Zinnwald Lithium (LON: ZINN) shares are down 20% this morning after news of a placing after the close last night. The current price is slightly above the placing price which could be seen as good news for the future.
Zinnwald Lithium is focused on the potential for lithium in the Erzgebirge, the long-known mining area on the German/Czech border. More traditionally known for tin and tungsten prospects the area does have lithium occurrences. The difficulty is that the minerals containing the lithium are slightly different from what is normally mined.
Globally there are two well-known lithium sources. There’s hard rock mining of spodumene, which is treated to a concentrate then shipped to processors. Or there are brine operations where extraction takes place from highly salted waters. The technologies of both are well known.
At Zinnwald (one of the local towns is called that, as well as the company) there are deposits of a mineral zinnwaldite which is lithium containing. Extraction techniques for this have been developed in recent years. However, the use of a new technique, a new mineral source, adds to the valuation complexity of Zinnwald the company.
We have our traditional estimations of any non-producing miner. So, how much of the target mineral is actually there, what are the costs of extraction and so on? These are common to all miners.
Then we have the lithium specific uncertainties. Given the EV revolution, there’s considerable worry that there won’t be enough lithium to power them all. This is producing considerable investment in exploration and extraction of course. But we’re all uncertain as to how much of this is going to work. The market is small enough, even after the EV expansion, that new resources or extraction technologies could significantly change the pricing structure.
Finally, with Zinnwald, there’s concern over the new mineral source. Spodumene and brines, the market knows the extraction costs, knows the process scales up. Extraction from zinnwaldite – the lithium concentrations are similar to those of spodumene so in theory, it’s just fine as a source – is feasible but there’s always concern over full scale up.
It’s the complexity of this valuation model that makes the Zinnwald Lithium share price potentially so volatile. Being on the right side of significant price movements is of course a good trading strategy. It will likely be after the market has digested this share placing that the full consideration of the prospects comes though.
Once all those placed shares are known to be firmly in long-term portfolios, away from those attempting a quick turn off the issue, then we’ll find out what the market really thinks of the prospects for Zinnwald Lithium. We might expect volatility in that opinion given the extra level of complexity to the valuation model – deposit, production value and also, finally, extraction method.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.