arriving at a promise of producing 100,000 tons per year by 2030. But no study has been issued to support the feasibility of those plans.

Lake Resources’ mining sites have far higher lithium concentrations than Standard Lithium’s, which, in turn, have higher concentrations than the brine in E3 Metals’ reservoir. But DLE systems can overcome the disadvantage of lower grades simply by processing a greater volume a brine, according to Alex Grant, a DLE expert who was a co-founder of Lilac Solutions but is no longer with that firm.

Stock prices for Standard Lithium and Lake Resources have done well in the past year – and in Lake’s case, very well. Standard is up 160 percent over the past year (as of April 11), with a market cap of $1.2 billion. Lake is up 450 percent, now with a market cap of $1.8 billion. Those valuations are in the range of 10 to 15 times E3’s.

With so much uncertainty surrounding new technologies, it is difficult to predict how DLE hopefuls will perform relative to one another. The examples of Standard Lithium and Lake Resources do show, however, that the market is willing to reward DLE companies that have yet to prove their mettle.

Favorable Public-Sector Tailwinds

Being in North America should be an advantage for both Standard and E3 because the governments of the United States and Canada are trying to play catch-up in the battery minerals’ market. Geopolitical concerns arising from Russia’s invasion of Ukraine will likely intensify this effort, as evidenced by the Biden administration’s recent decision to invoke the Defense Production Act to spur production of critical minerals.

Canadian companies could benefit from the United States’ urgency. One U.S. official reportedly said that Washington views Canada as akin to a 51st state in its quest for battery materials.

E3 enjoys advantages because of Alberta’s pro-mining viewpoint, streamlined regulatory processes and well-developed infrastructure. E3 received a C$1.8 million grant from Alberta for pilot plant development. Alberta Premier Jason Kenney has periodically plugged E3 on Twitter.

Management and Staff

E3 Metals CEO Chris Doornbos founded the company in 2016 and took it public through a reverse merger in 2017. Previously, Doornbos held positions in resource estimation and exploration at about a half-dozen companies. He graduated with a bachelor of science degree in geology from the University of Alberta in 2005.

Other E3 management figures have largely come from Alberta’s oil and gas industry, as have a significant share of its non-managerial employees.

Past roles of the company’s director of projects include acting as senior process engineer on the Fort Hills oil sands project, which Doornbos says was a $17 billion capital build.

The company’s advisory board includes Brad Wall, who served as premier of Saskatchewan from 2007 to 2018.

E3’s roster is small but expanding. In 2021, it increased its staff from five to 15 employees.

Finances

E3 reported C$17.8 million in cash on hand at the end of 2021. This was C$11 million more than the company’s reserves at the end of 2020. This increase was due to the company raising about C$17 million from private placements, plus exercises of stock options and warrants.

E3 is a pre-revenue company. Doornbos said in early 2021 that its recent capital raises would be sufficient to fund E3 through the implementation of its onsite pilot plant – which is projected to cost $3 million to $4 million – and completion of its preliminary feasibility study. I do not know if this forecast still holds.

Some further dilution will likely occur, if only because the company entered this year with about 10 million outstanding stock options and warrants. It would not be surprising if E3 has to tap into capital markets again before going out for comprehensive funding to develop its project.

While additional dilution would not be ideal, recent events suggest the company will be able to raise enough money to sustain itself until the time arrives for a final investment decision.

Doornbos has expressed a goal of financing capital construction with a combination of debt and contributions from off-take partners.

Milestones and Catalysts

E3 Metals has outlined three chief objectives for 2022:

1. Drill fresh wells in the Leduc aquifer to take precise measurements to inform its upcoming preliminary feasibility study.
2. Implement an onsite pilot project. Doornbos has said this goal might slip to early 2023 but, if so, he expects it to be achieved very early in the new year.
3. Synthesize battery grade lithium hydroxide from the lithium concentrate yielded by E3 Metals’ DLE system. The company plans to engage a vendor for this step, although it says it might eventually decide to handle refinement in-house. Doornbos is confident in E3’s ability to convert the firm’s lithium concentrate into a battery-grade product. He points out that the intermediate-stage concentrate derived from spodumene rock is just 6 to 7 percent pure, compared to 60 percent for E3 Metals’ concentrate. But investors will breathe easier once the firm proves it can produce a final battery-grade product that meets industry standards.

Five Risks

1. The biggest risk is that E3 Metals’ system will not succeed in delivering economical production of battery grade lithium at a commercial scale. Undergirding that risk, the information in the preliminary economic assessment might not be sound and/or the company’s reports on its test results might not be accurate.
2. The project could suffer excessive delays. E3 did not meet some of its goals for 2021, such as producing lithium hydroxide by the end of that year. It is common for timelines to slip, but chronic delays could cause the company to miss its window of opportunity.
3. The company may have difficulty raising money. I do not believe this is likely if E3 demonstrates technical and economic viability, but $600 million is an admittedly large sum.
4. The lithium market might not bloom in line with current signs. This could occur if electric car adoption slows. Alternatively, miners motivated by the sizzling lithium market could deliver a glut of supply, driving down prices. It will shock analysts if this occurs anytime soon, however, due to a shortage of projects in the pipeline.
5. The company might be acquired before reaching production. The prospect of an early acquisition should not truly be deemed a risk, as it would almost certainly result in an enviable return. But such an outcome might disappoint investors who are anticipating a trip to moon.

Investor Outlook

I rate E3 Metals a buy. I would call it a strong buy if I had enough information to conclude with confidence that a) the company is likely to achieve its stated incremental goals, and b) the company’s predicted capital costs are realistic. I am unable to make judgments on those questions based on the information in the public domain.

On the whole, my sense is that E3 is more likely than not to eventually reach commercial production. This is because I trust the company’s representations that its technology works. If that core question is proven true, I believe that there are enough actors – including automobile companies – with a vested interest in seeing lithium projects succeed that the hurdles will be overcome.

If E3 does get to production – or even procures the funding necessary for project construction – its stock value should rise by many multiples. But any investment in a junior mining company is risky. An unfavorable development could vaporize E3’s stock value. I would not invest in this company if I were not prepared to lose everything I have put into it.