The Energy Report: Jonathan, what is the condition of the
lithium space today?
Jonathan Lee: The lithium space today is an oligopoly; there are
only four major mines owned by four companies. Over the past three years, the
space has actually consolidated with the largest mine, Greenbushes, owned by
two companies through a joint venture agreement. From that perspective, price
increases have occurred over the past three years, just because of the
concentration of the mine operators.
TER: What are the greatest challenges for the space?
JL: The hardest challenge is that lithium is not really a mining
sector investment; it's a specialty chemicals investment. A lot of the products
that lithium miners or producers sell are specialty chemicals, and there is
somewhat of a competitive moat around these products because many are
specialized to the customer. Lithium is not a commoditized product. The
incumbents have both the premier assets globally in terms of low-cost
operation, and also a knowledge base of who the customers are, what they're
looking for and what specifications they require. Those are some of the
challenges faced by any new entrant to the space. From the investor perspective,
there are limited opportunities for pure play lithium exposure since three of
the four existing producers are part of larger conglomerates with other
business lines, Sichuan Tianqi Lithium Industries Ltd. (002466:SHE) being
the exception.
TER: What are the greatest opportunities here?
JL: While the premier assets are taken or being almost fully
utilized, demand is outstripping supply. The compound annual growth rate
(CAGR) for demand is over 10%, while the supply expansion from Chile is
limited in the near term because of permitting and lifetime production
quotas. Another factor limiting supply is the fact that FMC Lithium Corp.
(FMC:NYSE) continues to have technical problems expanding its production in
Argentina. Expansion potential in the short term is limited, while demand is
still growing at double digits. There is a dislocation, and that creates the
biggest opportunity today.
TER: Do the lithium producers have either the investment ability or
the resources to scale up to meet the demand?
JL: That's a good question. Their resources and reserves are
substantial enough for them to expand. However, there have been some limiting
factors in Chile. Sociedad Química y Minera de Chile S.A. (SQM:NYSE; SQM-B:SSX;
SQM-A:SSX) has been dealing with issues on the political front, as well
as its lifetime production quotas, which could be reached as early as 2021.
Production expansion would pull forward that quota data without negotiating
an extension of the production permit. So the company has halted on its
expansion plans.
Albemarle
Corp. (ALB:NYSE) has experienced delays in its expansion goals in Chile
as well. FMC has dealt with supply issues and production in Argentina over
the past four years. When you look at the whole scheme, the one producer that
expanded capacity has been the Greenbushes mine in Australia, which is a
joint venture between Sichuan Tianqi Lithium Industries and Albemarle. It has
been supplying the additional demand over the past three years. Additionally,
the lithium coming out of the Greenbushes has had annual price increases over
that same time.
TER: How is the lithium market responding to the construction of
the Tesla
Motors Inc. (TSLA:NASDAQ) Gigafactory and Powerwall?
JL: Tesla's developments are positive because they are an
additional source of demand for Tesla's lithium products. The announcement of
the Powerwall gives us confidence that, at $350 per kilowatt hour ($350/kWh)
demand will be there. Lithium production at the Gigafactory will now have two
avenues to be sold into; the electric vehicle market or the Powerwall energy
storage units. This gives us greater confidence that capacity utilization
will be full once the Gigafactory does get up into full production in 2017.
At $350/kWh, the price will bring in the economic buyer in certain areas,
as opposed to just the fashionable buyer. By that I mean it actually brings
in customers who could buy Powerwalls because it makes economic sense. This
customer set is a much larger consumer base.
TER: Are you anticipating a surge in demand for lithium as a result
of this?
JL: Yes. If you look at what the Gigafactory will be by 2020, I
believe it will have a 50-megawatt-hour (50MWh) capacity, and that will
require roughly 40 million tons (40 Mt) of lithium carbonate equivalent.
That's 20% of today's global lithium demand. This is just one of many battery
plants being built today. There will definitely be a surge in lithium demand.
That's why I'm pretty confident that double-digit CAGRs are on the pathway
for the next three to five years.
TER: Besides this surge, what other developments are having an
impact on lithium today?
JL: The other development is that lithium's use in the glass and
ceramics business, and in the construction business, has been growing at a
gross domestic product (GDP) growth rate. With some applications, lithium is
a better additive relative to sodium- and potassium-based greases and
lubricants. We are seeing a switch over to lithium because of the better
performance. But the real growth over the next 10 years is going to be demand
from lithium-ion batteries.
TER: Is the cost of manufacturing those batteries rising or
falling?
JL: It is definitely falling, and quickly. The fact that Tesla is
going to sell at $350/kWh, with the potential of the cost going down to
$200/kWh, is a huge and dramatic decrease from five years ago. Some companies
were producing batteries at anywhere from $800–1,000/kWh a few years ago.
This huge decline in manufacturing costs for batteries has correlated with
the decline in the cost of the batteries on a dollar-per-kilowatt-hour basis,
which then, in turn, allows for more economic applications.
TER: What does the falling cost of manufacturing mean for the
lithium producers?
JL: When we think about lower battery costs, and lower battery
prices, we get into more applications for the batteries. Once you get more
applications that are economical, you see the huge amount of energy storage
potential. The use of lithium-ion batteries becomes more prevalent. That
increases demand for lithium and is obviously beneficial for lithium
producers.
TER: Where are the most promising lithium deposits? What companies
are mining them?
JL: There are three major deposits globally, where the vast
majority of lithium is mined today. One is in Chile, at the Salar de Atacama,
where SQM and Albemarle produce lithium. The second is Salar del Hombre
Muerto in northwest Argentina, in the Lithium Triangle, and FMC produces
there. The third resource is the Greenbushes mine in western Australia.
