I have been optimistic on lithium demand since we first started covering the space through Salares Lithium and its merger with Talison Lithium in 2010. My investment thesis revolves around the fact that though lithium is plentiful and the market structure resembles an oligopoly, there is “room at the top” for select lithium development plays that possess a distinct disruptive advantage which lowers their overall cost of production and allows them to sustain operations and thrive.
Demand for lightweight electronic devices and mobility that is reliable and cost effective ensures robust lithium demand in an electrified future. There simply is no readily available substitute to the lithium ion battery and the double digit growth rates in battery use in recent years confirms this.
One company that I believe holds promise to join the ranks of production companies is Lithium Americas (LAC:TSX, LHMAF:OTCBB). I have discussed the company in video interviews previously. This is the first time I have discussed it in depth in print.
There are several reasons for LAC’s unique value proposition. The company’s new management, strengthened balance sheet, superior asset, and important cooperation agreement with POSCO (PKX:NYSE, 005490:KRX), rank it among the top near-term lithium production stories.
The agreement LAC has in place with POSCO has the potential to transform the production dynamics of the industry and render the age old debate about which lithium production method is better – brine or hard rock - irrelevant.
LAC, like the lithium industry itself, appears to be at an inflection point and is the focus of the following report.
LAC is based in Canada and publicly traded on the Toronto Stock Exchange. It was incorporated in 2009 and became public in 2010 with the intention of exploring for and developing lithium and other mineral resources in Argentina, where the company’s assets currently exist. The Company is comprised of three subsidiaries – two incorporated in Argentina (Minera Exar S.A. and Potassium S.A.), and one incorporated in Canada (2265866 Ontario Inc.).
In 2010, LAC acquired permitting necessary for mining and exploration within the Cauchari and Olaroz salars and began an initial exploration program. By 2010, LAC published an inferred resource and later that year the resource was upgraded to Measured and Indicated. In 2012, a definitive feasibility study was published with proven and probable reserve estimates and a clearer picture of the economics at the salars. LAC is fully permitted for production.
Location of Assets
LAC’s main asset is the Cauchari-Olaroz Lithium Project which comprises a significant portion of two adjacent Argentinean salars, or salt lakes. The salars extend in a north-south direction from S 23º 18’ to S 24º 05’, and in an east-west direction from W 66º 34’ to W 66º 51’. The average elevation of both is approximately 3,950 m.
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The Cauchari salar comprises the majority of LAC’s resource totaling over 81,000 hectares. It should be noted that this region of the world, also known as the “lithium triangle”, produces more lithium from brines than anywhere else. With major lithium producers including Sociedad Quimica y Minera de Chile (SQM:NYSE) and FMC Corp (FMC:NYSE) working successfully in the area for some time, it would appear that LAC is in good company, indeed.
The Jujuy-Antofagasta International highway intersects the Cauchari and Olaroz salars. A natural gas pipeline is 50 km away and a deep sea port in Chile is 550 km away. Fresh water will be obtained from wells as the region receives approximately 50 mm of rain per year. While the region is somewhat sparsely populated, labor is available and can also be brought in from the cities of San Salvador de Jujuy and Salta. Infrastructure is sound and large operations run by the aforementioned SQM and FMC are accustomed to operating in the region.
LAC maintains a NI 43-101 compliant lithium reserve and resource estimate shown below:
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The company also has a NI 43-101 reserve and resource estimate on a valuable byproduct at Colchari-Olaroz in potash:
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The grades of both lithium and potash compare favorably to other brine deposits and the magnesium to lithium ratio, a crucial indicator of positive economics, is low. Higher magnesium levels lead to higher costs as additional reagents such as lime are necessary.
As both the lithium and potash have proven and probable reserve estimates, a high degree of certainty around the potential economics can be ascribed here relative to competitors. A comparison of resources between companies is contained in this report.
Mining Plan and Economics
LAC has been substantially de-risked on the back of a bankable feasibility study published in 2012 which indicates that Cauchari-Olaroz contains reserves sufficient for a 40 year mine life which would produce up to 40,000 tonnes per year (tpy) of lithium carbonate (Li2CO3) and up to 80,000 tpy of potash (KCl). That said, LAC management has wisely decided to adopt a phased approach to production with the first of two stages proposed to produce 20,000 tpy Li2CO3 and 40,000 tpy KCl.
