SMALL CAP IDEA: European Green Transition is short odds to be a success

When this article was written the week of the Cheltenham Festival, a magnet for Irish racegoers, I looked at the European Green Transition (EGT) in the same way you might look at the form and pedigree of a dream Gold Cup competitor.

EGT’s breeding couldn’t be better. It comes from the stable of Cathal Friel, the entrepreneur who helped build and sell Amryt Pharma for a mere $1.5 billion and who performs the same magic with hVIVO And Poolbeg Pharmatwo fast-growing healthcare plays.

In Michael Nolan, EGT’s other co-founder, you have one of the leading lights behind Cove Energy, the gas explorer, which grew from an IPO value of £1m to being acquired for £1.2bn. Both men have experience in bringing together distressed assets to create real value.

Experienced team

The same can also be said of CFO Jack Kelly through his work at Raglan Capital, while CEO Aiden Lavelle brings significant experience in the minerals and mining sector, which will be key to this latest venture.

Crucially, Chairman Friel’s team has access to funds even in difficult times – a rarity in today’s market.

Lavelle and Kelly will lead EGT’s buy-and-build strategy. The company already owns three assets, including a promising rare earths plant in southern Sweden.

Additionally, it has a pipeline of 10 to 15 opportunities, Kelly told Proactive.

Broader remit

The original plan was to focus on the minerals needed for the new green economy – rare earths, copper, cobalt etc.

But then it became clear that restricting the pipeline in this way could prevent the EGT from capitalizing on the broader base of assets that have been exposed, such as processing, tailings, solar and wind energy opportunities.

At the heart of EGT’s strategy is a piece of legislation that may have escaped many; it’s called the European Critical Raw Materials Act. It is designed to address the challenges of securing minerals used in the new circular economy.

For example, the production of rare earth metals, used in wind turbines, telephones and car batteries, is dominated by China, a superpower that is not particularly friendly to the West. So it is imperative to find sources of these minerals on your doorstep (geographically).

In practice, the legislation regulates extraction, processing, sourcing and recycling and provides a very supportive framework for EU companies that help support this law.

Demand is increasing

At the same time, the number of potential end users in Europe for transition metals such as lithium, cobalt and copper has grown explosively, creating demand for raw materials and processing capacity.

The company’s main asset is the Olserum rare earth site, which has been designated as a project of national importance by the Swedish Geological Society.

There is potential to ‘significantly scale’ the resource, which currently stands at 4.5 million tonnes at a total of 0.6 percent rare earth oxide in the indicated category and 3.3 million tonnes at 0.63 percent (with a limit of 0.4 percent).

Next year, EGT should also have an updated JORC estimate for the site and start the process to obtain a 25-year operating permit.

The company also owns Pajala, in northern Sweden, which has potential for copper, cobalt and graphite. Meanwhile, the projects in Saxony, Germany, are home to a wide range of elements, including (but not limited to) lithium, rare earths and cobalt, as well as tin, tungsten, lead and zinc.

Financial heavy lifting

The plan with the current group of assets is to get them all to a point where a partner can be brought in to do the financial heavy lifting and complicated engineering required to get a mine into production.

EGT would receive a free transfer and retain a minority stake during this heavy investment phase, CEO Lavelle said.

“Our business model is to bring forward the assets and then engage with a miner,” he added. ‘It is not our intention to actually mine ourselves.’

Where things get really interesting is the range of opportunities that EGT offers against a backdrop of rock-bottom valuations and a shortage of willing buyers.

Potential targets include assets of publicly traded companies listed in Australia, Canada and the United Kingdom, as well as private companies.

There are two assets under consideration; processing facilities, one of which has generated significant revenue in the past.

Rare expertise

The other offers technological capabilities, which are rare outside China, and provides a strategic opportunity for EGT to differentiate itself.

Both potentially offer exceptional value, CFO Kelly said. “They also fit very well into the team’s track record because they are turnaround situations,” he added.

EGT has indicated its intention to float on AIM, and it is clear there is no shortage of interest from potential backers of this latest venture from the Cathal Friel stable.

Only time will tell whether the team’s turnaround expertise in the European energy transition sector will be as successful as in the healthcare, oil and gas sectors.

After studying the form, there is little chance that EGT will be a success – even if the circumstances are not ideal.