23rd Apr 2017: Patersons Research Report - (PDF - 2 MB)

EUROPEAN METALS HOLDINGS LIMITED

Research Note

THE LARGEST LITHUIM HARD ROCK PROJECT IN EUROPE

24 April 2017
12mth Rating	Speculative Buy
Price	A$	0.995
RIC: EMH.AX	BBG: EMH.AU
Shares o/s	m	129.4
Free Float	%	82.4
Market Cap.	A$m	139
Net Debt (Cash)	A$m	(3.4)
Net Debt/Equity	%	n/a
3m Av. D. T'over	A$m	0.18
52wk High/Low	A$	0.14-1.30
Analyst:	Juan Pablo Vargas de la Vega
Phone:	[phone]
Email:	[e-mail]
An investment in this company should be considered speculative and note assumptions employed are contingent on broader market conditions remaining supportive. These can change at short notice. Recommendations are current at the time of publication.
12 Month Share Price Performance
Share Price A$ Volume '000

• European Metals Holdings Limited (EMH) is an ASX- and AIM-listed mineral exploration and development company advancing the Cinovec Lithium / Tin Project in the Czech Republic. Cinovec is a historic underground mine that hosts a significant undeveloped lithium-tin resource with by-product potential including tungsten, rubidium, scandium, niobium, tantalum and potash. The Project has Indicated Mineral Resources of 348Mt at 0.45% Li2O and 0.04% Tin and an Inferred Mineral Resources of 309Mt at 0.39% Li2O and 0.04% Tin containing 7.0Mt of Lithium Carbonate Equivalent (LCE) and 263kt of Tin. By our calculations, this makes Cinovec the largest lithium deposit in Europe, and a globally significant tin resource. Recently, EMH released a Preliminary Feasibility Study (PFS) which highlighted that the Project has the potential to become a long life, low cost (Tier 1) lithium operation. We initiate coverage on EMH with a Speculative Buy and a valuation of A$1.68/share.
• Positive Preliminary Feasibility Study (PFS) results: EMH released results from the PFS on the Cinovec Project on 19 April 2017. Specialised independent consultants including Bara, Ausenco, and Hatch undertook the PFS studies co-ordinated by EMH. The PFS concluded that Cinovec could produce 20.8kt of LCE for 21 years with the lowest cost for a hard-rock lithium project globally (US$3,483/t LCE , including all credits). Cinovec's NPV was calculated as US$540m, after investing of US$393m in Capex, with an IRR of 21%.
• Successful manufacture of lithium carbonate at >99.5% LCE: EMH has proven at the laboratory the manufacturing of high-grade LCE using standard roasting technology. Hence, attracting a potential premium per tonne if producing lithium carbonate beyond >99.5% purity.
• Cinovec is close to infrastructure: The Project is centrally located for European end-users and is well serviced by infrastructure, with a sealed road adjacent to the deposit, rail lines located 5 km north and 8 km south of the deposit and an active 22 kV transmission line running to the historic mine. EMH claims that the deposit lies in an active mining region, with strong community support.
• Rising of new battery plants in Europe: Cinovec could experience high interest from the new battery plants being constructed (Samsung and LG) or planned to be developed in the new future, as the car industry experiences increased demand for electric vehicles. Tesla has indicated that it could build its second Giga-factory in the Czech Republic.
• Substantial Exploration Upside: Cinovec has an exploration target with the potential to add resources of 350-450Mt with a grade of 0.39- 0.45%Li, containing 3.2-5.2Mt LCE. As a result, the exploration target implies potential to increase Mineral Resources by 48-75%.
• Valuation: We estimate the value of EMH using the key parameters from the PFS as a base, a debt to equity split of 70%/30% to fund Capex of US$393m, risking 10% of the total Project value, cash flows discounted at a rate of 10% pa, exploration upside of Cinovec of A$30m and the current cash position of A$3.4m. As a result, we value EMH at A$542m or A$1.68/share. We have also valued an upside case with 5% and 10% premium over the long term LCE price with a value of $1.94/share and $2.20/share derived, respectively.
• Catalysts: short to mid-term, we envisage catalysts for value accretion to include signing of LCE off-take agreements, confirmation of project financing for Cinovec, and progress on Environmental and Mining Permits. The commissioning of the project will be a long-term catalyst.

