First Energy Metals Limited(FE.CSE) is De-Risked and Worth Investing In(DD Research Report)
Symbols
(CSE:FE) (OTCQB:FEMFF)
Summary of Our Research Findings
This report offers an analysis of First Energy Metals Ltd, a junior miner primarily targeting lithium and gold in Quebec, Ontario, and British Columbia provinces in Canada.
British Columbia, Ontario and Quebec are the friendliest and most productive mining regions in Canada with welldeveloped mining infrastructure. First Energy sales are expected to be driven by burgeoning demand for lithium from the global electric vehicles market.
• Lithium could be the new ‘oil’ as it powers the batteries of electric vehicles. EV adoption is accelerating and is likely to continue to accelerate, with ~320 million EV vehicles projected globally by 2040.
• With historical resource estimate of 4 million tons of 1% lithium oxide (LiO2) at its Augustus Lithium property, First Energy is perfectly positioned to take advantage of these trends
• Besides this, high-grade precious metal (gold/silver) prospects at its other properties (Titan, Scramble Mine, Kokanee Creek) offer additional revenue potential.
• First Energy boasts of proven management team with considerable experience and diverse backgrounds in capital markets, mineral exploration, and geology. A solid balance sheet for an early-stage small cap. In our opinion, this Company is worthy of active consideration and ongoing following for developments.
First Energy Metals Limited (CSE:FE) (OTCQB:FEMFF)
Introduction to First Energy Metals and its Projects First Energy Metals Ltd. is a junior resource company engaged in the exploration and development of mineral properties. As seen in Exhibit One, the emphasis for the Company is on properties in North America, with the current focus being primarily on Canada.
Founded in 1966, First Energy Metals Ltd. is headquartered in Vancouver, British Columbia, Canada.
The Company is fully reporting in Canada, trading on the Canadian Securities Exchange (CSE) with a symbol of FE. The Company’s shares are also listed on the Frankfurt Stock Exchange, trading under the symbol “A2JC89”.
Exhibit One – Canada Projects for First Energy Metals Ltd
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In addition to Canadian and German listings, the common shares trade in the United States with quotations on the OTC Markets Venture Exchange (the “OTCQB”) under the symbol FEMFF. The listing on the OTCQB requires companies to be current in reporting and maintain common shares minimum bid prices. This highlights that the management takes investor disclosure seriously, with all reports to the Canadian regulator and the OTCQB taking place in a timely manner. The company also undergoes full year audits by a certified auditing firm.
We commend the team at First Energy for the time, effort, and expense incurred relative to maintaining fully reporting and audited status. Further, the Company maintains an up-to-date website with the latest news and financial filings, which acts as an excellent resource for investors to gain information. The website is www.firstenergymetals.com
The First Energy Metals Corporate Strategy
The Company’s strategy is to create shareholder value through its exploration success. Given that First Energy Metals is a junior miner, it is therefore primarily focused on prospecting, and early-stage exploration of mineral prospects. This includes finding and proving resources, and then sourcing a joint venture (JV) partnership to finance further exploration and project development. This JV partner is typically a large mining company that specialize in extracting the resources, refining the product, and selling the commodity into the marketplace.
We think this model makes lot of sense given the significant amount of capex involved in setting up a full-fledged mining operation. Junior miners often have capital constraints, and this is where support from JV or senior miner is needed to fund the project to completion. JV partner also benefits as they do not have to allocate any resources to search for new mineral prospects. They can acquire it from junior mining operators, such as First Energy Metals.
The Company remains committed to acquiring new properties to add to its portfolio. It is focusing on adding mineral prospects in North America in the technology metals, precious metal, and base metal sector. In January 2021, First Energy acquired a lithium exploration property (Augustus Project) in Quebec, Canada. Further to this, the Company acquired more properties near Augustus project in February and March 2021. Last year as well, it acquired several gold exploration properties. This shows that the management in committed and focused on executing its growth strategy which bodes well for investors and shareholders.
Augustus Lithium Property – Lithium in a Mining Friendly Jurisdiction
The Augustus Lithium Property is located in Quebec, Canada. It covers an area of 927 hectares and has excellent infrastructure support with road network, railway, electricity, water, and trained manpower available locally. See Exhibit two, which outlines the project location.
