Vulcan Energy Resources Limited

VUL Details

This report is the full version of the report published on 5 May 2022 at 3:55 PM GMT

Vulcan Energy Resources Limited (ASX: VUL) operates as a metal exploration company. It operates a geothermal and lithium extraction project in the Upper Rhine Valley of Germany. Through this project, VUL aims to produce a battery-grade lithium hydroxide chemical product.

Q3FY22 Operational Insights:

• During the quarter ending March 31, 2022, VUL forged an agreement with a chemical company, Nobain, to assess the scope for a Joint Venture towards the development and operations of the Central Lithium Plant after it had secured a site in October 2021.
• VUL secured a new exploration license for geothermal energy and lithium in the Upper Rhine Valley Geothermal Brine Field with an additional area of nearly 50% to cover over 1,000 square kilometres.
• VUL granted a new research permit in Italy with geothermal heat and high-grade lithium. The project ‘Cesano’ where VUL considers holding potential for sustainable lithium battery chemical development.
• It had realized cash receipts of EUR 2.2 million in Q3FY22 ending March 31, 2022. With elevated administration and corporate overheads, VUL reported negative operating cashflows of EUR 3.06 million.
• It had closed the period with a cash balance of EUR 115.61 million as of March 31, 2022, as compared to EUR 134.55 million in the preceding quarter.
• On April 20, 2022, VUL announced the appointment of Mr Mark Skelton as Non-Executive Director.
• On April 6, 2022, VUL executed a 20-year purchase agreement with MVV Energie AG for 240Gwh per year of renewable heat.

Cashflow Summary (Analysis by Kalkine Group)

Key Risks: Due to limited scalability, VUL continue to incur negative operating cash flows. Volatility in lithium spodumene prices may influence the profit realization.

Outlook: VUL is expecting to produce 40kt battery-quality LiOH from the proposed expansion plan across the Upper Rhine Valley field. Its offtake agreement with MVV Energie AG is to commence in 2025. It includes a maximum supply of 350,000MWh per year.

Valuation Methodology: Price/Book Value Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: The stock of VUL has been corrected by ~10.79% in the past three months. The stock just recovered from its 52-week low price of $6.360. The stock has been valued using a Price-to-Book Value multiple-based illustrative relative valuation and arrived at a target price of low double-digit upside (in % terms). The company can trade at a slight discount to its peers, considering the negative operating cash flows in Q3FY22. For the purpose of valuation, peers such as Allkem Ltd. (ASX: AKE), Iluka Resources Ltd. (ASX: ILU), Aurelia Metals Ltd. (ASX: AMI), and others have been considered. Considering the new 20-year offtake agreement, ongoing expansion plan across the Upper Rhine Valley field, decent liquidity, upside potential as indicated by the valuation, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $7.860, as of May 05, 2022, 11:19 AM (GMT+10), Sydney, Eastern Australia.  Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

VUL Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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