| We are at the start of the electric vehicle era, and investors are increasingly attracted to battery minerals. Listed on the Singapore Exchange is Alliance Mineral Assets which is about to merge with JV partner, Tawana Resources. The pro-forma market capitalisation of about A$450m will place the merged group -- which owns the Bald Hill lithium project in Western Australia -- on the radar of many mid-cap institutional investors. In fact, they have started to come. See: ALLIANCE MINERAL ASSETS: 2 funds become substantial shareholders this month Here, we excerpt from interesting interviews that The Lithim Spot has just conducted with Guy Bourassa, President and CEO, Nemaska Lithium; Richard Seville, MD and CEO, Orocobre Limited; and Ken Brinsden, MD and CEO, Pilbara Minerals. For the full interviews, see links at the bottom. |
Q: The big elephant in the room is the Morgan Stanley downgrade of the lithium sector. What are your thoughts on this and what are they missing?
Nemaska: I believe that Morgan Stanley is relatively new to the lithium space and the authors of this report lacked the depth of knowledge of the lithium sector and what it takes to bring new lithium salts production on line, be it a hard rock mine or a brine project.
It is challenging to bring new production on line and to immediately achieve nameplate capacity. One has to look no further then Orocobre, which is the newest producer, who just reduced their yearly production guidance to 12,000 tonnes of carbonate from their nameplate of 17,000 tonnes, after more that 3 years of ramp-up.
Also achieving the customer quality specification for batteries and qualifying as a new supplier in this market is extremely challenging.
This is why at Nemaska Lithium we built the Phase 1 Plant to allow us to run a small scale semi-commercial operations to work out the technical issues in advance of building the full scale commercial facility. Also it allows us to send product samples to customers thereby starting the qualification process as new lithium salts provider.
Another fallacy in this report is the assumption that both Albermarle and SQM will immediately ramp their production to 500,000 tonnes by 2021 and flood the market with product and crash the price of lithium carbonate to US$7000/tonne.
Both companies have said they intend to increase production in step with the market and have no intention of flooding the market with lithium salts. In addition, both companies have indicated that increasing production will require massive investment and is technically very challenging.
Remember also that SQM is leasing their property and will be renegotiating their mining lease with Corfo in 2030. SQM has also clearly mentioned lately that they do not intend to increase their production to more than 100,000 tonnes from their actual 48,000 capacity.
The risk of investing large sums on money into this project for expansion has to be carefully weighed by SQM.
Finally, roughly half the world's production has cash costs around $6,000/tonne so selling it at US$7,000/tonne as suggested by Morgan Stanley will not allow for much margin and potentially take some production off line all together.
@ Bald Hill lithium project of Alliance Mineral Assets and Tawana Resources. Both companies are set to merge in Sept 2018, forming an entity with a pro-forma market cap of about A$450 m. Photo: Company
Q: What is the biggest hurdle you have to overcome when meeting with new investors interested in the lithium space, but perhaps not as well informed?
Nemaska: The lithium space does require that the investor do some reading and become educated in the space. Not all lithium companies are equal and investors should do their own due diligence to cut through the noise to decipher who has quality assets, experienced management teams and the ability to create shareholder value.
Orocobre: That the supply side of lithium is capital intensive, technically complicated, and most importantly it takes time for production to get off the ground. Even the lithium majors have had challenges in ramping up.
In the most recent quarter, major Chinese producers Tianqi and Ganfeng prices were reportedly stable at H2 levels with no un-committed volume available as both experienced an imbalance between spodumene concentrate supply and lithium salt production due to longer than expected maintenance or completion and commissioning of expansion volume.
Similarly, another significant conversion plant Yahua conceded it had temporarily ceased production to improve plant equipment (Benchmark Minerals, April 2018). Meanwhile, no information could be sourced to confirm that Shandong Ruifu's product line installed to convert direct shipping ore was completed on time.
Further investment is required in downstream conversion capacity to address the existing bottleneck for spodumene conversion. In response, many of the existing conversion plant operators announced expansions of varying scales and timeframes.
Historically, actual effective conversion capacity has been significantly less than claimed nameplate capacity.
Therefore, the actual conversion capacity realised in the short to medium term will lie somewhere between the existing capacity and claimed new nameplate capacity. We continue to see significant headwinds for new production and supply.
Pilbara: It started with how real the overall demand equation was, then moved to the validity of the respective supply bases and can't the brines just swamp supply? (still some laggards thinking along these lines).
Overall, I think the weight of numbers has started to win the day and in our view will continue to do so for a couple of years to come. Demand growth (especially from China) will continue to underwrite the broad story with global car makers capitulating and rolling out more EV product.
Energy storage should also not be underestimated. Li Ion batteries become the lowest cost rechargable batteries and as such become a bit subset of supply to this market.
For more, see Lithium CEO Roundtable I and Lithium CEO Roundtable II.
