The Mining Report: You have said, "Electrification of
transport will not succeed unless the world has cheap, abundant,
longer-lasting batteries." What are the obstacles to obtaining such
batteries?
Simon Moores: There are a number. The first is the scaling of
battery supply. The megafactories will be needed to drive down costs
significantly. Tesla Motors Inc. (TSLA:NASDAQ), LG Chem Ltd. (051910:KSE;
LGCLF:OTCPK), Boston-Power Inc., Foxconn Technology Group and, most recently,
Chinese electric vehicle producer BYD (1211:HKSE) have all announced plans to
build them. Meanwhile majors like Samsung SDI have announced significant
expansions of existing operations. The battery industry is preparing for a
surge in demand and its next phase of growth.
But these megafactories will need assured quality raw materials, which is
the second obstacle. The third is the security of supply for raw materials.
This last obstacle is overlooked at the moment, as the battery industry is
taking it as a given they will have supply as needed. But when megafactories
come on line, demand will soar. Therefore, supply visibility all the way
upstream to the mine is crucial to their success. This is what Benchmark
specializes in.
TMR: How does the oil price collapse affect current and future
demand for battery power?
SM: This is the question everyone's asking. Without a doubt, a
halved oil price has a negative impact on those consumers who want electric
vehicles (EVs) in order to save money on gasoline. To be honest, though, the
success of Tesla raises the question of how many people are buying EVs for
economic reasons today.
Regardless of the short-term effect, I don't think the oil price collapse
will have a long-term impact. I see internal combustion engines and EVs as
fundamentally different technologies. Once EVs mature, they will be far more
efficient and software-driven than cars powered by internal combustion
engines. I actually believe that you will get to a stage where a remote
software upgrade will improve the cars' performance. You are already seeing
this with Tesla. Once you reach this stage, the vehicles will actually
improve over time—in essence, cars will no longer be a depreciating asset.
TMR: Would you say that Tesla has a fundamentally different target
audience than Toyota Motor Corp.'s (TM:NYSE) Prius?
SM: Definitely. The Prius was created and priced for the mass
market from day one. At the time "green" and "cool" did
not go hand in hand, so many early Prius owners had to live with an
eco-label. The car has since proven to be one of the most economical and best
overall models on the road. People now have forgotten about the fact that it
is a hybrid and it has been accepted in today's world.
Whereas the Prius took years to shake off the green label, Tesla has made
its cars desirable from day one on the basis of performance and design. Tesla
has made EVs desirable. The fact its electric is now secondary.
Tesla's Model S is a quality super car, rather than just a functional
vehicle. It has achieved something in EVs similar to the "Apple
effect" on consumer electronics. The biggest challenge is yet to come,
however, as Tesla now wants to shift this success to the mass market with its
Model III launch in 2017—a car that will be powered by Gigafactory batteries.
TMR: We've heard that Apple Inc. (AAPL:NASDAQ) is about to enter
the EV market. How important would that be?
SM: It hasn't actually announced anything yet. But the rumor that
Apple is getting into the self-driving EV space is supported by a lawsuit filed
by A123 Systems Inc. (AONE:NASDAQ), a U.S.-based lithium-ion battery
producer, which claims Apple is poaching its staff. As for the possible
importance, well, if you thought Tesla was a game-changer, then Apple is
another thing entirely.
I was at first surprised by the rumor, but it really makes sense. Apple
has $178 billion ($178B) in cash and nowhere to spend it. It has already
disrupted the consumer goods market, and now it needs another huge global
market ripe for disruption.
TMR: China intends to become the world's biggest EV market by 2016.
What are the long-term implications of this for battery-production growth?
SM: In short, we need more batteries. China's EV market has already
shown exponential growth. In January 2014, about 600 EVs were sold. In
December 2014, that number had risen to about 27,000, almost 30 times as
many.
It's too soon to say whether this is a trend, but it does show how hard it
is to forecast new markets and how they can creep up on you.
TMR: Is China's massive expansion of the EV market a top-down
directive, or is it market driven?
