By Chris Berry
Separate and Unequal
In a note last week, I discussed the danger in assessing all critical metals together rather than individually. I am just back from Montreal where I chaired the 6th Annual Lithium Supply and Markets Conference hosted by Industrial Minerals.
Of the many takeaways, this idea of analyzing the prospects for these metals individually is evident in the case of lithium.
In the wake of Tesla’s (TSLA:NASDAQ) Gigafactory announcement, many lithium junior companies, who were left for dead, have been given a new lease on life. There are challenges that must be overcome to make the Gigafactory a reality, and am still unconvinced that a junior mining company not close to production can participate and benefit its shareholders, but we shall see. On the other hand, I try and make a habit of betting on successful visionaries like Elon Musk.
It is clear that the automotive sector is the real growth driver for lithium, as David Merriman of Roskill pointed out in his remarks:
It is important to remember that although electrified vehicles accounted for just 2% of global auto sales in 2013, this number was 1% as recently as 2011. Anyone who has driven any type of EV knows that this technology could gain widespread adoption subject to better economics (or higher gas prices).
What Happened to Leverage?
It is most surprising that despite the bloodbath in the junior lithium sector, lithium prices have held steady (roughly $6,000 per tonne depending on the purity for battery grade). Demand has continued to increase on an annualized basis to approximately 168,000 tpy in 2013. According to Dr. Jon Hykaway of Stormcrow, one of the conference speakers and a widely followed expert in the critical metals space, demand has grown by 80% in the past 5 years.
Unfortunately most lithium juniors haven’t benefitted from this stability and growth. Their share prices have collapsed by 72% as a group since 2011 according to Luis Santillana, CFO of Li3 Energy (LIEG:OTCBB).
It is a widely held view that junior mining companies gain from their discoveries and from leverage associated with higher raw materials (in this case lithium) prices. Why then can’t most lithium juniors seem to get back on their feet without the help of Elon Musk?
This likely has to do with a point I have made in the past regarding the lithium markets. The lithium market is an oligopoly. Realistically, this is a market well supplied by a small number of participants and despite the growth projections for the industry (something which I believe in over the long term), it is also a well supplied market.
Talison Lithium, a company that performed very well for our subscribers, has tailings at its Greenbushes mine with a reported higher grade than many other hard rock projects throughout the world. Facts like these give end users and other participants along the value chain pause when considering which early stage plays to fund. It is for reasons such as this that lithium juniors have suffered in the face of a healthy lithium market; while demand is steady, current supply is ample.
Another complicating factor is that an exorbitant amount of R&D dollars are being allocated towards battery technology calling into question exactly what the “winning” battery chemistry will be. It is clearly a challenge for end users or battery manufacturers to make large capital budgeting decisions when a question of this magnitude looms large. That said, the general consensus from the conference was that lithium ion battery technology is currently the best available. Nobody in attendance saw this changing anytime soon. Even if it were to, the time it would take for new supply chains to be built and new materials to be integrated into them is substantial, confirming the steady growth profile for lithium in the coming years.
I Have Said this Before: Don’t Throw the Baby Out With the Bathwater
Despite the uncertainties I mentioned above, avoiding lithium juniors altogether would be a mistake. We are still at the bottom of this cycle with an inflection point perhaps two years away. Lithium is an exciting commodity with a number of additional avenues of demand. This hedge against a fall off in demand from one sector is a very important benefit.
Given our focus on disruptive discovery, lithium must be viewed in this context. Now is not the time to indiscriminately begin acquiring a basket of lithium junior mining companies, but I do believe there are those in the sector that are well positioned for success.
Strong balance sheets and projects in stable political jurisdictions coupled with strategic alliances or potential for lowering production costs are the keys at this stage of the cycle.
During the conference, we learned about several technologies including solvent extraction which can help achieve lower costs. In addition to this, POSCO (005490:KRX, PKX:NYSE) one of the largest global players in the steel business, has made significant inroads into dominating the downstream lithium industry. POSCO has relationships with several lithium junior mining companies and one in particular I am conducting advanced due diligence on as the combination of this company’s management, balance sheet, asset, and POSCO’s potential low cost lithium production technology make it unique amongst its peers.
With or without the Gigafactory, the future for lithium across multiple industries appears sound. Everyone who has experienced driving an EV (as I have) knows that this technology can become a more widespread commercial reality in the future, although calls for the death of the internal combustion engine are certainly premature. That doesn’t mean that every lithium junior will succeed (or deserves to). Given ample supply of the commodity itself, investors must find those stories which have the right blend of sustainability and upside catalysts as the global economy works through the current disinflationary environment.
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