Cypress Development Corp’s (TSX-V:CYP) prefeasibility study (PFS) on its Clayton Valley Lithium Project is the best I’ve seen in over a decade of investing in and writing about the lithium space. (for the full study, go to SEDAR.com, click on “Search Database” and enter the company name)
The PFS shows an outstanding present value of $1.052 billion at an 8% discount rate, yielding an internal rate of return (after tax) of 25.8%. Payback is 4.4 years.
The IRR is based on a lithium carbonate equivalent (LCE) price of $9.50 a kilogram. All of the recent lithium PFS’s, and the more advanced studies, have used at least $12.50/kg; Ioneer’s prefeasibility used $13.20/kg.
Currently lithium carbonate sells for $7.50/kg while lithium hydroxide prices in China, Japan and Korea are $9.75/kg. (Cypress plans on producing lithium hydroxide, a lithium end-product that is a key ingredient of an electric vehicle’s lithium-ion battery cathode)
The proposed mine would produce an average 27,400 tonnes of LCE a year and have a mine life of +40 years. The mine would be neither a hard-rock mine nor a lithium brine operation, but rather, would process the lithium from claystones in Nevada’s Clayton Valley by leaching the material with dilute sulfuric acid.
The PFS is all the more impressive considering that Cypress went from drilling to prefeasibility in only three years – a very short turnaround time for any junior in any commodity. Moreover, Cypress only spent a million dollars in exploration to achieve the numbers in the report, which are comparable to the preliminary economic assessment (PEA), released in the fall of 2018.
The Clayton Valley Lithium Project hosts Measured and Indicated mineral resources of 593 million tonnes (Mt) averaging 1,073 parts per million (ppm) Li (3.387Mt LCE). Production is based on a Probable mineral reserve of 222Mt averaging 1,141 ppm Li (1.353Mt LCE). The project ranks among the largest undeveloped lithium deposits in the world.
The fact that Cypress is planning on making lithium hydroxide, means a significantly higher profit margin than if they were producing lithium carbonate, or for that matter, low-quality technical grade lithium. (the current LME price of lithium carbonate is $7.50/kg, for lithium hydroxide it’s $9.75/kg).
At a cash operating cost of $3,329 per tonne LCE, the company stands to make a profit of $6,421/tonne, if lithium sells for $9,750/t.
Extra revenue streams
And that does not include extra revenue earned from the sale of excess sulfuric acid, needed to leach the lithium from the claystones, excess power generated from the acid plant and sold into the electricity grid, or revenues from rare earth oxides that were identified during previous metallurgical testing. As stated in the PFS, Rare earth elements (REEs) were found at elevated levels in the lithium recovery process along with Mg, Ca and other elements.
Indeed, Cypress has a unique and potentially lucrative opportunity to mine rare earth elements at its Clayton Valley Lithium Project. REEs were detected in leach solutions ranging from 100 to 200 ppm. The rare earths include scandium, dysprosium and neodymium, in order of economic value.
Cypress ran diagnostic leach tests and determined there is the potential to recover these elements, along with potassium, magnesium and other salts.
There is also potential revenue from Cypress’ proposed acid plant, which converts molten sulfur into sulfuric acid. The heat generated can be captured and utilized as a low-cost source of electricity.
The proposed acid plant and co-generation facility would have a capacity of 2,500 tonnes per day, burning elemental sulfur to create sulfuric acid, and in the process, generating steam to heat leach tanks. Acid plant operations account for a third of the future mine’s total operating costs.
According to the PFS, most of the operation’s power requirements will be met by the acid plant. The plant’s generation capacity is 27.5 megawatts. The running power required by the operation is estimated at 21.6MW.
Excess sulfuric acid could be sold locally to large consumers, and the co-generation facility would provide enough carbon-free electricity to power the entire project, with excess power sold into the grid.
Lithium hydroxide demand
By 2030, the demand for lithium products is estimated to grow to 1.6 million tonnes a year, of which 1.4Mt is for lithium hydroxide. That’s exactly the product Cypress would want to position itself as a supplier of making themselves attractive to a battery manufacturer like Tesla. Current global lithium production is only around 500,000 tonnes of LCE.
Clearly, the ability to source enough water to supply a 40-year mine is critical to Cypress’ success. Do they have enough water to run a 27,000 tpa operation?
From the PFS,
Water supply costs allow for drilling four wells and an allowance for constructing a 14-inch pipeline over seven miles to the project, main and secondary water tanks, and installing electrical and piping distribution to the plant and buildings. The cost of obtaining water through rights acquisition, ongoing purchase, or other arrangements is excluded from the estimate.
Total water use in processing is estimated at 8,000 gpm [gallons per minute]. Approximately 75% of the water will be recycled from the processing plant and be returned to the leaching circuit. Makeup water required for the project is estimated at 2,000 gpm. The Clayton Valley basin has groundwater to support the project, but the water rights are fully allocated and held by several parties. Cypress has evaluated options for securing makeup water. The options are dependent on future conditions and agreements with other entities.
Using the 7-mile pipeline is “a basic assumption” in the operating plan. What we don’t know is where that pipeline will go. Currently CYP is negotiating for water rights in the Clayton Valley and the company, rightly so, isn’t divulging those details.
However from a little digging, we can tell you that the Clayton Valley basin is currently “over-appropriated”, with Albemarle Corp.’s Silver Peak lithium mine being the largest consumer of water in the area.
The Nevada Division of Water Resources has permitted Albemarle to extract 20,000 acre-feet a year from the Clayton Valley Basin. However, water rights in Nevada are “use it or lose it”.
Because water is scarce, large industrial customers must demonstrate an actual beneficial use. They cannot speculate on water rights or hold onto water rights they do not actually intend to put to a beneficial use in a timely manner. If they stop using the water, they will lose the water right.
