Clausi on the lithium market and why Nemaska shares are heating up
The lithium market feels like the second act at a blues concert. Sure the first act was fun and new, and everyone had a jumpin’ good time, but now we’re about an hour in, some hairy guy is still wailing on the G harmonica, the beer is warm, the bass player is unenthusiastically thumping the same predictable bass line, and this song about a woman, a guitar and a broken heart sounds just like the last. It’s time to go.
But then, just as you’re getting up, you hear a new sound. You’re curious, so you stay. And you’re glad you did.
First, the lithium market. Lithium, a soft metal that reacts vigorously with water, is relatively mature compared to more obscure metals like praseodymium or holmium. (Where do they come up with those names?) Discovered first in Sweden in 1817, lithium has been used since the 1940’s to treat mood disorders and for various industrial purposes.
This article from the United States Geologic Service provides a good overview of the domestic US market, both sources and uses, as well as a good global overview. Identified lithium resources in the United States total 5.5 million tons and approximately 34 million tons in other countries.
Batteries (for cell phones, laptops, handheld power tools), ceramics and glass, and lubricating grease are the top three uses, with supply and demand for lithium fairly evenly balanced out.
Numbers don’t always tell the story. To see how mainstream lithium has become, go to any general retailer’s website and enter “lithium” as a search word. Walmart’s website gave me 93 items. At Canadian Tire I found 129 items, the majority of which related to handheld lithium-battery tools (drills, saws, nail guns, grass trimmers, replacement batteries and chargers). Over 150,000 items came back from Amazon, including cell phone batteries, nutritional products, tools, pet supplies and a megaphone.
There even are ETF’s, like the Solactive Global Lithium Index and the Global X Lithium ETF, that track the performance of listed companies active in lithium mining or the production of lithium batteries.
Since they are more mature industries, I strongly agree with Chris Ecclestone that lithium or graphite can’t count on Tesla Motors for a jumpstart. It will be up to each company in those spaces to develop its own brands, identities and efficiencies to survive – and Tesla will have its own fundamental problems to address.
That means intermission is over and the band is well into the second set. Cue the sweaty harmonica player. But then there’s that new sound so sit down again.
Nemaska Lithium (TSX:NMX | OTCQX:NMKEF) is that new sound.
Nemaska intends to become a supplier of lithium hydroxide and lithium carbonate. It is aiming at two links in the supply chain, one as a miner and one as a processor.
As a miner, Nemaska says by volume and grade it has one of the richest spodumene hard rock lithium deposits in the world, at its Whabouchi deposit in the James Bay Region. Whabouchi has year round access by a gravel road, and the local airport is only 18 km away.
Then Nemaska intends to be a processor. Nemaska claims to have proprietary methods to produce lithium hydroxide and lithium carbonate from its Whabouchi materials, and has applied for patents on those methods.
Pulling all of that together, in June 2014, Nemaska filed a NI 43-101 technical report / feasibility study on Whabouchi. This report, a comprehensive 350 pages, concluded that the deposit and associated processing plant were technically feasible and viable economically. The Costs and Economic Analysis run for about 40 pages, with the Base Case Evaluation Summary starting on page 327.
To make sure it has a buyer for the processed materials, Nemaska signed an offtake agreement for lithium hydroxide with Clariant Canada Inc., a private subsidiary of the financially healthy chemical giant Clariant AG (“CLN” on the Swiss Stock Exchange). Exposure to Tesla has been minimized.
Finally, the leadership team is diverse with extensive experience in mining and finance. A review of the press releases shows a team achieving a great deal in a short period of time, with considerable community engagement and capital markets success.
But what gives it that special sound, and worth sitting through the second set for, is the Sept 8 press release. Nemaska announced the signing of an agreement in principle with the City of Shawinigan to buy existing manufacturing facilities.
That Shawinigan facility will house Nemaska Lithium’s Phase 1 plant and the future commercial Hydromet plant that will process the Whabouchi spodumene concentrate into high purity lithium hydroxide and lithium carbonate. Once the materials are processed, then the offtake agreement with Clariant can come into play.
This press release is vital for a number of reasons. First, Nemaska has built momentum by obtaining both Federal and Provincial support to go ahead with the construction of the Whabouchi mine and concentrator, and now obviously has support at the local level. Jobs will be created, taxes will be paid, translatable skills will be learned, the local population should grow. The importance of community-level support cannot be underestimated.
Second, Nemaska had originally planned to build the plant in Salaberry-de-Valleyfield, Quebec. Evolving the plan to use the Shawinigan facility means reduced construction time; significantly reduced capital costs; some of the requisite infrastructure, including natural gas, electric power station and a rail line, is already in place; and, Shawinigan is closer to the Whabouchi mine site than is the original site, which will reduce concentrate transportation costs.
It’s easy to just shrug and say “It’s just a building, so what?”. Being able to step into existing facilities is a massive “so what”. It means less money needs to be raised, less money needs to be spent, less distraction for management, less risk is taken in construction and less time is needed to get to production. Have you ever heard of a major construction project coming in ahead of schedule? Me neither. That’s why stepping into existing suitable facilities is so important.
All of that translates to less risk to the shareholders for roughly the same potential return. The business plan has been slingshot forward.
Risks still exist, of course. Nemaska will have to carry out several capital raises, by debt and equity, to execute on that business plan. With over 190M shares already outstanding, the shareholders need each equity financing to be priced at successively higher prices or face painful dilution.
But, with over $2.5M in the treasury as of March 15 and the company delivering on milestones, the stock price has been on a tear lately. More can be expected as the market digests this news and realizes that the band is just warming up.
Mr. Clausi is an experienced investment banker, executive, director and shareholder activist. A graduate of Osgoode Hall Law School called to Ontario's bar in 1990, ... <Read more about Peter Clausi>