Canadian junior and Chinese partner taking long view
Every junior commodity market has its share of pretenders to go along with the contenders as prices and demand move up.
In striking contrast to internationally traded bellwether metals such as copper and gold, the market for lithium is murky. Analysts have noted recent variances in spot prices in China ranging to $20,000 a tonne. There’s barely a handful of producers and buyers and a popular production method — extracting lithium from underground saline water deposits — is not scalable in the tradition of a conventional hard rock mining operation.
Lithium is the consensus ‘metal of the future.’ It is the core component in the rechargeable lithium-ion batteries that power electric cars and the key to a global transition away from fossil fuels for transportation.
Roskill, an industrial minerals consultancy, says demand growth for lithium carbonate has grown more than 16 per cent per year since 2012. Roskill projects demand to exceed 186,000 tonnes in 2016, reaching 325,000 tonnes by 2025. Nordic Mining associate company, Keliber Oy, expects annual demand to hit 473,000 tonnes by 2030 — a 250 per cent increase from 2016.
For a retail or even institutional investor, the challenge is to authenticate the capacity of both established and prospective lithium producers to respond to the opportunity. A recent rush of claim-staking in Nevada — accompanied by a flurry of news releases from junior explorers — suggests caution.
Joe Lowry, President of consultancy Global Lithium LLC, believes that the market cannot rely just on established producers to meet demand growth. Lowry has been involved with producers in the lithium market for more than 20 years — and even he is surprised by the pace of demand growth.
“There is no doubt that the lithium world needs a few juniors to be successful in order to meet future demand,” he said in a recent commentary. He noted that the largest producers now supply ‘less than half the market’ and that their response to a projected 120,000 tonne annual jump in demand by 2020 will fall short.
As a result, Lowry has been looking at juniors, who, he thinks, have “more of the proverbial skin in the game,” than their bigger counterparts — as well as a better grasp of the market.
Not all qualify as contenders, he adds: “Unfortunately, all too often junior companies do themselves, their peers and their shareholders a great disservice by exaggerating their opportunity and performance.
“I have been critical of the junior lithium projects that I believe are run by charlatans who are looking to ‘pump and dump’ their shares; however, there is no doubt that the lithium world needs a few juniors to be successful in order to meet future demand.”
One of the challenges is to meeting demand, according to Gary Schellenberg of International Lithium Corp.(TSX.V: ILC), is that there are two distinct methods for lithium production — and potentially wide variations in cost for each of them.
The brine method involves pumping water from salt lakes (known as salars in South America) and extracting lithium from it. Lithium is also available via hard rock mining. ILC has both kinds of projects — the 160-square kilometer Mariana salar project in Argentina and conventional hard rock projects that will potentially produce spodumene concentrate in Ireland and Ontario.
ILC has a strategic partner, Jiangxi Ganfeng Lithium, one of China’s largest lithium product producers. Ganfeng holds a 15 per cent equity stake in ILC, a situation Schellenberg described as generally uncommon in the mining sector, but indicative of the strong interest lithium producers have in locking in long-term supply.
“Back in 2010 we were contemplating spinning off all of our lithium assets from our parent company TNR Gold Corp,” Schellenberg, ILC’s chief executive officer, said.
“Ganfeng, at the time, was a very new company in the lithium sector. They had a very aggressive approach. They wanted to expand their presence and vertically integrate. We could see ourselves as the raw material supplier for their business. They took $2 million of our $2.5 million IPO in 2011 — this was a serious equity stake.
“As our relationship has developed, we have become entrenched as Ganfeng’s explorer. They’re looking to us to help keep them sourced with lithium for the future. They’re looking 20-30 years out.”
Right now, Ganfeng is advancing ILC’s Mariana project in Salta province, Argentina. In July 2016, ILC and Ganfeng co-announced that a $12 million budget has been approved to accelerate exploration and development at Mariana.
ILC president Kirill Klip noted that Ganfeng has a $4.5 billion US market cap holding 19 patents for lithium products. Klip said the $12.5 million will enable ILC to firm up the size of the Mariana resource and move forward its application for a pilot production plant on the property.
“This access to capital and Ganfeng’s advanced lithium extraction technology puts International Lithium in an exceptional position to move our project forward,” Klip said. He cited recent discussions about ILC’s project with senior officials in the Argentinian government as evidence that the country is enthused about foreign investment in natural resource development.
Schellenberg said that ILC has staked the entire Mariana salar and is working to meet Ganfeng’s goal of having it in production by early 2020.
“Generally you can economically produce battery grade lithium carbonate from brines, down to about $2,500 a tonne. Battery grade lithium carbonate from a spodumine concentrate (in hard rock mining) will be in around $3,700-$4,000,” Schellenberg said.
