Critical Elements Lithium (TSX-V: CRE) CEO Jean-Sébastien Lavallée & President Steffen Haber on the Robust Economics of the High-Purity Rose Lithium Project in Quebec

Gerardo Del Real: This is Gerardo Del Real with Resource Stock Digest. Joining me today from Critical Elements Lithium (TSX-V: CRE)(OTC: CRECF) is Mr. Jean-Sébastien Lavallée and Steffen Haber. How are you, gentlemen?

Jean-Sébastien Lavallée: We're good.

Steffen Haber: We're doing fine. Thank you, Gerardo. How are you doing today?

Gerardo Del Real: I am well. I am here in Austin. Steffen, I understand you are in Germany where it's nighttime, correct?

Steffen Haber: Yes, it is.

Gerardo Del Real: And JS, where are you based out of?

Jean-Sébastien Lavallée: I'm based from Montreal.

Gerardo Del Real: Excellent. Let's chat, guys. We talked a bit off-air. I explained that I think your timing is excellent with the flagship. I want to get into the Rose Project and why that's important. 

But before that, it's really impressive to me when I look at a company that's actually looking to put something into production and get it permitted. It's interesting to me to see if management has done that in the past. When I look at the management team and the experience, it's clearly a team that knows how to develop, permit, and monetize an asset. Can each of you give me just a brief background on that extensive experience?

Jean-Sébastien Lavallée: Yes, it will be a pleasure. I can start on my side. I'm a geologist by background, coming from a mining family. Both my grandfathers were mining engineers, geologist engineers, been involved in mines. My father is also involved in the industry and my uncle is a metallurgist. Mainly I come from mining.

I'm involved with the project since the discovery from an outcrop at surface, now at feasibility study level complete. We're working to put the permit in place that we hope we'll get soon.

It's a quick review of my background. I've been involved for the full process from the discovery up to now. I'll let Steffen introduce himself, but I think Steffan is really bringing a lot of expertise on the lithium side, expertise for the development of that project.

Gerardo Del Real: Excellent. Just to be clear, JS, you're CEO and Steffan is President, correct?

Jean-Sébastien Lavallée: Exactly.

Gerardo Del Real: Excellent.

Steffen Haber: Yeah. Let me continue and talk a little bit about myself. By profession, I'm a chemist. I did study, about 30 years ago, organic chemistry in Germany. I got a general management education on top of that. As a chemist, you normally start your career at one of the big German chemical conglomerates. At that time it was Hoechst. I worked in several departments; chemicals, specialty chemicals, agrochemicals.

After a while, I joined the pharmaceutical industry and I worked for six years at Aventis in the corporate headquarters, dealing with a lot of international matters on global marketing of diabetes products, or global marketing on genetically modified organisms. I've also established a joint venture in South Africa, together with the Nelson Mandela Foundation.

After Aventis was taken over by Sanofi I joined Rockwood as head of the lithium division at that time. I grew that company up from a turnover of about $200 million Euro at that time to more than $800 million Euro and a 40% EBITDA margin. Finally, we sold Rockwood Lithium to Albermarle, which now is continuing relatively successfully the lithium business in the world, globalizing it more and more and more.

After a period of silence, I moved to Critical Elements because Critical Elements holds one of the most important deposits in the world, a high-purity, high-grade deposit, which is qualifying for converting spodumene concentrate into high-quality lithium hydroxide battery grade. It's a great company. It's a great deposit with great people working there in a very disciplined way, looking ahead into the future because of the tremendously growing electric car market.

Gerardo Del Real: Steffen, you're being modest because you mentioned that you sold the Rockwood, but you didn't explain what you sold it for, which I think was approximately $6.2 billion US in January of 2015. Right?

Steffen Haber: Correct, yeah.

Gerardo Del Real: Again, it's interesting to me that you go from a sale of $6.2 billion US to a company that currently, I believe, has a market cap of just sub-$50 million Canadian. You obviously believe that this is a project that you can not only permit, but get into production. Can you tell me a bit about the project?