The Augustus Lithium Project is located in a very active hard rock lithium pegmatite area which houses many other lithium mines. As shown in Exhibit, there are several historical and currently active lithium mines in close proximity to Augustus mine. Total lithium resources for this region are over 50 million tonnes at 1% lithium oxide.
There are two prominent lithium (Augustus and Canadian Lithium) and one silver prospect the property which have been explored intermittently since 1948.
Augustus Lithium Prospect: The Augustus Lithium prospect is estimated to contain high grade lithium resource target of 4 million tonnes at 1% lithium oxide (Li2O). This is based on historical studies which were carried out in 1955.
Canadian Lithium Prospect: Past drilling at this prospect has shown presence of low-grade lithium. The studies indicate that the prospect has a potential for large volume low-grade bulk tonnage pegmatite near the surface.
Exhibit Two– Augustus Lithium Project
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Relative to the Augustus project, First Energy has the option to acquire 100% rights by making payment of $180,000 in cash, issuing 2,000,000 of its own stock and undertaking $500,000 in exploration expenditure on the property by January 2024. The vendor has the right to retain a 2% royalty. First Energy has already commenced exploration work on this property beginning second week of February 2021. The scope of this work is to confirm the historical drilling results and to develop future exploration targets on the property.
The results from initial sampling have been encouraging with one sample assaying LiO2 value as high as 4.61%, while many samples have LiO2 values of over 1%. The Company is moving ahead with the drilling program which started in the first week of April 2021.
To date, the Company has compiled historical drill hole data on the Property for 74 historical dill holes which were completed on the two lithium prospects on the Property. The historical drill holes indicated intersections over 1% lithium oxide. The current drill program will confirm the historical drill results and also enable to complete a maiden NI 43-101 lithium resource estimates on the Property.
Subsequent to the January 2021 purchase, the Company has acquired additional lithium exploration mining claims near the Augusta Property. The newly acquired property claims are spread in several blocks and some of them are located adjacent to the Augustus Lithium Property.
We are particularly excited about the Company’s opportunities in the region. The significant area already acquired by the company gives a wealth of data to make future exploration plans.
There is also growing support for the mining industry from the Quebec government and extensive support for mining exploration and production companies. Last year in October 2020, Quebec released a plan to advance the critical and strategic minerals sector. The critical and strategic minerals sector now joins several other sectors that the government has recently recognized as growth opportunities.
The basic objective of the government’s plan is to support the exploration of critical and strategic minerals in Quebec as well as their production and recycling. The critical and strategic minerals encompass 22 minerals which are deemed essential for the new economy. This includes vanadium, rare earths, cobalt, titanium, nickel, and lithium.
Titan Gold Property
The Titan Gold Property is located in Quebec in the Detour-Fenlon Greenstone Belt which is host to 20 million ounces of gold. The belt has reported strong high- grade gold intercepts and high-grade (18.49 g/t Au) bulk sample. The property is comprised of 80 mining claims totaling 4,334 hectares. A summary of the Titan Gold Project is provided in Exhibit Three. The Titan Gold Property is located within a structurally active corridor hosting several northwest trending deformation zones, which are key ingredients to the gold mineralization in the area. There has been no historical drilling on the Titan Gold Property. Despite the limited exploration in the area, indications of gold mineralization are widespread.
Exhibit Three – Titan Gold Property
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Scramble Mine Gold Property
In June of 2020, the Company announced that it had entered into an option agreement to acquire a 100% interest in the highly prospective Scramble Mine Gold Property, located in Jaffrey Township, Kenora Mining District in Northwestern Ontario, Canada. It is comprised of six mining claims covering approximately 140 hectares land. The region has excellent infrastructure support, linked by road and rail lines.
Approximately 5,200 meters of diamond drilling, 250 meters of surface stripping with sampling and 450 meters of underground development have taken place at the Property. Historical resource at the Property is estimated at 150,000 tons at an average grade of 0.24 ounces per ton (or 6.8 grams/ton).
The Company is moving systematically forward on exploration plan for the Scramble Mine property. It has already completed the initial exploration work, collected bulk sample as well as completed the airborne geophysical survey of the Property. The Company has contracted Bureau Veritas Minerals (BVM) in Vancouver to conduct the metallurgical testwork on the sample. It is also planning to start small scale trial production from the dump material and easily accessible mineralized quartz vein material. However, the permitting process is delayed due to COVID pandemic.
