The Energy Report: Are existing and projected supplies of
lithium sufficient, given the building of the Tesla Motors Inc. (TSLA:NASDAQ)
Gigafactory and the other battery manufacturing facilities that have been
announced?
Paul Renken: Production capacity will be more than adequate for the
factories for one to two years, but we do have concern about the actual
availability of the lithium to put into these batteries as the market gets
going.
A few press releases were published recently concerning growth or projected growth
in lithium battery demand because of the rapid fall of photovoltaic (PV)
costs. PV growth will increase demand for wall-mounted power cells for
residential and commercial use, particularly in more developed economies like
Japan, Germany and Scandinavia. If that happens, we'll need these factories
for sure, and more still because we think commercial viability and consumer
acceptance is going to pick up rapidly.
TER: Do domestic juniors have an advantage over imported materials
based on their logistics and regulations?
PR: It comes down to who can deliver into the supply chains. From
mine production, to battery fabrication, to the end manufacturer and
distributor of the power cells, the closer you can be to the various
components of the overall storable power module in lithium batteries, the
greater your advantage.
There are going to be some regulatory hurdles to overcome where countries
will be protecting their resources. We already see that in places like
Argentina and Bolivia on brine-based lithium projects. So those will always
be a concern, but as a general matter, the closer the mine is to the battery
fabricator, the better.
TER: Should investors be concerned about the difference between
lithium carbonate and lithium hydroxide or brine and hard rock?
PR: In those two compounds, the chemical plant will ultimately be
configured according to the end need from the actual battery utilizer. The
producer will supply a lithium-bearing concentrate one way or the other and it
will then go to this chemical plant, which will convert that into the
battery-grade carbonate or battery-grade hydroxide.
Right now hydroxide is the more valuable of the two compounds, but that
doesn't necessarily mean it will stay that way. There isn't yet a standard as
to what the overall chemistry of these batteries will be. There are at least
four different chemistries within lithium storage batteries that are vying
for consumer acceptance at commercial scale.
As far as whether it should be brine or hard rock, both types of lithium
deposits have their benefits and their drawbacks. It's going to come down to
who can provide it, or the economics for each situation. The investor will
have to judge those circumstances as they develop.
TER: Is success for these companies more dependent on the overall
market or on their ability to secure end users and meet specific needs? Will
the rising tide raise all boats?
PR: Achieving commercial scale in the storage battery market as a
sector will be the tide that raises all boats. We don't have that commercial
scale yet in the lithium battery storage market. The chemical side of the
business for things like greases has a steady, though rather unexciting,
growth. The ability to deliver into that growth is more than adequate at this
point.
The battery side of the lithium story is the one that can be well beyond
what is currently available in the marketplace. It is going to be very
important to see how individual companies can market themselves, both to find
their end users and to meet their specific production needs and financing. So
when you can see, for instance, a deposit that is close either to current
battery manufacturers or to current auto production, that would automatically
give some advantages to a company, especially if the deposit is large enough.
TER: What junior companies are you following in lithium now? How
are they positioning themselves?
PR: We follow Nemaska Lithium Inc. (NMX:TSX.V; NMKEF:OTCQX) fairly
closely because it is the most viable in that part of Quebec after the
bankruptcy of RB Energy Inc. (RBI:TSX). Nemaska is now getting the financing
commitment secured for its plant on the St. Lawrence Seaway. Financing is a
hurdle of about CA$25 million that I think the company is looking forward to
clearing in coming weeks and months. It recently received the Canadian patent
on a hydrolysis process and has already shown that it can directly produce a
lithium hydroxide, so Nemaska Lithium plans to go that route at this time.
We also follow a private company by the name of European Lithium Ltd. that
has a rather nice spodumene deposit in southern Austria. That story should be
quite good for European auto manufacturers or battery manufacturers producing
batteries for the residential and commercial market. We're also looking at an
Australian company, Lithium Australia NL (LIT:ASX), which is trying to
convert lithium micas into a commercially extractable starting product for
lithium as well.
And we follow two others, both clay-style deposits. One's called Western
Lithium USA Corp. (WLC:TSX; WLCDF:OTCQX). It's fairly close to the
Gigafactory in Nevada. It has been working quite hard to commercialize the
extraction of lithium from clay. The other one is Bacanora
Minerals Ltd. (BCN:TSX.V). It has a sizeable lithium clay deposit in
northern Mexico. It has a really nice-size deposit and it should have a
logistical advantage to deliver to battery manufacturers for the Mexican
automobile assembly plants. Bacanora Minerals also has a non-binding memorandum
of understanding with Tesla for future offtakes. So we'll see whether that
comes to fruition.
We also follow Orocobre Ltd. (ORL:TSX; ORE:ASX). The one thing we watch
closely about Orocobre is the speed of its ramp-up to production. It appears
it's about three months behind schedule as far as the production of saleable
product is concerned. The company is dealing with extraction issues in the
plant, and it has forecast that it should make breakeven production levels by
February of next year.