The inference here being that if Albemarle’s Silver Peak, due to production restrictions such as the comparably low lithium grades (the mine has been operating since the 1960s), no longer requires as much water for processing, it cannot hold onto its water rights in perpetuity. They would have to become available for application by Cypress or other lithium developers.
Cypress can also purchase water from a nearby municipality.
Current competitors for water rights include Schlumberger (NYSE:SLB), a global oil field services company. In 2019 Schlumberger signed an earn-in agreement with Pure Energy Minerals, to design and construct a pilot plant capable of processing lithium-bearing brines for lithium hydroxide from the latter’s Clayton Valley lithium property. Earlier that year Schlumberger obtained a 50-acre-foot water right permit. In May 2020, the company began drilling for initial lithium brine samples for chemical testing by SLB.
There’s also the possibility of drawing water from a 640-acre geothermal lease that Cypress holds 5 miles north of the project. You could use the geothermal water without obtaining a consumptive water right, as long as its utilized then released back into the environment, free of contaminants.
Estimated costs to explore and develop it would be approximately $10 million.
If there is one takeaway from investors interested in reading the 161-page technical report, it is the concept of scalability. Major mining companies are not interested in small deposits because they are not scalable ie., the junior mining company may be able to produce the metal they’re after, whether it be gold, silver, copper, rare earths, lithium, etc., but if the operation can’t be scaled up to the level needed by the major, it will not pass muster.
Cypress’ Clayton Valley Lithium Project has the size and scalability to interest a large mining company like Albemarle, a major EV automaker like Tesla, or a world-class battery-maker like SK Innovation, developing a large facility in the southern United States.
In the initial mining area, only the first eight of 16 “cells” will be required to mine, during the first 40 years of production – at the envisioned production rate of 15,000 tonnes per day.
It is possible that whoever decides to buy the project (or Cypress) will find the specifications of the mine, as outlined in the PFS, sufficient for its purposes. However it is just as likely that a major lithium miner would want to double, or triple, the 15,000 tpd capacity and 27,400 tonnes of annual LCE production set out by Cypress in its base case scenario.
For financing purposes, it is also important to recognize that CYP can scale the project down if its current USD$493 million capex is too big an ask in a lithium market that has been set back by oversupply and lower prices. Lithium juniors are having trouble raising money for pilot plants, let alone mine construction. If that turns out to be the case CYP could develop the project at half-scale to reduce up-front capex.
But the proof in the pudding for a major taking a serious look at Cypress, will be the mine’s ability to scale up.
To offer this proof, Cyprus is designing a pilot plant capable of continuous production of at least one tonne per day of claystone, for a month. If that test phase is successful, ie., if the flow sheet works and the lithium hydroxide finished product is acceptable, then a potential acquirer could envision 5 tonnes per day, or 20 tpd, whatever production rate is required.
The pilot plant will require raising an estimated $7 million. Cypress currently has about a million dollars in its treasury.
The company is continuing testing in preparation for the pilot plant, has begun baseline environmental studies, and is engaged in sourcing funds for further studies. The company looking at government grants and have applied for several, including one for $3.5 million, and a $500,000 grant to look at the operation’s rare earths recovery potential.
In the three years I’ve been covering Cypress, the business plan has always involved attracting a major financial or mining partner that can help drive the project forward.
Cypress states in a June 3, 2020 news release,
With the next step a pilot plant program, as recommended in the PFS, Cypress intends to invite proposals that can add value to the project and the Company through financial, technical, operating or marketing capabilities.
Here is where it gets interesting. Cypress CEO Bill Willoughby had previously told me, “[The partner] could be financial, another miner, or government entity, we’re going to explore all those options.” And then the kicker: “The pilot plant itself is going to be oriented towards a specific customer.”
Does he have somebody in mind? Even if he did, we wouldn’t expect Willoughby to divulge a name. My sense is that Cypress has been talking to a potential partner, or partners, plural. In my mind the two most likely candidates are Albemarle and Tesla.
Willoughby has also said,
“We want to find a partner interested in producing lithium in the United States. There’s three gigawatt [battery] factories either being expanded or built in the US. If all of those expand to full capacity that’d be about 100GWh each. We’d need to see all and every little lithium project being developed in the US being needed to fuel those plants.”
Albemarle is the world’s third largest lithium producer. Tesla is the largest EV manufacturer; its Gigafactory is just 125 miles from CYP’s Clayton Valley Lithium Project. The grades at Albemarle’s Silver Peak mine are declining. There’s no way Silver Peak can produce enough lithium to supply American needs, especially with all of the EV battery and auto production facilities planned.
There are other suitors that might be interested in securing a 40-year lithium mine in the United States. SK Innovation, Mercedes Benz, Volkswagen, Ford or GM are all possibilities.
Becoming a price maker
What sets Cypress apart from its peer group is where the Clayton Valley Lithium Project sits in relation to the global lithium market.
Again it comes down to scalability. According to Willoughby, 50,000 to 100,000 tonnes of lithium per annum is what a company would like to see in terms of making an impact on the world’s supply.
“What would 50,000 tonnes a year mean down the road when the world needs 1.5 million tonnes? Well, we’d be about 5% of world production at that point,” he said. “That’s still a significant number, but it would be enough to put you on the cost curve and have people look at your production rate, have people say, these guys are contributing to the world price of lithium.”
In other words, becoming a price maker, not a price taker.
Proof of concept
The next step is proof of concept. The purpose of the pilot plant is proving, in a real-world application, everything that Cypress has done so far in a laboratory. It’s showing to everyone that its technology works, on a commercial scale. After that, it’s on to a feasibility study – another major milestone in Cypress’ path to production.
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