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OVERVIEW

European Metals Holdings Limited (EMH) is an ASX- and AIM-listed mineral exploration and development company advancing the Cinovec (100% owned) Lithium / Tin Project in the Czech Republic. Cinovec is a historic underground tin mine (400kt of ore mined) that hosts a significant undeveloped lithium-tin resource with potential by-products including tungsten and potash. The Project has an Indicated Mineral Resource of 348Mt @ 0.45% Li2O and 0.04% tin and an Inferred Mineral Resource of 309Mt @ 0.39% Li2O and 0.04% Tin containing 7.0Mt Lithium Carbonate Equivalent and 263kt of tin. By our calculations this places Cinovec as the largest lithium deposit in Europe and greater than Rio Tinto's Jadar Lithium Project with 6.4Mt LCE, Serbia.

The Project is centrally located for European end-users and is well serviced by infrastructure, with a sealed road adjacent to the deposit, rail lines located 5 km north and 8 km south of the deposit and an active 22 kV transmission line running to the historic mine. EMH claims that the deposit lies in an active mining region with strong community support.

On 19 April 2017, the Company released its Pre Feasibility Study (PFS). Highlights of the study show that the Project can potentially produce:

• 21ktpa of lithium carbonate equivalent (LCE) per year at battery grade (>99.5%) at an average operating cost of $3,483/t (after tin, tungsten and potash credits)

• NPV of US$520m and IRR of 21% (post tax) after initial capital expenditure of US$393m.

We highlight that the project is already a large resource and its expected exploration upside of 48-75% is substantial. Mineralisation to the north in Germany remains open and untested, potentially extending the Project's footprint adding further value to EMH.

Figure 1: Map of the Cinovec in Europe (Czech Republic) - Proposed Battery Plants in Europe

Source: European Metals Holding Limited

The Cinovec mine development is planned as a bulk underground mine. In principle, tin, tungsten and potash are the by-products that make the project viable and, potentially, one of the lowest cost hard rock lithium projects moving to development. Our cost estimate is c.US$3,700/t LCE including by-products. The Cinovec Project location in Europe is an enabler to possible interested parties to secure a long term battery grade LCE as illustrated in Figure 1. We note that Cinovec is comparable in cost to brines operations which end users potentially can pay a premium for Cinovec's lithium product. Given the current production delays in lithium brine newcomer in South America, the hard rock lithium projects could find an advantage in the time to reach a steady output level compared with lithium brine projects. Hence, Cinovec has the potential to attract high market interest, secure off-takers and generate a quick path to development.

PRELIMERARY FEASIBILITY STUDY (PFS) PROJECT BACKGROUND

The Cinovec project is planned to be developed as an underground mine with a surface concentrator plant producing on average 360ktpa of lithium concentrate and a lithium carbonate plant producing lithium carbonate at battery grade, with potash byproduct. The project will also produce a tin and tungsten concentrate for sale to smelters. The project is known to be mined since 1,300AD; In the 1940s a large underground mining operation was established primarily to produce tungsten for the war effort. Mining and processing activities continued under the Czechoslovakian Government with the mine continuing to expand and produce tin in addition to tungsten. Due to the fall of communism and lower tin prices, the mine was closed in 1993. In 2011, the old processing plant was removed and the site rehabilitated. Overall, it is estimated that 400kt of mining has been extracted from the project. This is a small quantity when comparing the estimated 34.45Mt of mining extraction for the next 22 years for the new proposed development.

In 2014, EMH acquired the Cinovec project. Since then, the Company has drilled the Project significantly to validate the comprehensive data generated by the earlier exploration activities and provided metallurgical test work samples. EMH has been successful at demonstrating the Resource potential of Cinovec. EMH has significantly increased Resources in November 2016 and again in February 2017. These results have converted the Cinovec deposit into one of the largest hard-rock lithium projects globally, containing 7.0Mt of lithium carbonate equivalent. As a comparison, Rio Tinto's Jadar hard rock lithium project (in Serbia) has a JORC Resource containing 6.24Mt of LCE.

