Everything you need to know about the Lithium market

Lithium – A Fluctuating Flavour: With lithium mainly mentioned in popular culture as drug to control moods swings it is somewhat amusing to reflect upon the manic-depression of the promoters in the metals in recent years. Many needed more lithium in their medicine cabinet than in their portfolios.

The Lithium story started to get up a head of steam in the second half of 2008, boomed through the first half of 2009 (as a concept, but not price-wise in the physical), lost momentum as gold hogged the headlines and the momentum crowd moved on to the Rare Earth space.

Lithium was never a product to inspire much enthusiasm due to its linkage in the popular imagination to psychiatric drugs even though its real attraction is in applications related to lithium-ion battery applications (cellphone, laptop, automotive) amongst other high tech uses. The spotlight had been turned upon the metal by the rising perception that lithium supplies were relatively limited in the short-term and that demand was burgeoning both from the electronics and the automotive industries.

The upsurge of interest resulted in a stampede in early 2009 into the few names that were already in the space and the creation of a blizzard of extra players via new listings or the recycling of miners from other sub-sectors into this new area. Several players that were positioned in Latin American mining found it easy to switch on to the new buzz.

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The sector was firmly divided into two types of companies, those with exposure to lithium in brines (essentially where the metal has upwelled in liquids through the Earth’s crust) and those with exposure to lithium in rock/clays. The latter long dominated the space (particularly during the period when the US was the dominant producer) but had been eclipsed in recent decades by the cheaper to extract brine lithium that largely came from Chile and Argentina.

Lithium-1

Lithium Uses & Demand: Lithium compounds have long been used for various applications, though they were primarily marketed to the glass and ceramics industries. Thus the metal has moved to a new level of interest in recent times with the dynamics of firstly the laptop and cellular phone producers, with their demand for lightweight batteries, and more recently the massive upsurge in hybrid automobile demand and production. A long-term negative for the electric powered auto niche had been the weight of batteries involved.

Demand for lithium (according to the consultants Roskill) displayed strong growth in the mid-2000s, with world consumption estimated to have increased annually by 4-5% since 2002. The estimates for lithium demand growth below come from the esteemed consultants TRU Group. They show the 2009 recession-induced consumption dip before demand powers higher over the next decade.

Lithium-2

Source: TRU Group


The new applications for lithium produced a surge in demand with the usage of lithium in secondary batteries rising at a compound annual growth rate of 25% in the early part of the new century. Nearly all mobile phones and over 90% of laptop computers incorporate lithium-based secondary batteries due to their higher energy density and lighter weight than nickel-cadmium and nickel-metal hydride products. TRU are predicting that batteries will make up 40% of total lithium demand by 2020.

Beyond battery usage, most observers feel that demand from the core traditional users, the glass, ceramic and pharmaceutical industries will not grow more than the GDP growth rates in the Western economies. TRU are estimating growth from glass/ceramics to be only 2.4% p.a. in the period 2007-2020. Thus scenarios of massive lithium demand expansion (and its corollary the need for more production) are almost entirely battery-linked.

Sources – the key to understanding: The lithium industry at the global level was dominated by the US until the 1980s with hard rock mining from spodumene, mainly in North Carolina. This industry was made extinct (except in Australia) over a short period by the better economics offered by the Chilean< and then the Argentine, brine lake deposits. Better pricing in the last decade however allowed the dusting off and reactivation of hard-rock projects.

World production of lithium via spodumene is around 80,000 metric tonnes per annum, primarily from the Greenbushes pegmatite of Western Australia, and some Chinese and Chilean sources. The Talison mine (discussed further on) at Greenbushes in Western Australia has an estimated reserve of 13 million tonnes.
The chief problem for the hard-rockers is that they have is large capital costs to get going (a formidable hurdle in current financial markets) and the fact that their production cost is around $2 per lb compared to around $1 per lb for the brine exploitation process.