SM: A bit of both. It does come from the top, as China's urban
pollution is so bad that clean vehicles are essential. But the Chinese are
business savvy, and they're not going to waste a lot of money producing
vehicles without a return.
The electric bike market in China shows that it's a fundamentally
different market than anywhere in the world. The Chinese don't have to be
persuaded on switching gasoline for electric—they are far less in love with
cars than the West. It's more of a cost proposition.
TMR: What's the optimum price point for the widespread adoption of
electric vehicles? Is it $50,000, $40,000, $30,000? Lower?
SM: Mass-market EVs need a price that can more than compete against
gas powered vehicles. Tesla and General Motors Inc. (GM:NYSE) have both said
that they're aiming for a sub-$35,000 car in 2017 (in 2017 dollars). If they
can make EVs profitable at under $30,000, we could see a market shift, with
EVs becoming genuinely popular with consumers in all income levels.
The only way you can achieve this is by producing cars, batteries and raw
materials through economies of scale.
TMR: Since 2008, economic growth worldwide has hardly been robust.
Has this slowed the shift to EVs?
SM: It has because consumers haven't had the money to spend on
them, and they are at present deemed niche or luxury vehicles. For
manufacturers, they are more of a PR concept than an actual business
proposition.
A weak global economy has also meant that these auto manufacturers haven't
been willing to invest the money in R&D to really innovate their cars or
improve their batteries. Nissan Motor Co. Ltd.'s (NSANY:OTCPK;7201:TYO) Leaf
came out in 2010, and we haven't seen much from the traditional manufacturers
since.
This gave a window of opportunity for someone to steal the limelight.
Progress in EVs is now being led by a disruptor, Tesla, which designs and
sells EVs in a completely new way. That's the upside to a poor economic
situation.
TMR: The shift in the U.S. to more efficient, less-polluting cars
was driven by government mandates from Washington and from individual states,
California in particular. Could we see similar mandates with regards to EVs,
with U.S. governments requiring X percent of manufacturers' fleets to be
electric?
SM: Such mandates would obviously have a very positive medium-term
impact on the EV space because they would guarantee sales. Ultimately,
however, EV producers can't rely on governments. They need to build vehicles
that can compete in quality and price with the vehicles that the average
person buys.
TMR: The three metals key to increased battery production are
graphite, cobalt and lithium. How is each placed to meet increasing demand?
SM: I'll consider them individually and start with graphite. The
problem here is the ability to produce spherical graphite, which is used to
make the anode in the EV battery. Currently, 95+% of the world's spherical
graphite uncoated comes from China. There is no diversification in supply.
You can also use synthetic graphite in batteries, so you have a substitution
option here. At Benchmark we estimate that there is about a 50/50 split for
natural versus synthetic used in batteries.
Lithium is better placed as the battery market has been the number one
consumer for the last five years. But the volume of battery-grade lithium
isn't sufficient to supply the megafactories that are planned for the near
future. For example, lithium hydroxide, which is also used in batteries along
with the more familiar lithium carbonate, has been neglected and is likely to
see a squeeze in demand this year. In the long run, however, I expect, that
this capacity issue will be corrected.
Cobalt has an even bigger upstream problem than the first two, because 55%
of the world's cobalt now comes from the Democratic Republic of the Congo. In
the rest of the world, there's a selection of very small producers, and their
output is overwhelmingly a byproduct.
All three of these industries are structurally inflexible to any major
demand shocks. That is something buyers must be aware of.
TMR: We began by talking about cheap, abundant, longer-lasting
batteries. Now, even with megafactory economies of scale, wouldn't the huge
quantities of graphite, lithium and cobalt needed for them drive up prices of
both the metals and the batteries?
SM: Yes. If the megafactories come on stream in the next two years
with little change in the raw material supply, prices will rise and impact
the cost of the battery. Currently, the battery industry and the people who
supply the raw materials are not working together. There is a disconnect in
the supply chain.
Those who are planning these megafactories need to get visibility all the
way upstream to the mine. At the moment, they look only for the cathode and
anode materials, which they regard as raw materials but are really
semi-processed products.