LAC may have the third largest brine resource in the world based on all available data.
The feasibility study also shows that LAC’s battery grade lithium carbonate operating costs are expected to be one of the lowest in the industry, significantly lower than hard rock lithium projects. Should the estimates in the feasibility study hold, the cash operating cost for one tonne of Li2CO3 are estimated to be USD $1,876. Including byproduct credits, the cash cost per tonne falls to US $1,332. The feasibility study uses a base case Li2CO3 price assumption of US$5,700, so with battery grade Li2CO3 trading at roughly US $6,000 to $6,500 per tonne, strong margins for the project are possible.
The Net Present value of Phase 1 is $738 million on a pre-tax basis at an 8% discount rate.
The mine plan calls for a traditional lithium brine operation with potash production adding a by-product credit. The initial capital expenditure for lithium and potash amounts to $314 million ($269 million for lithium and $45 million for potash) and is broken down as follows:
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The operating costs break down as follows:
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Potash is viewed as a byproduct here. Therefore, looking at operating costs on a net basis is instructive:
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On a slightly more technical note, the process flow diagram for each commodity:
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In 2012, LAC received final project approval for project construction. With permits in place, the final major hurdle will be attaining financing. This is where the partners LAC has chosen become important.
Finding partners is one of the challenges in bringing an industrial minerals project from exploration through development and ultimately to production. Partners are necessary in arguably all phases of a company’s lifecycle, whether or not it’s for help in financing or the ultimate goal: an off-take agreement. With geopolitical sensitivities on the rise throughout the world today, having local, regional, and federal government support of a project is also a must.
These relationships are crucial keys on de-risking a project and LAC has established valuable relationships in this vein.
To minimize political risk, LAC signed a letter of intent (LOI) in November 2012, with Jujuy Energia y Mineria Sociedad del Estado (JEMSE). JEMSE is the provincial government of Jujuy’s mining investment company, helping to develop local mining projects. JEMSE will acquire an 8.5% equity interest in the Cauchari-Olaroz Lithium Project under the terms of the LOI and, provides LAC with the ability to navigate the local and regional political structure in Argentina. JEMSE will aid LAC in the most efficient processes for import of equipment for project development and also liaise with the Central Bank of Argentina for import and export of currency.
This agreement between JEMSE and lithium developers is not unprecedented as JEMSE struck a similar deal with Orocobre (ORL:TSX, ORE:ASX, OROLF:OTCBB) in the earlier stages of that company’s project development.
It is assumed that once project financing is attained, the LOI will become a formalized agreement.
LAC also has an option on an off-take agreement in place with Symatec (Magna). According to the feasibility study, Symatec’s agreement allows it to purchase up to 25% of the Company’s Li2CO3 production, at a 5% discount from market prices.
In return for the discount to the market price, Symatec agrees to certain terms including the option to provide interest free financing for project development. Specifically, the contributed amount will be equal to its off-take rights.
As an example, if LAC produces 20,000 t Li2CO3, Symatec would purchase 5,000 tonnes. Financing would be made available in the amount of 25% of $269,000,000 (or $67,250,000). In addition to this, Symatec can help arrange for low interest financing for an additional 25% of the project cap ex. This arrangement could provide 50% of the overall project cost.
Finally, and most significantly, LAC has entered into a co-operation agreement with South Korea-based POSCO, one of the largest steel producers in the world. That a company of this size (a market cap of US $30 billion) would be diversifying into lithium says a great deal about the potential that the lithium space holds in the future, not to mention Korean worries about resource dependence.
POSCO has been developing what amounts to next-generation lithium extraction. This is designed to shrink the environmental footprint of the lithium brine production process and also dramatically shorten the time necessary to produce lithium from brines (from months to hours).
Details are hard to come by as this is a proprietary technology, but essentially through a chemical process, POSCO is able to extract not only lithium, but other elements as well from salt water. The initial benefits of the POSCO lithium production method include an increased recovery rate (upwards of 80%), a roughly one month time frame to produce Li2CO3 (though small amounts can be produced in hours), scalability, and less susceptibility to weather anomalies as pond sizes are smaller.