Latin America is not the only place with lithium rich brines and salt-pans but it was the focus of the first wave of de novo attention on the lithium space in 2009. Since then it has become obvious that the US also hosts such deposits and that in fact its only current lithium output comes from a saltpan in Nevada (which we shall discuss further on) that is exploited by Chemetall. However the bulk of Western supply currently comes from the brine lakes of the southern Andes.

The Puna plateau, covers a portion of Argentina, Chile and Bolivia. It is at an elevation of around 4,000m and contains the largest concentration of economic evaporate deposits in the world.  In the first flush of lithium enthusiasm the mid-Andean region became a hot spot for its ample resource of lithium/potassium brine lakes, called salares by the locals. The evaporate deposits are formed by intense evaporation under hot dry air in a closed basin. The brine, under the crust formed on the surface of the salt lakes, contains high concentrations of sodium, lithium, potassium, magnesium and boron (the major element of borax).

Supply and Pricing: One interesting feature of the supply side of the market is its opaqueness. Some refer to it as an oligopoly, the less polite call it a cartel.

Demand from the battery market and higher production costs spurred a recovery in lithium carbonate prices from 2003, peaking in 2008 before a slight pullback and the a return to the current slight uptrend.

Lithium-3Many of the salares-based lithium projects being contemplated in the Argentine altiplano have the potential to become meaningful contributors to global lithium supply (or maybe over-supply). Balancing this lithium production increase are markets that are anticipated to grow solidly owing in part to the expanded uptake for lithium batteries utilized in hybrid motor vehicles and other major applications in the glass and ceramics industries.

The Heavyweights: The lithium space is a small club indeed if one is talking of actual producers. This was the state of things as at several years ago, so the share of Others would have increased by several percentage points reducing slightly that of the major players.

Lithium-4

Source: Hallgarten

 This group controls the market and it has been a very lucrative market for them. The biggest players are the sometime emerging market investor darling Soquimich (which trades as an ADR under the symbol SQM) and the German company, Chemetall (formerly associated with the ill-fated Metallgesellschaft) that is now part of the low-key US chemicals company, Rockwood. The latter tried to make a takeover of Talison (the producer in Western Australia that had previously merged with Salares Lithium, but they were gazumped by a Chinese group, Tianqi, with a whopping CAD$848mn bid). Meanwhile in Argentina, the US agrochemical major FMC controls the only major mine (thus far) in the country while Rincon (controlled by the mining hedge fund, Sentient) is looking to move into commercial production shortly (it currently has a test production facility). Just this week, FMC announced that it would be dividing into two companies both listed on the NYSE, with one focused on the lithium and alkaline chemicals part of the current entity. Interestingly it eluded to bulking up through acquisitions.

These majors look far more like diversified specialty chemicals companies than mining companies. However, mining analysts and investors that exclude them from their field of vision risk getting blindsided by commercial reality. They ARE the “lithosphere”.

Names in the lithium space: They key thing to remember here is that the four big producers are large and well-funded, compared to the new entrants. There is NO current shortage in the metal.

This was NEVER like the Rare Earth space where everybody is potentially up and coming. There was already a base of Western producers in Lithium. Thus the addition of less than a handful of extra producers will deal with added demand over the next few years. There was NOT space for all the projects that surfaced in 2009/10, and unfortunately (or fortunately the grim equity markets have culled many wannabes).

Lithium-5Orocobre (ASX: ORE): This company stands the best chance of being the “next Talison”. It is very advanced on its Olaroz salares project in Argentina. The project was 75% complete in January with $164mn in capex either having been spent or committed. The company has $31mn in cash over and above the monies in its project companies and it also owns the long-established borax businesses that it bought from RTZ several years ago for what we thought was a derisory sum. The Olaroz project is the largest greenfields lithium brine project in 20 years. The ownership of the structure is Orocobre at 66.5%, Toyota Tsusho with 25.0% and JEMSE (an entity of the provincial government) for 8.5%. Projected production is estimated at 17,500 tonnes per annum of low-cost battery grade lithium carbonate and is scheduled to commence in Q2 2014. Olaroz is definitely the most exciting thing in the Lithium space. It is almost a “must-have” acquisition for one of the Lithium cartel to ensure that their ranks are not broken by such a sizeable (and diversified) interloper. The borate operation just make it even more attractive.

