Frontier Lithium Inc. (FL:TSX.V; LITOF:OTCQX; HL2:FRA) is a mineral and chemicals company focused on the development of its 100%-owned PAK Lithium Project in Ontario.
With increased emphasis on local supply chains FL's objective is to become a strategic domestic supplier of battery-grade lithium hydroxide and other chemicals to the growing electric vehicle and energy storage markets in North America.
With its high-purity raw ore product, Frontier has qualified its material to high-quality glass manufacturers. The specifications required by this industrial market are more stringent than the chemical industries also requiring concentrate feedstock for the battery industry. This is important in an industry where quality material is likely to be in short supply in the future and is likely to demand a premium.
Frontier aims to complete final permitting, metallurgical test work and definitive feasibility in 2023 to construct and mine, mill and downstream chemical plant to produce lithium chemicals by 2026.
With this tailwind of development momentum, FL's stock price has risen 400% since September, 2020.
Last month, Frontier released results from a Preliminary Economic Assessment (PEA) which reported a pre-tax Internal Rate of Return (IRR) of 27%.
A PEA answers the question, "How best can this deposit be exploited to maximize its profits for investors?" Unlike more advanced studies, a PEA can use Inferred resources for its operational and financial modeling.
A positive PEA will typically create an upward re-valuation of the company, unless the spot price of the targeted mineral is falling—which is unlikely given the growing global demand and shrinking supply for high-purity lithium mineral concentrates and chemicals.
The IRR is a metric used in financial analysis to estimate the profitability of investments.
The metric is ideal for analyzing capital budgeting projects to understand and compare potential rates of annual return over time.
The PEA anticipates a mine-to-lithium hydroxide chemical/hydromet plant facility in the Great Lakes Region of North America, assuming a hydromet plant that would convert spodumene concentrate feedstock sourced from open-pit mining and a milling facility at the PAK Lithium Project.
Highlights (in $USD unless otherwise stated):
- Life of Project Revenue of $8.52 billion over 26-year total project life;
- Total initial capital expenditure estimate of $685 million with a contingency of 22.5% included.
- Sustaining Capital of $117 million;
- Post-tax NPV8 of $974.6 million and IRR of 21%
- Annual Average EBITDA (steady-state) of $225 million.
- Chemical plant producing 23,174 tonnes of battery-quality Lithium Hydroxide Monohydrate (LiOH-H2O) per year with an average selling price of $13,500 per tonne.
- A total of 556,200 tonnes of LiOH has been contemplated being produced from open pit mining only at the PAK and Spark deposits
- PAK and Spark deposits are open in all directions and could provide potential resource expansion for a newly commenced Preliminary Feasibility Study
- All-in operating cash costs of $4,083 per tonne of LiOH; and
- After-Tax Pay Back of Capital Expenditures is 4.5 years after the start of commercial operations.
- Life of Project Revenue of over 26-years total project life
- Sustaining Capital of Pre-tax NPV at an 8% base case discount rate of .62 billion and Internal Rate of Return (IRR) of 27%
- Post-tax net "undiscounted" Cash Flow (before initial capital expenditures) of Post-tax NPV of and IRR of 21%
"The fully Integrated Project PEA demonstrates the economic and strategic benefits of developing lithium chemical production of lithium hydroxide in the Great Lakes Region of North America, with skilled labour, exceptional infrastructure, low carbon sources of energy, prime intermodal transportation access and low operating costs," stated Trevor Walker, president & CEO of Frontier Lithium.
Streetwise Reports spoke at length with Walker about the significance of the PEA and the milestones to production.
"The PEA is really that first step to say 'we've got a resource—can we do something with it?'" stated Walker, "The PEA gives you a sense of what the economics are, based on a resource. In our case we have two deposits, the Spark and PAK deposits."
The PAK deposit contains a pit constrained mineral resource in the Measured and Indicated categories of 5.4 million tonnes averaging 1.99% Li2O and an Inferred mineral resource of 0.60 million tonnes averaging 1.97% Li2O, hosts a rare technical/ceramic grade spodumene with low very low iron content.
The Spark deposit is located only 2km northwest of the PAK deposit and contains a pit constrained mineral resource estimate of 3.3 million tonnes averaging 1.59% Li2O in the Indicated category and a mineral resource of 15.7 million tonnes averaging 1.31% Li2O in the Inferred category.
"With that type of operation, based on that resource size, we have a projected 26-year-mine-life year, just in those two open pits and it drives some really compelling economics," added Walker.
"Strip Ratio" refers to the amount of waste that must be removed to release a given ore quantity. 20:1 strip ratio, means you have to remove 20 tonnes of waste to generate 1 tonne of ore.
In open pit mines, grade and stripping ratio are key metrics to better understand the potential economic value of a mine. A high lithium grade deposit has less impurities in the ore and drives a higher lithium yield (ore input/finished product ratio).
Removal of waste is a significant production cost; in addition, a large stripping ratio increases the probability of further ore dilution and impurity introduction—which will reduce revenue potential. The lithium business is a chemical business, whereby quality is paid a premium.
Under Frontier's PEA, the two open pits project an encouraging stripping ratio of 3.6 to 1.
Computer-generated modeling of the two pit-constrained deposits provides a visual explanation of why the ratios is so low. The deposits are at surface, and wide (in excess of 50m).
The open pits will be mined using a standard fleet of off-road mining trucks and hydraulic excavators at a rate of approximately 2,900 tonnes of ore per day.
"We're really conservative by nature here at Frontier," states Walker in relation to the PEA numbers, "So we see a lot of room for improvement as we advance to the next level—which is a Pre-Feasibility Study (PFS).
Frontier will need to raise $685 million to build its mine, mill and chemical plant—they anticipate paying it all back in 4.5 years.
Even for the notoriously conservative banking industry, that may not be a hard sell.
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1) Lukas Kane compiled this article for Streetwise Reports LLC and provides services to Streetwise Reports as an independent contractor. He or members of his household own securities of the following companies mentioned in the article: None. He or members of his household are paid by the following companies mentioned in this article: None. His company has a financial relationship with the following companies referred to in this article: None.
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