POSCO will construct a pilot plant at the Cauchari-Olaroz salar and utilize brine from the salar for testing purposes. Pieces of the pilot plant are in transit to Argentina and the current plan calls for the plant to be operational by Q4 2014. The plant will have an annual capacity of 200 tonnes Li2CO3, POSCO’s largest effort to date. Under the terms of the co-operation agreement, POSCO is charged with development of the technology and management and operation of the pilot plant, while LAC is to provide brine from the salar and local support.
This is an initial agreement and is limited to activities surrounding the pilot plant, however a future exclusivity period has been agreed to whereby LAC and POSCO can negotiate the details of a commercial operation. Costs of building, delivering and operating the pilot plant will be borne by POSCO, which also retains 100% ownership of the pilot plant. This amounts to a “free carry” for LAC and while there is no guarantee that the technology will work as promised, the upside to a successful operation speaks for itself.
There is very little that I could say about lithium supply and demand that hasn’t already been said. This section of the report is therefore designed to provide general background on the lithium space, what some of the demand drivers are, when the inflection point may occur, and provide an idea of how LAC can fit in this growing industry.
Lithium demand is growing well above global GDP growth rates and because of this, makes it one of the few exciting commodity stories out there.
In 2013, various estimates indicate that roughly 160,000 tonnes of lithium was consumed globally. The chart below shows the major end uses:
Though these percentages may shift somewhat in coming years (likely to the benefit of batteries), I believe you’re looking at a bigger overall pie rather than one where market share shifts dramatically from one end use to another.
Also, for the sake of reference, shown below is the Li2CO3 content in various devices:
With respect to growth rates, the lithium space can be broken down into two distinct sectors: battery and non-battery. While the non-battery sector is anticipating growth in line with global GDP in coming years (~3%), the battery sector is forecast to grow at much higher rates – anywhere from 15 to 20% out to 2020.
Given these estimates, the chart below shows forecast lithium consumption at CAGRs of 8%, 10% and 12%. Data is in tonnes:
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Various industry sources have global lithium production capacity at 185,000 tpy. Using that as a benchmark, here are rough estimates of supply growth looking out to 2025:
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To make interpreting this data somewhat easier, I have created a chart showing what year demand will overtake supply out to 2025:
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A word of caution: these estimates are unscientific and based on assumptions I am making with regards to the various engines of demand juxtaposed against the certainty of increasing capacity. Forecasting supply growth is enormously challenging due to a host of factors that are essentially “unforecastable” including adverse weather impacts on projects, resource nationalism, and financing challenges for junior mining companies.
A huge boost to the entire industry has come from Tesla Motors (TSLA:NASDAQ) and no report on lithium would be complete without a mention of the company and the planned Gigafactory. The intent is to produce up to 500,000 EV batteries per year by 2020 – more than are produced globally today all from a single factory. The 35 gWh of planned production could increase lithium demand by 20,000 to 25,000 tpy potentially altering the supply and demand math above.
This may seem a stretch goal, but even if TSLA falls somewhat short, the expansion plans other battery manufacturers have in place, including LG Chem (051910:KRX) who recently signed a joint venture deal to produce 100,000 EV batteries by the end of 2015 in China, lend a great deal of assurance that demand for lithium will remain robust and should lead to higher pricing – beneficial for all market participants, but especially those potential low cost producers such as LAC.
Lithium has traditionally be a challenging commodity to invest in as the market structure resembles an oligopoly with four major producers dominating the market. SQM, Rockwood Lithium (ROC: NYSE) and FMC all produce lithium from brines. And each company has brine operations in the region near LAC’s operation. Additionally, ROC has a brine operation in the United States and would be an ideal partner for TSLA. The fourth company, Sichuan Tianqi Lithium Industries (002466: SHE), produces lithium from hard rock at the highest grade lithium mine in the world in Australia. It is widely believed that producing lithium from hard rock sources costs anywhere from $3,500 to $5,000 per tonne and producing lithium from brines is somewhat less at $2,000 to $3,000 per tonne. It’s important to note that lithium is also produced from clay and costs vary here as well, though are closer to brine production costs.
The supply side for lithium is set to get more crowded in the near term with RB Energy (RBI:TSXV, RBEIF: OTCBB) and Orocobre (ORL:TSX, ORE:ASX, OROLF:OTCBB) set to add 20,000 and 17,500 tpy at their full capacities. There will be a ramp up period towards full production in coming years, so these companies and near-term producers such as LAC can grow and scale alongside the market. To be fair, there also appears to be slight excess capacity amongst existing producers, but as demand ramps up, this slack should be accounted for rather quickly.