Albemarle and Tianqi have a joint venture there, where they produce lithium
concentrate, a precursor to lithium chemicals.
TER: What are your thoughts on some of the near-term producers?
JL: The existing producers have the premier assets, and have
consolidated over the past three years on a very high EBITDA (earnings before
interest, taxes, depreciation and amortization) multiple relative to other
specialty chemicals business. We've seen that consolidation, but there
continues to be no pure way of playing the lithium theme inside the current
producers.
But some other companies have started production and built mines. Orocobre
Ltd. (ORL:TSX; ORE:ASX) has built a mine in Argentina, and is
commissioning its plant now. RB Energy
Inc. (RBI:TSX), formerly known as Canada Lithium, has built a mine in
Québec and is going through a restructuring and bankruptcy process. It will
come out of bankruptcy with a clean balance sheet, which may enable the
company to get back up and running. Those two major mines have been built
over the past five years.
Two projects in Argentina are permitted, and may find a way to get private
financing over the next year or so to get into production. But what we've
seen is that every new mine has encountered commissioning delays, and has
been overlevered in terms of the amount of debt taken on relative to cash
flow over the first couple years. This was seen at Galaxy
Resources Ltd. (GXY:ASX; GALXF:OTCMKTS) past lithium project and RB
Energy's Quebec lithium mine.
TER: What can you tell us about Galaxy?
JL: Galaxy Resources has been in the space for a number of years.
It was the first company to build a new lithium mine in Australia, and had
some problems with it. The company also had a conversion plant in China and
took on too much debt. Galaxy became overlevered. When the new management
team came in, it did a good job in terms of preventing a bankruptcy,
restructuring and selling some of the company's non-core assets to get a
better balance sheet. Management has turned Galaxy around, from a company
that was potentially going bankrupt, given its balance sheet, to a company
that is less levered and is looking at a potentially bright future, having
left a lot of legacy challenges behind. The team has done a great job in
selling assets and finding new joint venture partners for its Mt. Cattlin
mine. The company will look to develop the Sal de Vida site in a short time.
TER: What will happen with the Québec Lithium mine following the RB
Energy bankruptcy?
JL: There were two large issues with the Québec Lithium mine.
First, the project itself had a significant amount of debt on the balance
sheet, with senior loans or convertible notes and prepayments for offtakes.
RB was encumbered by those legacy liabilities. Second, the mine just wasn't
able to ramp up effectively. It was never able to produce the amount of
lithium it was expected to produce at the cost it was looking to produce it
at. With the bankruptcy proceedings, and going forward, the project can
possibly come out with a cleaner balance sheet. And while it may never
achieve the costs that it was expecting, RB may be able to ramp up the
project and produce at a margin without the encumbrance of the loans that
swallowed it whole.
TER: What's the significance of the Olaroz project for Orocobre?
JL: The opening of the Olaroz project has been a huge construction
success. It is behind schedule, but recently produced its first batches of
lithium carbonate. It will be interesting to see how it goes forward in terms
of ramping up to the 17,500 tons per annum nameplate capacity, which is
planned to be achieved by the end of 2015.
TER: Is the project meeting goals?
JL: Orocobre has had some delays in the ramp-up phase. It will be
interesting to see how it progresses over the next six months. As of Dec. 31,
2014, the joint venture that holds the Olaroz lithium project, which Orocobre
owns 72.7% of, had AU$247 million ($AU247M) in long-term borrowings and
AU$43M in current liabilities. On a corporate level, AU$55M was raised, so it
will also be interesting to see whether Orocobre can meet production and cost
goals to service its loans and borrowings over the next 12 to 18 months. If
the company can ramp up production quickly, that would alleviate some of the
potential short-term pressures with respect to the project loan obligations.
TER: What is the significance for Lithium Americas of its proposed
commercialization at the Cauchari-Olaroz project in joint venture with POSCO
(PKX:NYSE)?
JL: I think it's very significant, in that the partnership
encompasses a new processing technology. The fact that the POSCO
demonstration plant at Cauchari worked very quickly was encouraging. The
opening ceremony was in December 2014, and by the end of January the plant had
produced over 20 tons of lithium phosphate. The demo plant is smaller than a
commercial plant, but it's a significant size and shows that the technology
works on a fairly large-scale basis. The fact that the plant ramped up very
quickly, was running on a continuous basis, and produced a significant amount
of lithium phosphate very early on is a strong positive for Lithium Americas,
especially since some of the new mines that have opened in the past three
years have had issues with the startup phase.
TER: Overall, how are you advising investors to proceed in lithium
right now?
JL: It's very difficult to gain exposure through any of the
existing specialty producers of lithium. For example, with FMC, lithium is a
very small portion of its business. Albemarle's lithium operation is a very
small portion of its business. For the asset in Greenbushes, Tianqi Lithium
is listed on the Shenzhen Stock Exchange, and for U.S.-based investors,
sometimes it's difficult to invest on the Chinese exchanges.
The only way to get exposure to the lithium space going forward, and the
only investable ideas, are really with the emerging miners, whether they be
miners that have failed and restarted, like RB Energy with the Québec Lithium
mine, or new producers that are in the process of getting project financing,
like Galaxy or Lithium Americas. I believe that's where you have to invest to
gain exposure on the lithium side.
TER: Jonathan, thank you very much for your thoughts.
Jonathan Lee is the president of JGL Partners LLC, a
consulting firm based in New York that consults to investment firms and
corporate clients.