RB Energy (ex-Canada Lithium | TSX: RBI). Clearly wanting to distance itself from a fad, Canada Lithium, once regarded as being at the forefront of the hard-rock producer wannabes, changed its name to RB Energy. Despite this the asset and the focus remains the same. The deposit was mined and processed on-site between 1955 and 1965. The mine, with its 150m deep shaft and lateral workings on three levels was operated under the former Quebec Lithium Corporation and included a surface concentration plant and refinery. It produced ceramic-grade and chemical-grade spodumene concentrates, lithium carbonate, lithium hydroxide monohydrate as well as a small quantity of lithium chloride and feldspar. These products were principally for sale to the North American market. In 1974, SNC was contracted by Sullivan Mining Group to write a feasibility report on the rehabilitation of the former Quebec Lithium Mine. SNC calculated a historical reserve estimate (non-NI43-101) of 15,736,938 tonnes grading 1.14% Li2O.

Construction of the mine and process plant began in August 2011 and was completed early in 2013. Commissioning is now in the latter stages, while first production of lithium carbonate is anticipated to occur in the fourth quarter of 2013. The planned production rate is 20,000 tonnes of battery-grade lithium carbonate per annum. The life of mine will be just under 15 years. The latest feasibility study calculated a Net Present Value pre-tax of US$190 mn and an IRR of 22% and a simple pay-back pre-tax of 22%.

One of the negatives is a stripping ratio of 5.5:1 which is rather frighteningly high for an underground operation. Capex was estimated at US$202mn with average operating costs of US$45.09 per tonne milled and US$3,164 per tonne of Li2CO3 produced.

Western Lithium (TSX: WLC): This company is another example of one in the specialty minerals space that has cut its coat to suit its cloth. While still ostensibly having lithium as the major focus, it happened upon a deposit of hectorite at its Kings Valley lithium project in Nevada. So, in light of the strong demand for this hectorite clay for the use as an additive for specialty drilling muds, it decided to get into production with this material and have cashflow in the short term.

Meanwhile at the main lithium project, studies indicate that the annual production of 26,000 tonnes lithium carbonate, 90,000 tonnes of potassium sulfate and 100,000 tonnes of sodium sulfate. The Preliminary Feasibility Study from December 2011 forecast a Pre-tax NPV of $552 million with an IRR of 24% at an 8% discount rate. Operating cash costs, net of by-product credits are estimated at $968 per tonne of lithium carbonate. Once full lithium carbonate production of 26,000 tonnes per year is achieved, average annual cash flow is projected to be $124 million per year. At least they have a lithium demonstration plant under construction and the income from the drilling clays will move them into the producer category. Cashflow is king…

Li3 Energy: (OTCBB: LIEG) We usually don’t focus on OTCBB stocks of any kind but the thinning of the ranks of lithium plays made this one more apparent. Its focus is the acquisition and development of lithium and potassium brine deposits in South America. Its main project is the Maricunga deposit, which consists of two adjacent properties: a 60%-controlling interest in SLM Litio 1-6 (1,438 hectares), the Cocina Mining Concessions (450 hectares) acquired in April 2013; both located in the northeast section of the Salar de Maricunga in Region III of Atacama, in northern Chile. The latter project has a grandfathered approval for lithium extraction which makes it very interesting indeed. Li# bit the bullet in what is a tough financing environment by selling 51% of its subsidiary that controlled the two projects to BBL SpA in January of this year in exchange for total consideration that they valued at $8mn. Most of that however went into the subsidiary, with Li3 receiving $1.5mn in hard cash.

Galaxy Resources/Lithium One (ASX: GXY): this lithium producer was always at the front of the pack in the lithium space and definitely had a first mover even though its project was a tough one to get into operation and its Australian mine went into mothballs in 2012 almost as soon as it opened.