Steffen Haber: Yeah. The project is a high-quality project with a spodumene grade, which is not only qualifying for battery applications, which is already a high purity profile, but also for very special tech grade applications, which provide a huge profit margin in the tech grade area. It's a very seldom case. There's only one other case in the word which qualifies for those applications. The margins are tremendous. That's definitely the backbone of that deposit.

I also want to mention that the deposit in Canada is based in a very stable jurisdiction. You are not dealing with huge inflation rates, you are not dealing with political uncertainties, and you are dealing with a very reliable government and reliable administration, which gives you the guarantee that you really can run a project for 20 years in a smooth way.

I have never seen that before in the lithium industry. I have worked in Chile. I have worked in Australia. I know the Argentinian projects. All of them are struggling more or less each couple of years, either because of the weather and climate conditions, or because of political constraints with the local communities, or inflation rates, or difficulties in the exchange rates, and other issues. 

That's a big advantage of Canadian projects. That makes it for me very attractive to join that company at that moment of time, because I'm convinced personally that the EV market is going to come. It's already successful. We already see penetration rates of 5% and more for pure electric cars here in Germany. Germany is a country which is pretty reluctant to new technologies, and everyone is forecasting penetration rates of 20%, 25% already in 2025.

That means we are looking into huge demand for lithium products, a market which is going to quadruple over the next coming years. That makes it very attractive. Obviously, you see the pricing opportunities in the lithium market, because a couple of years ago the price for lithium hydroxide battery grade was just about $7.20, and now it's about $14 US dollars per kg. That makes it very attractive. 

Obviously, if you are sitting on a high-quality spodumene resource, it allows you to manufacture the products in a very competitive way, because whether you have the new technology or using a conventional technology that doesn't matter. The cost of the manufacturing is definitely determined mostly – and I don't want to say only – but definitely it's mostly determined by the fact of the recovery rate. If the yields are high, your costs are going to be low. If the yields are low, obviously your costs are going to be high. That's totally independent from the fact of whether it's a high-grade or low-grade deposit. That's only depending on the fact, what is purity profile of the whole material.

Gerardo Del Real: JS, I mentioned the market cap being sub-$50 million Canadian. That's really the opportunity for shareholders and potential shareholders. Can we talk a bit about the feasibility study and the numbers there? Because the margins are compelling, the IRR is compelling, the mine life is compelling. I think that's really a critical point that I want everybody to walk away with.

Jean-Sébastien Lavallée: Yeah, for sure. If you look at the feasibility study, it's 17 years of mine life. You need to add to that the two years of construction. We can say it's a generation-long project. The resource and the reserves are still open in all direction. We already know that there's several other zones right beside the main reserve. So it can be drilled and expanded. 

Based on the feasibility study, if we look at the economics, we're talking about a NPV after-tax, at 8% discount. of $726 million dollars with an IRR of 35% after-tax. Talking about EBITDA, we're talking of an average of $180 million per year. It's a pretty strong number based on long-term pricing, we think it's very robust number for the project. This is why we are pushing right now to get a permit in place, bring a partner in, and develop the project to be in production in the next year, year and a half.

Gerardo Del Real: The CapEx for the project is relatively modest given the NPV. Can you go over that with me briefly?

Jean-Sébastien Lavallée: Yes. We are talking about a CapEx of $341 million. I think it's important to put the precision there if some people are doing a comparison with an Australian project. It's important to understand that in our CapEx, that number includes all the mining equipment. It means that we plan to have our own fleet of equipment to mine the pit. If we put that out to get more comparable with Australian projects that are using contractor mining, you need to put out about $70 million. So it's a very reasonable number in terms of CapEx versus the future return of the project.

Gerardo Del Real: Excellent. I have to believe the infrastructure has to be pretty good for that CapEx to be as modest as it is.

Jean-Sébastien Lavallée: Yeah, we are super lucky with the location of the project. Yes, it's Northern Quebec, but we have everything in place, everything being built by the development of the hydropower. There is road access that goes right through the deposit, I will say 200 meters from the deposit. We're saving a lot of money. There is a power line that actually goes right over the deposit. Then there's a camp 23 kilometers north of the deposit, where we plan to work with the local community to use that camp and give them the lodging, catering contract for all the mine workers. Plus there's a small airport, also close to the project for the fly-in, fly-out of all the workers. 