Pricing for lithium carbonate has remained resilient in the face of falling prices of a plethora of other commodities. This is no doubt due to the explosive growth in the battery business, and why many in the junior developer space are focused on producing battery grade Li2CO3 or lithium hydroxide (LiOH).
As no two lithium plays are identical, making an “apples-to-apples” comparison difficult, to say the least. Inviting the wrath of a junior company CEO who doesn’t like the way his company is portrayed is a terrible use of my time. That said, it behooves the average investor to have a strong grasp of the lithium space from producer to developer and that is what this section of the report is designed to provide.
Shown below from the LAC Feasibility Study is a comparison of LAC and a combination of lithium producers and developers involved in brines:
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One of the most important data points is the magnesium level in a brine deposit as this impurity can negatively affect overall economics. More magnesium means more reagents (typically lime) are needed, driving up costs. Shown below is an overview of lithium concentration (higher is better) and magnesium to lithium ratio (lower is better).
With respect to size and grade of select brine deposits, the chart below provides an idea of how all companies compare to one another:
And finally, a comparison of lithium developers (or recent producers) broken down by brines and hard rock/clay. It is important to dig into the data as each company may make different assumptions about various data points, affecting overall project economics. For example, two projects which assume different discount rates for their NPV will show different results. Similarly, two companies may assume a different long-term LCE price which can alter economics and make misleading comparisons.
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Strengths – Lithium overall demand is growing well above global GDP growth rates; Insider ownership in LAC is substantial with Geologic Resource Partners owning 26% of the company; Strong relationship with Argentinean officials; Off take potential with Symatec; POSCO’s new production methodology could allow for even lower costs; As LAC will produce potash, the risks of relying on a single commodity for revenue and cash flow are mitigated.
Weaknesses – EVs may not become commercially viable as quickly as forecast; Argentinean exchange rate or political situation could become unpredictable; Exactly how much dilution will be taken to finance the project to production?
Opportunities – EVs and energy storage exceeding growth estimates; LAC is substantially de-risked, so the ability to integrate into existing supply chains is amplified versus its competitors; Should uncertainty around a state policy in Chile for lithium mining continue, this could open opportunities in other countries such as Argentina.
Threats – A sustained fall in either lithium or potash pricing could hurt the economics of the project. Should production from Cauchari Olaroz be delayed, opportunities to gain market share could be lost; The possibility that the POSCO lithium production methodology does not work at scale could hurt LAC’s position in the industry and delay a production decision.
Lithium is one in a long list of resources that, while critical for certain applications, is not in short supply. The market structure is an oligopoly with slight excess capacity.
Doesn’t sound like a great investment proposition, does it? That said, any rational person can look at forecast supply and demand data for lithium and see a looming inflection point, offering an opportunity for patient investors. I have long been a proponent of finding investment opportunities in Energy Metals which hold some sort of a sustainable disruptive or competitive advantage over their peers. This could take many forms, be it a strategic partner or new technology which can lower production costs and allow a company to compete with entrenched producers operating at scale.
LAC is one such example with a newly strengthened balance sheet, new management team, a large lithium/potash deposit, solid economics on the back of a BFS, and well-known partners in the lithium industry.
It is this last point which helps differentiate LAC from its peers – its partners, specifically POSCO. Though there is much yet to be learned about POSCO’s lithium production technology, this represents a perfect example of a disruptive opportunity in the lithium space. If the technology works as advertised by minimizing the environmental footprint through smaller evaporation ponds and shortens the time necessary to produce lithium from brine to hours from months, major changes could be in for the lithium industry and LAC stands to benefit. Aside from this, the capital expenditure figure for LAC could be substantially reduced.
The title of this report indicated that lithium was at an inflection point and it appears that overall demand could begin to outstrip supply as soon as 2016. Should this be so, near-term production stories that are de-risked and can be in production by 2016 or soon after offer the optimal way to play lithium, in my opinion. LAC is the current best example of this thesis.