Of importance to investors is the announcements made by the Company outlining impressive results from its initial exploration program. The average value of gold in all samples is 29.34 g/t, with some samples touching as high as 82.3 g/t.
Kokanee Creek Gold Property
Kokanee Creek Gold Property consists of three mineral claims covering ~1,590 hectares located in southeastern British Columbia. The Property is part of a very active mining area with several historical and current gold, silver and base metals deposits located in the region. Also, it is supported by excellent infrastructure linked by rail and road lines.
The past producing mines in the vicinity including the Molly Gibson and the Alpine deposits. Historical production reported for the Molly Gibson mine (between 1909-1940) was at an average grade of 36.1 g/t gold and 15.3 g/t silver with recent exploration returning samples running up to 270 g/t gold. The 2018 study on Alpine deposits estimated inferred resource of 142,000 oz at 16.52 g/t gold.
The Company reported impressive results from its initial exploration work completed in 2020. It returned encouraging values of silver, lead, and zinc mineralization. This includes Silver (Ag) values are in the range of 0.19 grams per tonne (g/t) to 43.69 g/t; Gold (Au) values at 0.006 g/t to 0.211 g/t and Zinc is from 29.3 parts per million (ppm) to over 10,000 ppm (>1% Zn). The Company has filed a drill permit application and is awaiting approval for the same.
Shaw Gold Property
On September 22, 2020, First Energy entered into an option agreement to acquire 100% right in Shaw Gold Property which consists of multiple mineral claims covering ~693 hectares located near Timmins Gold Camp area in Ontario. The Timmins Gold Camp has produced over 70 million ounces of gold from 50 gold mines over the last 100 years. It is encouraging to note that the previous historical explorations had identified significant gold deposits in the area, but First Energy has not completed sufficient work to verify these claims.
Red Lake Gold Mining Camp
On September 14, 2020, First Energy entered into an option agreement to acquire a gold property located in the Red Lake Mining District in Ontario. The property consists of 94 mineral claims covering ~1,880 hectares land. Red Lake gold mining camp is one of the largest gold camps in North America famous for its high-grade gold deposits. The region has produced more than 30 million ounces of gold.
According to 2020 Ontario Geological Survey (OGS) Red Lake Resident Geologists report, there are 5 major exploration projects ongoing in the Red Lake District. Besides this, over 40 active exploration permits have been issued for this area. This shows that the region generates a lot of interest among miners and the Company’s gold property could also see high-grade deposits.
Bald Eagle Silver Property
On August 10, 2020, First Energy entered into an option agreement with Geomap Exploration Inc. to acquire a 100% interest in Bald Eagle Silver Property, which consists of three mineral claims covering ~1,013.5 hectares land in British Columbia. Red Lake gold mining camp is one of the largest gold camps in North America famous for its high-grade gold deposits. The region has produced more than 30 million ounces of gold.
The acquisition will be caried out via an all-stock deal. First Energy will issue 550,000 of its common stock to acquire 100% interest in the Property. Geomap Exploration Inc. will retain a 2% royalty of which First Energy may purchase 1% of the royalty.
Bald Eagle boasts of excellent connectivity and is located just 57 Km by road from a major Port. This allows the Property to easily ship minerals by ocean freight to any destination in the world. Historically, four mineral occurrences on this property have been documented which have assayed gold and silver deposits. First Energy is likely to conduct its own exploration studies to verify the historical claims and establish occurrence of new deposits.
Quebec’s $6.7 Billion Plan for Green Economy – Big Boost for Lithium Metal Miners
In December 2020, Quebec’s government announced a $6.7 billion plan for a Green Economy by 2030. As part of this plan, the government intends to undertake major electrification of vehicles and is targeting to ban sale of new gasoline-powered cars from 2035. Light trains, city and school buses, taxis, cars, and trucks will all be electrified. The target is to have 1.5 million electric vehicles on Quebec roads by 2030.
Quebec is not alone in this. Ontario is trying to carve out its niche in the electric vehicle market as well. The 2021 budget highlighted $4.3 billion in investment from automakers to build electric vehicles in the province, and also announced a strategy for extracting battery minerals.