TER: The biggest news in the junior uranium space is the deal
between Fission
Uranium Corp. (FCU:TSX) and Denison
Mines Corp. (DML:TSX; DNN:NYSE.MKT) that the Fission shareholders
quashed. Where does that leave Fission Uranium strategically?
PR: It leaves Fission Uranium essentially back to the position it
was in before the Denison Mines deal, and that is with probably the
highest-grade unmined uranium deposit in the world that isn't controlled by a
major uranium producer. I'm not sure that Fission Uranium is really concerned
about that one way or the other.
The uranium market is having some constructive news and price response in
yellowcake since the beginning of the year. China's president, Xi Jinping,
announced that China would end up with a one-third portion of the new Hinkley
Point nuclear power plant in the U.K., and that's a $20 billion investment.
That kind of news certainly is supportive to the outlook for uranium and the
future for nuclear power. I believe we also had a second plant in Japan go
into warm-up mode just recently. Those kinds of things are putting some
breath back into the market for uranium.
TER: What would you expect from Denison Mines? Another offer,
another deal?
PR: I would expect Denison Mines to keep a close eye on it and see
how the market proceeds. It is limited as to the time that it has to let go
by before it can make another formalized bid. We'll see what develops. In the
meantime, it gives other firms that might want to get a high-grade deposit
for the long term a chance to look at Fission Uranium. Just keep an eye on
that space.
TER: Do you know of any other suitors for Fission? Any scuttlebutt?
PR: We haven't had any rumors that would suggest who it might be
one way or the other, but my feeling is that someone like AREVA SA
(AREVA:EPA), which was burned rather badly on an acquisition about 10
years ago, was getting some decent-size deposits under its belt and might
want in because it has significant current exposure to a more risky political
jurisdiction. AREVA might want to take a run at it.
TER: What about the rest of the junior uranium market? How does it
look as far as getting into production with the most economic project by the
time prices turn up again?
PR: One to follow on the exploration front is NexGen
Energy Ltd. (NXE:TSX.V; NXGEF:OTCQX). It's important for a couple of
reasons. First, it's high grade; second, it's on the same structural trend as
Fission Uranium's deposit at Patterson Lake, and it's likely both of their resources
are part of the same system because they're occupying the same structures and
stratigraphic sequence. NexGen Energy is just off to the northeast of
Fission's Patterson Lake deposits. The bigger the total resource gets in
those two deposits, the more likely there's going to be a plant built in the
vicinity to treat those ores to concentrates rather than send them some
distance off to the eastern side of the region, where the existing plants
are.
Another one I'd like to mention is the merger between Uranium
Resources Inc. (URRE:NASDAQ), and Anatolia
Energy Corp. (AEK:ASX). That has everything to do with the deposit called
Temrezli in Turkey, a nice in-situ leach situation that Uranium Resources
gets a piece of. Another one we watch is Berkeley
Energy Ltd. (BKY:ASX; BKY:AIM). It has the Salamanca uranium deposit in
Spain, which ought to be a nice, low-cost, open-pit operation.
TER: Now that Berkeley Energy has secured all the major permits it
requires in the Salamanca project, what do you anticipate its strategy will
be?
PR: We had Berkeley Energy in to visit with us recently, and its
managers made it quite clear that they intended to be producers on this
project.
TER: Is that a good move?
PR: I think it's just fine. It would be the primary uranium
producer coming on in the near term for the European market and with France
next door to Spain, that's the obvious place where that yellowcake would end
up going, I think.
TER: You mentioned that NexGen's resource was on the same trend as
Fission's. Are both companies following a similar strategy?
PR: Right now, both Fission's and NexGen's strategies are the same,
essentially to further define more resources to determine the scale of
mineralization on the properties. So beyond that, I think the managements are
holding their cards close to the chest. Anything else is just pure
speculation.
TER: To close, how would you advise investors going into each of
those markets—lithium and uranium?
PR: Both of these commodities are relative bright spots in an
otherwise poor commodity demand environment for natural resources. Their
fundamentals are much more favorable than other materials, at least that we
can see in the near term. My advice to investors is that there's no reason to
pay for uncertainty, which means that your same investor dollar is going to
buy projects at very low prices that are much further along the development
curve for both permitting and finance. So why not buy when things are quite
inexpensive as far as risk is concerned? That's what the institutional money
is looking to do. That's what the private equity boys are looking to do—use
their cash to buy quality things on the cheap. Also, concentrate on those
deposits that are definitely going to be high-grade and in the very lowest
ends of the cost curves of whatever the ultimate longer-term pricing outlook
is. No reason to chase after companies that are showing average grades that
don't impress.
TER: Paul, thank you very much for your thoughts today.
PR: You're more than welcome.
Paul Renken has a broad range of experience in various
aspects of the mining and minerals business. He began his career as a
geologist for Canadian junior resource companies in the Western United
States. Owning a stake in a private consulting firm as vice president of
exploration, Renken searched for various base metals, precious metals and
industrial minerals. In the U.K., he worked in the equity market media
outlets of Digitallook and Hemscott before joining VSA Capital Ltd. as mining
analyst in 2006.