LAC Major Shareholders
W. Thoman Hodgson, MBA – Executive Chairman
o Mr. Hodgson is an independent financial consultant and Chairman of Greenbrook Capital Partners Inc.
o Mr. Hodgson has previously served as a consultant and advisor to the Chairman of Magna International, one of the world’s largest automotive suppliers
o Also previously served as a consultant to, and as President and CEO of, Magna Entertainment Corp, and as a Director of MI Developments Inc.
John Kanellitsas, MBA - CEO
o Mr. Kanellitsas is the Chief Operating Officer of Geologic Resource Partners, an investment manager focusing on global mining and metals resource industries
o John has worked in financial markets and asset management for over two decades with positions at prominent investment banks and money management firms in San Francisco, New York and Sun Valley, ID. He has been a director of numerous private and public companies and currently also serves as a director of Kiska Metals Corporation
o He has a Masters of Business Administration from University of California at Los Angeles and a BS degree in Mechanical Engineering from Michigan State University
Franco Mignacco, MBA – Vice Chairman
o Mr. Mignacco is the President of Minera Exar, Lithium Americas’ operating subsidiary in Argentina. He is responsible for overseeing the development of the Cauchari-Olaroz lithium project, as well as for overseeing relations with local governments and communities.
Michael Cosic, MBA, CFA – Chief Financial Officer
o Mr. Cosic is a business executive with 20 years of experience in a variety of industries.
o Prior to joining Lithium Americas, Mr. Cosic was Vice President Business Development at ADP Inc.
o He has considerable experience in evaluating, structuring, managing and executing global transactions.
Board of Directors
Gary Cohn, MBA, JD
o Mr. Cohn is the Vice-President, Mergers and Acquisitions of Magna International Inc.
o He has been employed by Magna or one of its subsidiaries for a total of 17 years.
o He holds a Bachelor of Mathematics degree from the University of Waterloo, an MBA from York University and a Juris Doctor degree from Osgoode Hall Law School.
Gerry Feldman, CPA, CA
o Mr. Feldman is the Vice President of Corporate Development and Chief Financial Officer of Pinetree Capital Ltd.
o Before joining Pinetree, Mr. Feldman was a senior Partner at a number of accounting firms where he provided services to clients, specializing in audits for public companies, securities dealers and mutual fund dealers.
o He is a Chartered Accountant with 30 years of mergers and acquisitions, corporate finance, and financial experience and sits on a number of public company boards.
Constantine Karyannopoulos, BASc, MASc, PEng
o Chairman of Molycorp.Inc
o Former President, CEO, and Director of Neo Material Technologies Inc
o Mr.Karayannopoulos is a Director of the Canada China Business Council and a member of the Board of Advisors to the Department of Chemical Engineering and Applied Chemistry at the University of Toronto.
Myron Manternach, MBA
o Mr. Manternach is the President of Castle Grove Capital, a consulting firm that provides strategic and financial advice to investment firms and portfolio companies.
o He is a consultant to the investment committee of Geologic Resource Partners, an investment fund specializing in the mining and metals sector, and he leads the fund’s initiatives in distressed investing, restructurings and structured financings.
o He has 20 years of experience in managing investments, with significant experience in the natural resources and technology sectors, and currently serves on the board of directors of Wellgreen Platinum Ltd. and Rathdowney Resources Ltd.
o Mr. Marchi is the Principal of the Marchi Group, a global strategic consultancy based in Geneva, Switzerland.
o He is active in global affairs, with a professional career that spans both the private and public sectors.
o He was a Federal Member of Canadian Parliament for 15 years, during which he served as a Cabinet Minister in Citizenship and Immigration, Environment, and International Trade.
o After leaving the political arena, Mr. Marchi was appointed as Canadian Ambassador to the World Trade Organization and the UN Agencies, in Geneva, where he served for 5 years, including being elected Chairman of the World Trade Organization General Council.
o Mr. Pirie is an accomplished mining executive with over 29 years of experience in exploration and production companies.
o He was previously the President and Chief Executive Officer of Breakwater Resources Ltd. and prior to that, he held a series of progressively more senior positions during a distinguished 20 year career at Placer Dome Inc., including Chief Financial Officer, and President and Chief Executive Officer of Placer Dome Canada, and Executive Vice President of Placer Dome Inc.
o Mr. Pirie also has extensive board of director experience having served on a number of boards, including the Mining Association of Canada.
Lithium Conversion Ratios
Lithium ETF and 1 year Performance and Constituents
Constituents Page 2:
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