Even the US government is looking to Canada for lithium and other minerals to boost EV production. US plans to deepen financial and logistical partnerships with the Canada’s mining sector over time. The U.S. President Joe Biden and Canadian Prime Minister Justin Trudeau have committed to building an EV supply chain between the two countries. We think Canada will become an important part of North American EV supply chain.
This is a very positive news for miners of metals such as lithium and others. First Energy is also likely to benefit given its claim over large lithium blocks at its Augustus Property
Lithium Gaining Prominence
Lithium is gaining more ground in a world which is looking for alternative sources of energy. It will play a key role in the rush to replace vehicles with internal combustion engines with electric vehicles (EVs). Lithium is one the key ingredients for batteries that power electric vehicles. Lithium can generate more energy per cell than the traditional lead-acid or zinc-carbon batteries. Macquarie Research predicts that demand for electric vehicles could trigger material shortages of the metal from 2025. Goldman Sachs claims that lithium along with copper could become the new oil.
Exhibit Four – Share of EVs to Rise
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Policy support from governments globally is one the major factors driving the uptick in EVs. Developing nations’ governments, particularly in Europe, have set targets to reduce carbon emissions by 2030 by phasing out vehicles running on petrol and diesel. Electric vehicle (EV) sales are expected to reach 45 million units per year by 2040, with a total global EV stock of 323 million, according to Wood Mackenzie.
China stated that it wants new energy fuel vehicles to account for 20% of its total car sales by 2025. The China Association of Automobile Manufacturers predicts China's EV sales will hit 1.8 million units in 2021, up 40% from a year earlier. France expects to phase out gasoline powered vehicle sales completely by 2040, while Norway is targeting to achieve the same goal by 2025. The changes could be significant because a growing number of countries are stepping up their policy initiatives to support EV adoption.
The rising demand for electronic vehicles and the stringent government regulations to reduce emissions are expected to drive demand for lithium.
Lithium Prices – On the Rise
Lithium is one of the key constituents of the Lithium-ion battery which has been witnessing high demand primarily from the electric vehicles market. China is currently the major producer and consumer of lithium chemicals with a focus on lithium-ion battery applications. The batter-grade lithium carbonate prices have risen 103.4% since the start of 2021. The lithium hydroxide price is up 44.3% so far this year, to $11,475/t. The strong action in prices is underpinned by significant expansion in New Energy Vehicles (NEV) uptake.
S&P Global expects domestic lithium carbonate prices would reach Yuan 80,000/mt ($12,371/mt) in 2021, an increase of more than 20% from early January 2021. China's battery-grade lithium carbonate and hydroxide prices averaged Yuan 43,845/mt and Yuan 50,346/mt, respectively, in 2020.
The bullish outlook for EV sales means that the lithium demand is likely to be outpacing supply side growth. Macquarie echoed this sentiment as it expects the lithium market to be in deficit from 2022, with material shortages emerging from 2025. This should support prices for lithium.
Gold Prices at Near 30-Year Highs
The gold prices are at near 30-year highs as shown in the below Exhibit Six. While the prices are unlikely to see major jump from current levels in the near-term, the good news is that majority of analysts do not predict a major fall in price either.
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The current price is around $1,770/oz and according to Citibank, it is likely to remain in the range of $1700-$1900/oz over the next 12 to 18 months. Numerous other analysts also see prices in the similar range.
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Recently, gold has faced strong headwinds amid rising real yields, which has seen investors trim their gold exposure. Higher Treasury yields are bearish for precious metals as investors can earn guaranteed returns from the yield unlike holding metals, which fluctuate in price and do not pay interest or dividends.
For the long-term, the trend seems to be bullish. According to estimates from The Economy Forecast Agency, the metal prices are likely to be $1,972 at the end of 2022 and $2,402 per ounce at the end of 2025. Many other long-range forecasts also point to gold prices above $2000 per ounce by 2025.
We think this is extremely positive for First Energy Metals which has a number of gold properties in its portfolio. Initial exploration studies on these properties have indicated the presence of high-grade gold resources. Further, the long-range forecasts also point to gold prices above $2000 per ounce by 2025.
The Balance Sheet
The most recently released balance sheet for First Energy was dated December 31, 2020. The balance sheet showed cash of C$257,119 as against total liabilities of C$285,544. The total assets were again minimal at C$1,111,727 representing the small size of the firm and the current stage of its projects. Cash used in operations for the nine months ending on December 31, 2020, was approximately C$0.8 million and approximately $0.25 million was inbound during the same period in the form of loan proceeds. The December balance sheet is included below as Exhibit Eight.