TMR: You've argued that we have likely seen "peak graphite
supply" in China. Will this result in a race to new production outside
China?
SM: I think we're already seeing that from the juniors and from
some private companies. The world is too dependent on China for battery-grade
graphite and needs supply diversification if batteries are going to fulfill
the potential of being a new, major global industry.
TMR: How will this new boom in graphite compare to the boom of five
years ago?
SM: Back in 2010, the boom was all about the resource: the
location, its size and the size of the flakes. Now the industry has matured.
The juniors now know that success, in the main, requires three things. First,
they need a good-quality resource. Second, they need clear goals in sales,
marketing and processing. Third, they need a profitable selling price on a
par with the Chinese export price for graphite. Medium-flake graphite
exported from China sells now for about $1,000 per ton. Large-flake graphite
of 94–95% carbon sells for about $1,250 per ton. If the juniors can compete
with those prices or the prices of semi-processed products, such as spherical
graphite, they'll have a great chance of success.
TMR: Would you comment on the prospects of specific juniors with
regard to meeting the increasing demand for graphite?
SM: At Benchmark we don't endorse or invest in any junior stocks.
We view the industry from our independent perspective in relation to
predicting when new supply will be coming into the market. There have been a
number of recent news developments in this sector.
Many people have been talking about Syrah Resources
Ltd. (SYR:ASX) and its Balama project in Mozambique. The company signed
an 80,000 ton offtake deal with Chalieco, a subsidiary of Chinalco
(ACH:NYSE), to sell into the aluminum industry. This is a new market for
flake graphite that shows that China is looking to lock up foreign raw
material. The company also announced preliminary plans to establish two
spherical graphite plants in Africa and the U.S., which shows its intention
to position itself for supplying a surge in battery production.
In February 2015, Energizer Resources Inc. (EGZ:TSX.V; ENZR:OTCQX) released
its Bankable Feasibility Study (BFS) for its Molo flake graphite deposit in
Mozambique that it has been progressing for some time. The BFS outlines the
costs for the project and shows that the new generation of projects can
compete on cost with China.
Focus
Graphite Inc. (FMS:TSX.V; FCSMF:OTCQX; FKC:FSE), which has the Lac Knife
project in Quebec, has done much testing on coated spherical graphite. This
is an example of having a strategy beyond the resource and looking at serving
a market from the user perspective. It is also another company that is
looking to capitalize a battery sector that is evolving.
Northern
Graphite Corporation (NGC:TSX.V; NGPHF:OTCQX) is another one of only a
handful of companies that have created battery-grade spherical graphite
sourced from its Bissett Creek project in Canada. It is positioning itself to
serve this market, but also in its March 2 press release reminded the industry of its intention to
serve existing industrial sectors of refractories and expandable graphite.
Canada Carbon
Inc. (CCB:TSX.V) has three graphite projects in Quebec, including two
past-producing mines. The company has been doing work on the Miller project
and is going down the high-purity graphite route. Canada Carbon is finding a
niche in the graphite space and this gives it several options, such as
nuclear-grade graphite or other specialist markets.
From a fundraising perspective, Mason Graphite
Inc. (LLG:TSX.V; MGPHF:OTCQX), with its Lac Gueret project in Quebec, has
been active in a very tough market. I was in Vancouver in February, and the
consensus was that we could be in the worst slump of all time, certainly if
it continues for another 18 months. To raise money for a niche mineral in this
environment is an achievement.
Great
Lakes Graphite Inc. (GLK:TSX.V; GLKIF:OTCPK; 8GL:FSE) has been focusing
recently on launching Great Lakes Innovations, the company that is investing
in the restart of a micronization facility. The plant has a capacity to
produce 10,000 tonnes of product and gives the company value added
capabilities to go with its Lochaber project 30 kilometers from Ottawa.
Finally, from Graphite One Resources Inc. (GPH:TSX.V) the industry is
awaiting the release of its first preliminary economic assessment (PEA),
which is expected mid-2015 and will give a clear picture of how the company
can position itself in the growth markets. The company has also just updated
its resource estimate on the Graphite Creek project in Alaska in a build up
to the PEA announcement.