Although it’s less expensive than hard rock mining there’s a limit to annual production from a brine source. This is based on the volume of water in the salar and the availability of an alternate water source to replace what’s pumped out.
“You can realistically pump out only as fast as new water comes in and replenishes it. Also with the brines your grade slowly depletes,” Schellenberg said.
ILC’s approach with Mariana is to own rights to the entire salar.
“We want to be the only straw in the milkshake,” Schellenberg said. “Elsewhere, you’ve got companies sharing ownership of salars. The one pumping the fastest and the hardest gets the lion’s share of the resource. That’s not a sustainable business model.”
Schellenberg believes many junior exploration companies chasing lithium projects are not cognizant of the economic and technical challenges.
At Mariana, ILC will be shipping lithium chloride, a concentrated brine, by tanker to Ganfeng’s existing production plant in China, “as opposed to setting up our own plant in Argentina. That lowers our capital expenditures. We don’t have to go through the growing pains and hoops of trying to build a plant that works with our brine. One already exists for us in China.”
Schellenberg pointed to Albermarle’s Silver Peak lithium mine in Clayton Valley, Nevada — the only producing lithium brine operation in the United States. The decision by electric car innovator, Tesla, to locate a battery manufacturing plant in the state has triggered a rush of claims in Clayton Valley.
“Clayton Valley is a closed basin so it’s relatively stable — although Albermarle started at upwards of 600 milligrams per litre of lithium in the brine and now they’re mining 100 milligrams per litre.
“Other basins in Nevada are open. Water travels in and out, which naturally reduces lithium concentration. This makes the possibility of finding an economic lithium deposit much more difficult and probably impossible.”
“New explorers are all after ground, just staking everything under the sun but not really appreciating the differences between locations — or even if you should be exploring an area at all.”
Klip noted that Panasonic has an exclusive contract to supply batteries for Tesla’s mass market Model 3 vehicle — but has no lithium source in Nevada. Tesla has agreements to buy lithium chloride from selected Nevada producers at a reduced market price. But so far, there is no public disclosure about prices. That adds another layer of economic uncertainty.
Klip said Telsa’s Nevada Gigafactory is generating excitement among all stakeholders in the lithium sector. But he added that “the real story of the lithium race is happening in China right now.”
“China became the largest auto market in the world for electric cars last year and (Hong Kong-based) BYD Company is now the biggest manufacturer of electric cars in the world this year,” Klip said, adding that Warren Buffett is a stakeholder.
“In China, they call battery power The New Energy, and it’s part of their current five-year plan. Twenty-five companies are making 51 models of electric cars in China already. A whole new strategic industry is being created from scratch. Ganfeng grew from $3 million dollars in sales in 2000 to $4.5 billion in market cap now.
“Security of lithium supply becomes the most important factor for the leaders to keep their dominant position in the fast-changing marketplace."
Hard rock mining has advantages for companies feeding into a growing market. It can take up to three years for brine projects to shift to production, depending how long it takes the water holding the lithium to evaporate. A mine, by contrast, can begin shipping product almost immediately when it’s commissioned and it can respond to spikes in demand.
“It comes down to grade, infrastructure and the jurisdiction where the mine is located,” Schellenberg said. “A mine producing one per cent lithium oxide grade is marginal. Yes, you can make money at current levels above $12,000 a tonne, but there’s a real chance that lithium carbonate could go back to $4,000 a tonne, which would be uneconomical for a lot of the deposits being promoted right now.”
Proximity to infrastructure is also important. Schellenberg cited a very good Quebec mining project with an estimated $550 million price tag that includes large costs for infrastructure and transporting product to market. “A similar sized deposit in southern Ontario or central Ontario would be half that amount. You really have to look at your infrastructure costs and distance to market,” Schellenberg said.
Meanwhile, ILC is moving along its Mavis and Raleigh projects in northwest Ontario. In late July, the company announced that strategic partner Pioneer Resources Limited is planning $1 million in exploration expenditures in 2016 on the properties. Schellenberg sees these projects as ILC’s first step to creating a secure supply of lithium for the North American auto market.
In total over the next 18 months, ILC has budgeted $17 million across its projects in Canada, Argentina and Ireland. That makes ILC, in Schellenberg’s words, “one of the most active exploration companies in the lithium sector.”
“Since 2010, ILC’s focus has been building a global portfolio of lithium assets and strong strategic partnerships,” he said. “With rapidly expanding markets for electric cars and energy storage, security of lithium supply becomes the critical issue. We believe our strategic partnership with Ganfeng and our exploration work with Pioneer demonstrate that we’re moving in the right direction, at the right time, with the right projects to take advantage of this exceptional opportunity.”