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During the nine months ended December 31, 2020, the Company issued ~3.4 million common shares for total proceeds of C$465,000. As of March 31, 2021, the Company had 49.1 million common shares issued and outstanding. With the shares recently closing at around US$0.27 (or C$0.34), the total market value of the Company is about US$13.7 million. Additionally, approximately 13.5 million options and warrants are outstanding, which yields an all-in share count of ~63 million on a fully diluted basis.
Based on the current market price of C$0.35 of the stock, only the options are dilutive in nature. This includes 2.64 million stock options at an exercise price of C$0.21 and 1.3 million stock options at an exercise price of C$0.35. All the warrants are anti-dilutive in nature. This includes 9.6 million warrants at an exercise price of C$0.40.
The last fund raise of significance was on March 5, 2021 - a non-brokered private placement financing for gross proceeds of C$1.55 million. It consisted of the sale of $960,000 flow-through units (FT Units) by way of issuing 4 million shares at $0.24 per FT Unit and the sale of $590,000 hard dollar units (HD Units) by way of issuing 2.95 million shares at $0.20 per HD unit. Each unit consistedof one common share and one common share purchase warrant. Each warrant will entitle the holder thereof to purchase one additional common share in the capital of the Company at C$ 0.40 per share for two years from the date of issue.
During the December quarter, the Company registered net loss of C$0.8 million, compared to a loss of C$0.2 million the prior year period. With more exploration programs being conducted during the March quarter, we expect another quarter of net loss (more likely higher than the previous quarter).
Exhibit Nine – Summary Quarterly Financial Information
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We see strong sales growth possibilities for the Company in the 100% owned Augustus Lithium Property and the recently acquired mining blocks in its vicinity. With initial exploration results suggesting the presence of high-grade lithium and historical estimates pointing to ~4 million tons of Lithium Oxide at Augustus, we see massive traction in sales and earnings in the medium to long term.
We will be closely monitoring the liquidity of the company given its plans to conduct number of exploration operations over the next twelve months. Management estimates that the current cash balance funds will not be sufficient to carry out currently planned exploration and operations through the next twelve months. Therefore, the Company will need to seek additional sources of financing to meet all exploration expenditures as well as its ongoing operations.
The Outlook and Conclusions
There is a lot to like about the First Energy Metals story. In summary we feel investors should consider the following.
The company is present in three of the major four mining districts of Canada. These districts account for over three-quarters of Canada’s total value of mineral production. This suggests that the likelihood of mineralization is high in these regions.
• The company’s exposure to lithium via Augustus Lithium Property is a big positive. There are several historical and currently active lithium mines in close proximity to Augustus mine. Total lithium resources for this region are over 50 million tonnes at 1% lithium oxide (LiO2).
• The results from initial sampling have been encouraging with one sample assaying LiO2 value as high as 4.61%, while many samples have LiO2 values of over 1%. The Company is moving ahead with the drilling program which started in the first week of April 2021.
• Aggressive green economy plans by Quebec and Ontario governments should boost demand for metals such as lithium. Quebec is targeting 1.5 million electric vehicles on roads by 2030. This is a very positive news for miners of metals such as lithium and others. First Energy is also likely to benefit given its claim over large lithium blocks at its Augustus Property.
• Lithium could be the ‘oil’ as it powers the batteries of electric vehicles. EV adoption is accelerating and is likely to continue to accelerate, with ~320 million EV vehicles projected globally by 2040. With historical resource estimate of 4 million tons of 1% lithium oxide (LiO2) at its Augustus Lithium property, First Energy is perfectly positioned to take advantage of these trends
• Gold prices are strong and the long-term trend for the prices is bullish. We think this is extremely positive for First Energy Metals which has a number of gold properties in its portfolio.
• The recent capital raise in March 2021 is a sign that the company is able to successfully raise funding from capital markets. This will allow the company to carry out its exploration activities as well ongoing operations.
There is lot to like about the company and the portfolio of mining projects that it has accumulated. The balance sheet has ample flexibility to raise additional funding and the management team has demonstrated its ability to successfully tap capital markets with recent fund raises this year.
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