Analyst urges caution as lithium excites and pitfalls multiply

TORONTO (miningweekly.com) – Lithium’s prospects are bright as demand from the battery sector is surging and observers believe it will only get better as more electric vehicles (EV) are produced and new energy storage solutions arise, such as Tesla’s Powerwall technology.

Indeed, prices had marched higher, while progressively more investors were making lithium plays to ride a bull run in a still-difficult commodities bear market.

That momentum was expected to build, spurred on by further shortfalls in lithium supply estimated for some years to come.

At the start of March, Macquarie Group highlighted some estimates predicting a 20 000 t market shortage on an expected 150 000 t to 170 000 t lithium produced in 2016.

In an interview with Mining Weekly Online, Disruptive Discoveries Journal editor Chris Berry noted the supply narrative was a valid one and added that further technological improvements, efficiencies and cost competitiveness would act as propellants.

Renewables, battery storage and EVs had also captured people’s imagination. “By my calculations, more than 30 automotive companies are electrifying their fleets to varying degrees,” he stated.

Tesla attracted much of the media focus, but others deserved close attention as well. For example, the Volkswagen Group unveiled its ‘Strategy 2025’ goals on June 16, with the company hoping to produce 30 new EVs by 2025.

“The demand narrative is real; you’re seeing companies take concrete steps and I think that sends a powerful signal,” he said.

Investors needed to stay with the sector, but also to take profit when possible and sell into market strength. However, prices were likely to be marked by a spike and then retrenchment back to the mean trend, Berry cautioned, citing the last lithium run and bubble in 2009 as an example.

Prices were also opaque because of the market’s nature, which included a plethora of sales points and grades being traded.

“Nobody really knows what price is,” Berry said. “You could call somebody in China and get a quote at this or that level, but nobody’s really sure. It’s often an indicative number and not the actual price.”

WHAT IS NEEDED?
The price rises also ran the risk of obscuring essential factors that investors needed to consider when looking at the lithium market, Berry stressed.

“The price of battery-grade lithium carbonates or hydroxide increased dramatically in a short period and that’s exciting and positive,” he said. “But it’s not the most important factor to consider when thinking about lithium and investing.”

Firstly, an investor needed to realise that the market was dominated by an oligopoly of four main producers: SQM, FMC, Albermarle and Talison. They accounted for about 85% of supply, according to Macquarie Group.

Therefore, a company attempting to enter the lithium space needed a number of critical advantages. First and foremost, its project needed to be in the lowest percentile in terms of production cost.

“Having the lowest cost of production also means it doesn’t necessarily matter if, for example, hydroxide is $10 000, $16 000 or $5 000 per tonne. It insulates you more than your competitors because you’ve got the lowest cost,” Berry advised.

Secondly, a company needed a confirmed letter of intent (LOI) for a binding offtake agreement with a notable buyer – and one that also discussed output and purity.

“Obviously, there’s a lot of guesswork involved because they’ll never let you see what the actual prices are within all the amounts,” Berry noted. “But with an LOI you at least know there’s going to be a buyer at the end.”

Thirdly, a company had to be able to process its output at a consistent quality and at a low cost.

Berry added that lithium should not be viewed through the prism of a traditional mining narrative. Even hard-rock spodumene was dependent on further processing to achieve lithium hydroxide or carbonate.

“It really speaks more to chemistry than anything else,” he said.

Development of proprietary technology tied to processing and the advantages accrued from selling rights usage could be another significant business angle for some companies.

EYES ON THE PRIZE
In the Americas, there had been much focus on Argentina and Chile and their respective approach to lithium via brine operations. 

“South America is a major lithium-producing region, of course,” Berry said. “But to use a basketball phrase, ‘it’s a bit of a jump ball’, because there are lots of different things going on.”

For example, he noted Chile was continuing to work through issues with SQM and that Albermarle had sought to ramp up its Chilean capacity. “Although SQM objected to that on environmental grounds,” he said.

Argentina’s new administration possibly heralded a fresh approach to lithium, although it was probably too early to assess the full implications.

However, a recent move by SQM and Lithium Americas to establish a 50/50 joint venture for the Cauchari-Olaroz lithium project, in Jujuy, Argentina, was a notable development and an expression of confidence.

“It’s also significant and a powerful signal that SQM believes in the demand story for lithium,” Berry said.

For Canada, Nemaska Lithium’s Whabouchi project was high-profile, along with the company’s proprietary technology for processing its spodumene into high-purity lithium hydroxide and carbonate.

“They’re benefiting from the realisation it’s a good deposit and that the Quebec government is supporting it with some serious financial assistance,” Berry added.

Nevada was more problematic, whereby a number of companies had highlighted their proximity to operations or their levels of landholding. Berry was cautious about some of the activity in that state.

Overall, he estimated the sector had raised about $280-million on the markets year-to-date. The average lithium stock was up by 167% year-to-date, except for the majors and irrespective of market capitalisation levels.

Berry stressed it was unlikely that all of the proposed new supply would come on stream and highlighted the 2009 lithium bubble as a cautionary example, whereby around $1-billion was raised but only about 20 000 t of additional capacity was secured.

“So a billion dollars was raised and a large portion of that was wealth destruction,” he warned. “We’re following a similar path now, which is why I’m a little cautious.”