Cypress Development Corp (TSX-V:CYP) was one of the few bright spots on Tuesday, as junior resource investors awoke to a sea of red ink corresponding with a nasty correction in the gold price.
Following news of an updated resource estimate at its Clayton Valley, Nevada lithium project, Cypress gained 4.1% to finish the trading session up a penny and a half, at $0.375/sh.
Cypress Development Corp
CYP started to move in 2017 with the commencement of drilling at its Clayton Valley Lithium Project in Nevada. The stock moved higher in November 2017 on first assays showing a large mineralized area with high lithium grades; on the maiden resource estimate delivered in April 2018; and around the time of the PEA, released in the fall of 2018.
Since reaching a five-year high of $0.38/sh, however, many investors exited their speculative positions, and without an exciting catalyst to bring them back, Cypress shares have floated along, trading within a fairly tight band of $0.17 and $0.22, until the release of a blockbuster prefeasibility study in May of this year. Between the prefeas and some high-grade hits in the area Cypress has designated for its +40-year lithium mine, Cypress has more than doubled from 18 cents on March 1 to its current $0.375.
5.2 million tonnes LCE
More good news came Tuesday in the form of a new resource estimate. Using additional assay data from four drill holes received in June, the new RE totals 929.6 million tonnes averaging 1,062 parts per million lithium, or 5.2 million tonnes of contained lithium carbonate equivalent (LCE).
The updated Measured & Indicated (M&I) resources represent a 57% increase in tonnes of material, and a 55% increase in contained lithium. There are also 100.4Mt of Inferred resources, averaging 986 ppm lithium.
Measured resources grew to 574.1Mt or 3.3Mt (contained) lithium carbonate equivalent. In the Indicated category, resources increased to 355.6Mt or 2.0Mt LCE.
The previous resource estimate tallied Measured and Indicated resources of 593.3Mt averaging 1,073 ppm lithium, or 3.387Mt LCE.
Cypress notes that all resources are pit-constrained and based on a 900 ppm Li cutoff grade. The pit designated for the mine’s first 40 years extends to the project’s contiguous property boundaries, which were expanded to include additional land on which mineral title was cleared.
Lithium hydroxide producer
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 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 $7.25/kg, for lithium hydroxide it’s $9.40/kg).
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 an EV manufacturer like Tesla. Current global lithium production is only around 500,000 tonnes of LCE.
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.
That makes Cypress among the lowest-cost producers, and in my opinion, the best value within a small group of advanced-stage lithium projects in the United States.
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.
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. Cypress is 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.
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.
The company’s business plan has always involved attracting a major financial or mining partner that can help drive the project forward.
CEO Bill Willoughby recently 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.”
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.
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.
The case for Albemarle reaching out to Cypress to make a deal over its Clayton Valley Lithium Project has strengthened in recent weeks.
The chemicals giant is planning on temporarily closing its two lithium facilities in the US, the Silver Peak Mine next to Cypress in Nevada, and its Kings Mountain lithium hydroxide plant in North Carolina. Parts of the mine would continue operating, ie. the water wells and containment ponds, on a care and maintenance basis.
Why is this good for Cypress?
According to Albemarle, the closures are due to weaker demand for lithium, caused in part by the hit to EV sales resulting from the pandemic. The company would restart the idled output in early 2021.
Or would they? Why would Albemarle, a $9.8 billion market cap company, return to producing lithium carbonate at Silver Peak, then ship it over 2,000 miles to Kings Mountain, NC, when they could purchase Cypress and make lithium hydroxide a short distance from their existing mine, or even at Silver Peak if existing infrastructure is suitable?
According to Visual Capitalist Albemarle’s Silver Peak lithium mine only produces enough lithium to produce roughly 1,000 tonnes per year of lithium hydroxide, within a current lithium market of roughly 500,000 tonnes per annum of lithium carbonate equivalent (LCE), a term that encompasses both lithium hydroxide and carbonate used in EV batteries.
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.
Moreover, Albemarle’s Silver Peak/ Kings Mountain supply chain is surely not big enough to make a dent in the largest lithium producer in the world’s bottom line.
The company is hurting financially and struggling in Chile, where it battles for market supremacy in the salt flats of the bone-dry, lithium-rich Atacama desert with state-run lithium miner SQM.
Albemarle posted a 45% drop in second-quarter profit, which it partially attributed to weak lithium prices caused by oversupply. Sales fell $283.7 million in the three months to June 30.
The lithium giant has been reviewing its expansion plans and stepping back from earlier commitments. A year ago Albemarle postponed a project in Chile that would have added 125,000 tonnes of processing capacity.
Also last year, the Charlotte, NC-based company revised a deal to buy into Australia’s Wodgina lithium mine, owned by Mineral Resources, and said it would delay building a processing plant it expected would add 75,000 tonnes of capacity at Kemerton, Western Australia.
Adding insult to injury, in May Albemarle cut its 2020 budget and tossed its annual forecast, amid the spread of the coronavirus.