Galaxy owns the Mt Cattlin project in Western Australia, where it briefly mined lithium pegmatite ore, processing it on site to produce a spodumene concentrate and tantalum by-product. At full capacity, the facility was expected to process 137,000 tpa of spodumene concentrate and 56,000 lbs per annum of contained tantalum. The concentrated spodumene was to be shipped to Galaxy’s wholly-owned lithium carbonate plant in China’s Jiangsu province. At full capacity, the Jiangsu plant was expected to produce 17,000 tpa of battery-grade lithium carbonate, however, in 2013, it only managed to produce 5,844 tonnes. In November it switched its processing method to one suitable for taking output from Talison’s mine, which makes it seem as if the Mt Cattlin project is going into permanent eclipse.

In the run up to the mine opening, prior to 2012, Galaxy completed offtake or distribution agreements for what it anticipated would be 100% of the production from Jiangsu with Mitsubishi Corporation of Japan and thirteen major Chinese cathode producers. Galaxy also had plans for a lithium-ion battery plant, to produce 620,000 battery packs per annum for the electric bike (e-bike) market. We suspect this is also filed in the bottom drawer now.

In March 2012 Galaxy announced a merger with the TSX-V listed Lithium One, the salares explorer. Essentially this was a repeat of what had happened at Talison, when the Australian spodumene producer subsumed a Latin American salares player. In this case Lithium One’s principal asset was the Sal de Vida lithium and potash brine project in Argentina. The November 2011 preliminary economic assessment by ARA Worley Parsons outlined an operation producing 25,000 tonnes per annum of lithium carbonate and 107,000 tonnes per annum of potash, with an IRR of 28% and a NPV of US$1.066 billion (at an 8% discount rate). End-user partners are earning a maximum of 30% project equity in Sal de Vida by funding a minimum of US$15mn towards feasibility, by providing an off-take agreement for up to 50% of the lithium production and providing a completion guarantee for the debt component of the capital development costs. It would be somewhat ironic if the Latin salares ended up being the “mine” feeding the Chinese plant instead of the ill-fated Australian mine.

The company also owns the James Bay bulk tonnage spodumene project in Quebec.

Conclusion:

Thus in summing up the positives for lithium are:

  • The lithium mining sector is one where a clear dichotomy exists between brine extraction and hard rock/clay mining. The former (with a strong bias to South America in sourcing) has a massive lead over hard rock mining due to a dramatic cost differential (hard rock processing being 100% more expensive in general terms).
  • The simplicity of the brine process means that the road to production for these facilities is relatively inexpensive and with a shorter lead time. It also has almost no environmental impact (evaporation being the main component in the processing).
  • The lithium resources in the lakes of the altiplano of Argentina, Chile and Bolivia are substantial.
  • Lithium demand for the longer term appears robust despite the global slowdown with the biggest upside coming in automobile batteries. The hybrid auto industry may become enormous in the next few years more than making up for maturity in the other two principal applications (laptops and cell phones) for lithium ion batteries.
  • The cartel may feel compelled by circumstances to acquire emerging producers (as nearly happened with Talison) to maintain discipline and control

Meanwhile, the negatives for lithium are:

  • The pace of growth in lithium demand is clearly linked to economic activity. The extended slump in global economies crimped demand with consumption down more than 12% in 2009.
  • Hybrid auto outlook is bullish but potentially subject to slowdowns or lowering in projections.
  • A step-up in the effort to recycle lithium ion batteries could mean that 10-12 years down the track, consumption could run into a brick wall with an increasing amount of “old production” lithium reappearing in recycled form
  • Beware attempts by the “cartel” to instill discipline in the space

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Christopher Ecclestone

About Christopher Ecclestone

Christopher Ecclestone is a Principal and mining strategist at Hallgarten & Company in London. Prior to founding Hallgarten & Company in New York in2003 he was the head of research at an economic thinktank in New Jersey which he had joined in 2001. Before moving to the U.S., he was the founder and head of research at the esteemed Argentine Equity research firm, Buenos Aires Trust Company, from 1991 until 2001. He worked in London from 1985-1991 as a corporate finance and equities analyst and as a freelance consultant on the restructuring of the securities industry.
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