Lithium bubble floats higher as investors ignore dangers

TORONTO (miningweekly.com) – Lithium is in a bubble and many investors have taken positions in companies with little prospect of achieving a market presence, let alone creating value, Resource Maven newsletter writer Gwen Preston told Mining Weekly Online in a recent interview.

“Lithium stocks are in a bubble and many of them have outperformed the market. But many involve companies that have simply added ‘lithium’ to their name, or they’ve picked up ground they are claiming is prospective,” she said.

“The odds that most of these companies create value is basically zero,” she stressed. “They’ll ride the bubble until it bursts and then they’ll come crashing back down.”

BEHIND THE BUBBLE
The bubble’s creation was rooted in a legitimate narrative: the current lithium capacity would be unable to match future demand that came from the industrial sector, the battery manufacturers feeding the consumer electronics markets, and the electric vehicle (EV) industry.

Preston noted that industrial demand had risen between 3% and 4% a year, while consumer electronics demand had grown by around 20% a year. At a conservative estimate, the current trajectory of EV uptake would spur a tripling in lithium demand on its own.

“There’s simply not enough output to match these requirements, which means there’s a fundamental argument that new lithium production is needed,” she said. “But few of the stocks involved in the current bubble will ever feed into this.”

These were the “bubble stories” and she urged investors to be careful when seeking value in lithium. For example, she highlighted proximity plays witnessed in Nevada, whereby land had been secured near producers and promoted on this.

Yet some of these stocks had doubled or tripled, which was evidence that many invested without understanding the basics of lithium, such as the two main methods of production: brine extraction or hard rock spodumene exploitation.

Both methods had specific requirements that often involved a lot of proprietary technology, particularly for brines. Hard rock material was mined and processed into higher-grade chunks and then sent to conversion facilities, primarily in China.

Behind these two methods were the complexities of processing, logistics and purchase agreements – essential elements that took time and effort to build.

However, time was not on the side of many new participants because the market required additional output within the next decade. That meant projects already in advanced stages or definitively moving towards this were the ones with opportunities attached.

“Ten years is a short timeline,” Preston said. “If you’re not about to be taking lithium out of the ground, then you’re not actually in the game.”

CAPACITY QUESTIONS
The position and power of the four main lithium producers – Albermarle, FMC, SQM and Talison – needed consideration too, as they would seek to maintain market share and dominance.

But information on their positions and intentions was hard to obtain, while would-be market participants also needed output that would be low-cost and competitive.

It was also noteworthy that none of the four majors were producing at full capacity. “So another big question is whether they can ramp up output to feed future demand,” Preston said.

There was some uncertainty here because some of their operations faced permitting or social issues, she noted. There had also been discussions about whether Chinese conversion facilities faced roadblocks in their ramping-up.

Many believed the capacity expansion was both feasible and readily viable, while others argued the opposite. “My take is somewhere in the middle; they’ll be able to ramp up to a certain extent but new operations will be needed to fill the gaps,” Preston said.

Tesla and its ability to secure the lithium needed to feed its Gigafactory battery plant often came to the fore in discussions surrounding demand drivers. But Preston stressed that this was just one aspect of the overall picture.

Indeed, China’s effort to increase EV ownership and build the necessary battery infrastructure for this had been a far more important part of the equation.

While EVs only made up around 1% of China’s car market, she noted that sales had tripled last year. This was backed by government incentives as part of an effort to start reducing conventional car levels and their attendant emissions.

“For example, while electric cars are expensive at $30 000-plus, subsidies in China cover around half the purchase price, including an exemption from sales tax,” Preston said.

In addition, those wanting to drive in China had to undertake several bureaucratic steps before receiving a licence. Driving restrictions were also imposed by many municipalities, with vehicles owners only allowed on the road every other day.

“By comparison, an EV driver gets his or her licence on application,” Preston said. “So there are a lot of incentives and China is a pack leader, although plenty of other countries have similar inducements as they seek to get the car-buying public into EVs.”

CASE STUDIES
In considering North American lithium projects, Preston highlighted Nemaska’s efforts in advancing the Whabouchi project, in Quebec, as noteworthy. The company had also developed proprietary technology to process the spodumene into high-purity lithium hydroxide and carbonate.

“Nemaska is one of the very few that could get into production,” she said. “They could be on stream in around five years if the stars align in their favour, so it’s certainly a contender in this race to production.”

Preston’s other example was Lithium X, which was advancing the Sal de los Angeles project, in Salta province, Argentina.

“They’re aiming to build an inexpensive pilot plant through which they can prove that their lithium can be produced economically,” she said. “It will also help answer all kinds of treatment questions because they’ll be processing.”

That would assist with product competitiveness and help make the output more attractive for potential buyers seeking offtake agreements.

Another vital factor was the experience of a company’s management team. Understanding project development was important, but knowing the dynamics of the lithium market was equally essential.

“It’s about achieving significant steps and getting experts in the lithium industry,” she said. “You need people who know what they’re talking about and who can move a project into production or make it attractive enough for a lithium major to seek an acquisition.”