We're very happy about the local infrastructure. Plus if you go into the last news of last year, we signed also the impact and benefit agreement with the local community, the Cree Nation of Eastmain, where we plan to work with them to develop the project and generate and create jobs and contracts for them.

Gerardo Del Real: You're fully expecting a positive permitting decision this year, correct?

Jean-Sébastien Lavallée: This is our target. With the government authorities and with the COVID for sure we saw some delay. We filed back the answer with the Provincial authority, we're filing back very soon the Federal. It was a second round with both levels. Normally there's two rounds, might have some minor questions coming back. Our target is by year end to get the permit in place. There is a third party involved so we can never warranty these things, but we're confident that we can reach a permit by the year end.

Gerardo Del Real: Steffen, you have a project that has robust economics in a stable jurisdiction, excellent infrastructure, and every month that passes we need more stable supplies of critical metals. Can you walk me through what potential offtake agreements or what kind of discussions you're having to help finance the construction and development of the project?

Steffen Haber: Yeah. Obviously, we are looking for a strategic partner. That's our objective. The strategic partner would inject capital, which would allow us to finance at least 40%, 45% of the construction of the concentrate plant and mine. In exchange of that equity investment, obviously participating in the future earnings of the project, the strategic partner would get an offtake agreement which would allow them to take 100% of the material, which is the key point for an offtake, to secure their future raw material supply and raw material needs.

Gerardo Del Real: Excellent. I imagine that the rolodex, or the network that you have developed over my many, many decades, multiple decades is likely proving helpful in the discussions.

Steffen Haber: Yes, it is. Definitely.

Gerardo Del Real: JS, before I let you go, can you walk me through the share structure? I like the fact there's not a lot of overhang with options and warrants. Can you brief us on that really quick?

Jean-Sébastien Lavallée: Yeah, the capital structure right now, we just raised $3 million that we closed about a week and a half ago. After that raised, there is about 168 million shares out and 5 million warrants out at $0.45. Normal warrants and they're good for two years. Options, we're talking about 6.9 million options, with the strike price between $0.56 and $1.25. It's mainly owned by the consultant and the board or management. Fully diluted we're talking about a share structure of around 180 million shares. 

It's important to understand that from that 180 million shares fully diluted, there's about 60% of it that is controlled by a long-term shareholder that has been super supportive over the years. Management owns close to 10% of it. We have two large brokers with their clients that one owns probably 15%, the other one is close to 20%. We have individuals that own between 5% and 8% each. There's three of them. It's a pretty tight structure. Yes, 180 million shares, but I think if we can go into production with less than 200 million shares out it will be a very a good structure and a big reward for the shareholders.

Gerardo Del Real: I absolutely agree. It doesn't sound like we're going to have to wait very long to figure out what the outcome on the permitting front will be. Of course, if that is positive the way we anticipate and hope, then I imagine that a strategic becomes a whole lot easier to bring in the fold. Gentlemen, I want to thank you for your time. Is there anything else that you'd like to add?

Jean-Sébastien Lavallée: I think like you just said, the strategic will be important. I think the permit will unlock a strategic. Like Steffen explained in terms of structure, our goal is to bring a strategic participating on the financing of the project, with a structure at project level that will avoid dilution, where the strategic will benefit of the earnings and will also benefit of less dilution. It will be a real long-term partnership to develop the project and it will be beneficial for all the shareholders.

Gerardo Del Real: Excellent. Steffen, anything else before I let you go?

Steffen Haber: No. It's a great project and let's say we will benefit from the high quality of the resource.

Gerardo Del Real: Gentlemen, thank you again. I'm looking forward to chatting again soon, hopefully with some positive updates.

Jean-Sébastien Lavallée: Great. Thank you, Gerardo.

Steffen Haber: Take care. Bye.