From the active producers' side, there is GK, Graphit Kropfmühl, which is
owned by AMG Mining AG, one of the world's major processors of graphite and
producers of specialist graphite products. The company recently sold a 30%
stake to private investors, and the impetus from this deal will push GK into
the new graphite markets.
At the end of 2014, U.S.-based Asbury Carbons Inc. (privately held)
officially opened its graphite and carbon plant in Europe. The plant in the
Netherlands is a major investment for the company as it extends its presence
for the first time outside of North America. This foothold in Europe will
mature in the next 18 months and will be one to watch.
Flinders
Resources Ltd. (FDR:TSX.V) is actually producing now from its Woxna
graphite mine in Sweden. It has a very different challenge to those not in
production and that is to actually sell product into the market, negotiate
contracts and find new customers. Flinders is Europe's first flake graphite
mine since the late 1990s and in essence doubles the continent's capacity to
around 20,000 tons per annum.
StratMin
Global Resources Plc (STGR:AIM) was the only other junior company that
graduated into production last year. The company is now selling flake
graphite to customers and in February sold +80 (large flake) and +50 (extra
large flake) to the global market.
Australia's Valence Industries Ltd. (VXL:ASX) has restarted the Uley
flake graphite plant and is now producing from stockpiles. The company
announced recently it has signed a number of contacts for a total of 8,000
tonnes. The product ranges from extra-large +35 mesh to fine powder of -300
mesh.
TMR: If you compare the graphite industry with the gold industry,
gold is pretty simple. Does the market understand the complexity of the
problems involved with graphite, the questions of flake type, flake size,
purity, type of product and the necessity of offtakes?
SM: Much of the market probably doesn't understand it yet. But the
more advanced and more experienced juniors do. Many of these companies have
spent the last three years working closely with end users to develop their
projects, and this close connection to the end market, especially with regard
to specialist graphite products, is critical. This is a make-or-break issue.
TMR: Tesla is committed to ethical cobalt sourcing, which would
rule out supply from the Congo. But the Congo, which currently supplies 55%
of world cobalt, is not included in the Dodd-Frank restrictions on critical
metals. So we can expect that country to continue to supply the battery
industry, yes?
SM: Correct. The Dodd-Frank legislation only applies to the U.S.,
and it only says that public companies have to report where they source
conflict minerals from, i.e., tin, tantalum, tungsten and gold. It is not a
trade ban. We really think cobalt wasn't listed because it would have caused
significant disruption to what is a niche but important market.
But with such a large proportion of supply coming from one country, and no
major secondary options on the same scale, the majority of the battery
industry has little choice but to use material sourced here, usually via the
refineries based in China.
TMR: What are the alternatives to Congo for cobalt?
SM: It's important to understand that 60% of the world's
cobalt-refining capacity is in China. There are environmental and supply
restrictions and problems all the way along the supply chain for cobalt
because it has been neglected for a generation, as have so many other
critical minerals. Now the upsurge in the battery market has forced the world
to confront these problems.
There aren't many cobalt companies out there. It's easier to find graphite
and lithium as they are not rare minerals, so there's more of these companies
listed. Cobalt, and certainly primary cobalt deposits, are much more
difficult to find.
TMR: Which juniors are poised to benefit from the rush to find
non-African supply?
SM: There are currently three companies based in North America: Global Cobalt
Corp. (GCO:TSX.V), Fortune Minerals Ltd. (FT:TSX) and Formation
Metals Inc. (FCO:TSX). All three are focusing on developing cobalt assets
but out of all three major battery raw materials to date, cobalt has been the
most overlooked.
But investors have an information problem. You can't get very reliable
data out of the Congo, and this makes it difficult to evaluate these projects
on an economic basis. That said, the fact that there are few options for new
sources plays strongly into the hands of those juniors developing projects on
a supply security basis for North America.