Chile, as we have reported, is facing pressure on its water supply, particularly northern Chile where most mining takes place. Lithium mines have to compete for water with Chile’s massive copper mines, including the largest in the world, Escondida. In July the country’s Superintendent of the Environment said it would charge BHP’s Escondida with drawing more water than its permits allowed. The agency charges the operation has caused a reduction in the water table greater than the 25-cm limit allowable in the Atacama desert.
The country’s regulator has also rejected SQM’s $25 million environmental compliance plan for the Atacama salt flat, calling the 2019 plan “insufficient”. A multi-year investigation found the state miner had overdrawn its brine water allocation.
It’s only my opinion, but it seems to me Albemarle is having a serious re-think of its global lithium business. Why continue a money-losing, lithium-depleted operation in Nevada when its neighbor, Cypress Development Corp, is ready to prove its lithium claystone mining and processing technology on a commercial scale?
Also consider: in Nevada water rights are granted on a “use it or lose it” basis. Albemarle has the rights to most of the water in the Clayton Valley. If it doesn’t restart Silver Peak, it will lose its water rights. Albemarle has the water, but Cypress has the resource (and the water, with or without Albemarle). A resource that has almost doubled, from 3.3 million tonnes of contained lithium (LCE), to 5.2 million tonnes.
Is this not a partnership waiting to happen?
Of course, the business case for building a massive new lithium mine in Nevada has to be there for Albemarle to consider moving on Cypress. Although Albemarle blamed oversupply and lower prices on its weak financials, the company’s CEO is bullish on the lithium market.
Earlier this month, Chief Executive Kent Master said lithium demand growth will return “pretty quickly,” by which he meant late 2021.
Moreover, the head of the company’s lithium business says via Bloomberg that hefty incentives for consumers to buy EVs in Europe, as well as changes to encourage carmakers to build greener cars globally will help lithium demand.
“It’s really a European story and a regulatory story,” Albemarle’s Eric Norris said in an interview.
“And in China they’ve extended the subsidies out a couple of years instead of having the program expire — that was the original plan — so China secondarily will be a contributor.”
According to a report from Benchmark Mineral Intelligence, Europe’s “megafactory” battery plants have surged from 63 in 2018 to 115 in 2019. Europe’s planned hike in battery capacity to 348GWh includes a 432% increase in Germany’s capacity over the next decade. The country’s new EV plants include CATL in Erfurt, Farasis in Saxony-Anhalt, Northvolt and Volkswagen in Salzgitter, and most recently, Tesla’s Gigafactory 4 in Berlin.
And while passenger vehicle sales have been hurt by the pandemic, the outlook for electrical vehicles is surprisingly positive. A new report from the International Energy Agency predicts EV sales in 2020 will match the 2.1 million sold in 2019.
If we’re talking EVs and lithium demand, we have to mention Tesla, the other company I see as a natural fit with Cypress.
Although Tesla currently works with Panasonic to manufacture lithium-ion batteries for its EVs, and has contracts with South Korea’s LG and China’s CATL, we know the company is exploring the possibility of making its own batteries. In June, Reuters cited documents from the city of Fremont, California, stating that Tesla plans to build a “round the clock” research and manufacturing facility in a project dubbed ‘Roadrunner’.
The EV maker already has a small-scale battery manufacturing operation in Fremont and applied for city government approval to expand it. Construction could be completed as early as the end of September, Reuters said.
Another interesting development is that Tesla’s planned facility in Berlin will not assemble batteries. Automotive News Europe reports the company will eliminate facilities for battery-back production and plastic components, citing documents filed by Tesla to get the project approved. The plant’s new provisions include reducing the plant’s water needs in a nod to local concerns.
Could Tesla be positioning itself to have battery production and assembly based in the United States? If so, it only makes sense if its raw materials are sourced locally. Tesla’s Gigafactory in Sparks, Nevada is only a three and a half hour drive from Esmeralda County, home to the Silver Peak Mine and Cypress’ Clayton Valley Lithium Project.
Albemarle must recognize that the world is moving to lithium hydroxide from lithium carbonate, as the preferred lithium product from making EV batteries. Right next door to its Silver Peak Mine, Cypress’ Clayton Valley Lithium Project has one of the best lithium deposits on Earth, large enough to supply 5% of the world’s lithium market, and have an impact on global prices. Cypress would make lithium hydroxide on site.
Acquiring CYP would almost certainly guarantee that Albemarle remains the world’s top lithium producer for decades. The low-cost operation would be profitable, even without additional revenue streams like the production of rare earth oxides or selling surplus sulfuric acid/ electricity.
At a cash operating cost of $3,329 per tonne LCE, the mine appears to have the economics to survive a lithium downturn and profit handsomely from a return to lithium price growth.
Albemarle has had a rough year and Cypress could help to shore up the company’s bottom line. If played right, an Albemarle-Cypress combination is a beautiful scenario shaping up for Cypress and its shareholders.
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