In 2015, EMH completed a Scoping Study for re-development of the Cinovec Project with positive results which was then followed by a Trade-Off Study completed in November 2016. The Trade-off Study concluded that conventional roasting technology would deliver high lithium recoveries with a lower operating cost, lower technical risk, require less impurity removal, and be less dependent on potassium by-product credits. EMH has chosen this path as the preferred method of lithium extraction for the current PFS.

RESULTS

Figure 2: Cinovec's JORC Mineral Resources Estimate as 19 Feb 2017

On 19 April 2017, EMH released its PFS on the Cinovec Project. The Study was optimised using the JORC 2012 resource base of 656Mt at 0.2%Li as shown below in Figure 2. More than 50% of the Resources are in the Indicated category giving robustness to the Study. Only c.10% of the total Resources were included in the Study.

JORC CATEGORY	Cut-off	Tonnes	Li	Li2O	LCE	W	Sn	Sn
	%	(Millions)	%	%	Mt	%	%	t
INDICATED	0.1 % Li	347.7	0.2	0.5	4.0	0.015	0.04	139,080
INFERRED	0.1 % Li	308.8	0.2	0.4	3.0	0.014	0.04	123,520
TOTAL	0.1 % Li	656.5	0.2	0.4	7.0	0.014	0.04	262,600

Source: European Metals Holding Limited

The results show that the Project can potentially produce on average 20.8ktpa of LCE with a grade of >99.5 LCE, with operating costs averaging $3,483/t of LCE and a life-of-mine of 21 years. At the same time, the Project can produce tin, tungsten and potash as by-products. The Project's by-products are the key to potentially make the Cinovec a competitive project even when compared to lithium brine producers, as illustrated in Figure 3 and Figure 6 (Page 7). Figure 3 highlights that Cinovec has a significantly lower operating cost when compared to the next lithium hard rock competitor (Australian Minerals) producing at c.$6,000/t LCE.

The PFS was developed by EMH using four specialist companies to perform independently specific studies on the project. Widenbaar and Associates completed the Geology study; the underground mining Study was developed by Bara Consultants (Johannesburg, South Africa). Ausenco Ltd designed the front-end comminution and beneficiation ("FECAB") plant, and Hatch Engineers designed the Lithium Carbonate Plant ("LCP").

The Study underlines that the Project can be benefited from low-cost access from existing infrastructure, cheap grid power and a local workforce that is highly skilled with a low cost of employment. EMH has mentioned that Cinovec has strong support from the local community for job creation in areas that have both historical and current operations.

EMH believes that Cinovec is in a strategic position as the deposit lies in a stable European jurisdiction that is located centrally to the rapidly expanding electric vehicle industry (with a strong focus on Germany) which is forecast to be the primary driver behind increasing lithium consumption.

Figure 3: Lithium Carbonate Industry Cost Curve - Cinovec Competitive Position (US$))

Source: European Metals Holding Limited

Figure 5 (Page 6) illustrates the entire process flowsheet at the Cinovec Project from mine extraction to producing lithium carbonate, potash and tin/tungsten concentrate products. Giving the shallow or flat dip of the ore body, the Cinovec Study plans to mine the Resources underground using a long-hole open stope mining method (without backfilling) with a twin decline, one for a conveyor and one for general service and as ventilation intake. The ore mined is sent to a primary crusher underground with an average rate of 1.7 Mtpa. The crushed ore is then conveyed 1,800m to surface to the mine portal and then stacked on the Comminution Plant stockpile (30kt live capacity), providing a buffer and surge capacity between the underground activities and the processing plants.

The project has been designed to have minimal environmental and community impact. The overall processing plant layout is simple with space saving and designed to add further equipment if required. The underground primary crusher and enclosed surface mill are both designed to minimise noise and reduce visual impact.

The mining inventory was restricted assuming an unplanned dilution and unplanned ore loss of 3% for each factor and excluded zones above 70m in general, except for when extracting ore from underneath the mining village which assumed an exclusion zone of 150m. A view of the mine design and infrastructure for the life-of- mine of the Cinovec Project is illustrated in Figure 4 below.