TMR: With regard to lithium, Tesla is in Nevada, and there's been an
assumption that it will look for suppliers as close as possible to its
Gigafactory. Is this a given?
SM: It's not, because the team at Tesla that's developing the
Gigafactory, especially on the raw-materials side, is savvy and very aware of
the fact that it's a game of economics. They will insist on getting from
suppliers the right quality of minerals, at the right volume, and at the
right price.
However, to get lithium sourced in Nevada for batteries made in Nevada
that then go into cars manufactured in California would be a mine-to-market,
made in the U.S.A. story that's very attractive to Tesla on a political and
public relations level.
TMR: Should Tesla decide to source lithium in Nevada, which
companies would benefit?
SM: Western Lithium USA Corp. (WLC:TSX; WLCDF:OTCQX) is the closest
source to the Gigafactory and is actually up and running, not yet with
lithium production but in hectorite clay, which is used in oil and gas
drilling. Western is seeking to develop its lithium production line and will
look at both the carbonate and hydroxide options as most exploration-stage
companies are now.
Currently, the only place in North America where lithium is produced is
Rockwood Lithium GmbH's Silver Peak site in Nevada. Next door to this is Pure Energy
Minerals Ltd. (PE:TSX.V), which is undertaking a detailed drilling
program of Clayton Valley.
Also located close to the Silver Peak facility is Ultra
Lithium Inc. (ULI:TSX.V), which is developing its South Big Smokey Valley
project 16 miles from Clayton Valley.
The battery megafactory trend and Tesla's Gigafactory will most definitely
be on all of these companies' radars and vice versa. But this is not
necessarily a question of proximity; more important is stable supply, at the
right specification, at the right price.
TMR: Which other lithium companies elsewhere in the world are
poised to benefit from the megafactories?
SM: Orocobre Ltd. (ORL:TSX; ORE:ASX) is the newest producer
in the space. The company commissioned its Olaroz facility in Argentina in
February and is the first brine junior to enter lithium production from the boom
that started in 2009.
It's now 2015, and only now are we seeing the first new tonnages coming
onto the market to challenge the established producers: Sociedad Química y
Minera de Chile S.A. (SQM:NYSE; SQM-B:SSX; SQM-A:SSX), FMC Lithium Corp.
(FMC:NYSE), Rockwood Lithium and Talison Lithium.
It has taken the company seven years to get from registration to
production. That itself should come as a warning to any new, major buyers of
these raw materials.
TMR: There is an enormous amount of lithium where Chile meets
Argentina, and there are quite a few juniors with brine projects there. Given
the estimates of how much lithium will be needed to supply the burgeoning
battery market, is this a rising tide that will lift all Andean boats?
SM: It should because this is the lowest-cost production area in
the world. But I think this is a bullish story for all lithium juniors
anywhere. Tesla's Gigafactory will be buying lithium hydroxide, but if it
came on stream today at capacity, there just wouldn't be enough.
And it's not just about getting the lithium onto the market, but
developing the technology and know-how to produce the battery-grade materials
at the right volumes. That's the challenge Orocobre faces and one for any new
producer looking to enter this ever changing market. This will challenge the
established producers as well, as they must increase capacity in line with
demand, and not overshoot, in order to keep the price healthy. They can't
invest too much too soon. It's all a question of timing and getting the
balance right.
TMR: What is your general advice for investors seeking to benefit
from the battery revolution?
SM: I can't give investment advice because I'm not qualified, and I
don't invest in any of these companies because it's against the policy for
any Benchmark employees to do so as an independent source of analysis in the
sector.
But I will say that investors in raw materials always tend to look
upstream at the minerals. They always speak of a gold story or a graphite
story, for example, with very little focus downstream at the sectors that are
buying these raw materials.
If investors looked more downstream and mapped out these growth sectors
and actual plant by plant expansions, that will give a very good indication
of whether a certain mineral or metal is the right one to invest in.
This industry is a medium- to long-term prospect. Any investor looking for
short-term returns from critical minerals and metals is playing a high-risk
strategy.
TMR: Simon, thank you for your time and your insights.
