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Although
lithium equities have not elevated moods much recently, House Mountain
Partners founder Chris Berry makes his case that over the longer term the
element will be in such strong demand for the electric vehicle (EV)
revolution that investors will no longer be able to ignore explorers and
emerging producers. The crucial growth driver is the nascent lithium-ion
battery industry that will be vital to management and allocation of energy
sources ranging from nuclear and coal to wind and solar. In this exclusive Energy
Report interview, Chris has identified several publicly traded lithium
juniors priced low enough to reward patient investors with big multiples on
investment.
Companies Mentioned: BHP Billiton Ltd. - FMC Lithium Corporation
- Galaxy Resources Ltd. - Lithium One
Inc. - Rio Tinto - Rock Tech
Lithium Inc. - Rockwood Holdings, Inc. - Sociedad
Química y Minera de Chile S.A. - Talison Lithium Ltd. - Western
Lithium USA Corp.
The Energy Report: I'm looking at an unweighted basket of
lithium stocks and it's down about 17% since July 22. During the past six
months, these stocks have underperformed the S&P 500 by about 30%. Chris,
what does this tell you? Is it heralding a slowdown in manufacturing and the
economy in general? Or, are lithium equities a screaming buy here?
Chris Berry: I think it tells us both. If you look at recent gross
domestic product (GDP) data in the United States or, most recently in
Germany, many Western economies are in stall speed with second quarter GDP
numbers barely coming in above zero. So, the world economy is at a little bit
of a crossroads—the West is slowing down and relying on the East as the
sole engine of economic growth. There is a risk of a
double-dip recession here in the United States, but I think it remains to be
seen if that will happen. Regarding whether lithium equities are a
"screaming buy," I think there are some lithium stocks that are
undervalued at their current levels, but it's not safe to assume that all
lithium stocks are a buy right now.
There are two reasons you've seen lithium equities get pushed down in the
last couple of months. The first has to do directly with uncertainty in
Western economies. Second is the fact that there are likely too many junior
exploration companies in the lithium space based on current and near-term
supply and demand. So based on these two factors, everyone is just getting
pounded. It's a flight to quality, and it's a reaction of fear in terms of
where to put your money, which is why you've seen gold hit historic highs.
Lithium, itself, is an industrial metal, whether or not it's used for
polishing glass, as a grease, or its most popular current-day use—in
batteries. The long-term potential of lithium rests with growth and innovation
in the automotive industry. Electric vehicles are a key growth driver for lithium demand in the future. So
electrification in the automotive industry, energy storage and consumer
electronics demand are all themes to focus on when developing an opinion on
long-term lithium demand. There is a great deal of debate in scientific
circles regarding what the optimal battery chemistry is or will be. Lithium
will play a central role here, but there are other choices, as well, clouding
the end game.
TER: Will some look back at this as a missed opportunity in lithium
equities?
CB: I think so as long as you are selective. One of the main themes
that we look at in our research at House Mountain is how GDP growth is
directly related to access to cheap and reliable energy. How that energy is
generated is a question with a number of different
answers. If you think about the potential that lithium has in terms of energy
storage and generation, it will no doubt play a role in the world's future
energy mix. Hydrocarbons will always be with us thanks to their availability
and energy density, but lithium will, in my opinion, play a
central role in transportation. This isn't something that is going to all
shake itself out next week or next year. We are looking at a process that is
slowly evolving.
TER: At the end of June, Rockwood
Holdings, Inc. (NYSE:ROC), a $4 billion market-cap company announced a
20% lithium price increase and the stock really responded quite well until
things began to turn down. What is driving that kind of pricing power?
CB: You are absolutely right about Rockwood. I believe a week or two
after the Rockwood announcement FMC Lithium, a division of FMC Lithium
Corporation (NYSE:FMC) raised prices as well. The prices of select
lithium end products were increased by 20–25%. What I read into this
was the fact that there is a substantial amount of raw materials inflation
globally and these companies are passing higher costs on to their customers.
It remains to be seen whether these higher prices stick.
TER: Right now, given the current economic environment, what is the
bull case for lithium?
CB: I'm not sure the bull case is particularly compelling, again,
because you're looking at a predominantly industrial mineral facing a slowing
global economy; granted some economies are expanding faster than others. I
think the lithium industry draws an interesting parallel with the rare earth
industry. You are at the beginning stages of a huge shake out in the rare
earth space where many of the junior explorers there won't achieve production
as the small size of the market cannot support the 200-plus companies
involved in rare earth exploration. With lithium, you've got four primary
global producers and a couple near-term producers in a market that today has
too many participants given the current global lithium demand picture.
But I do think over the coming years as this emerging growth phenomenon in
countries like China, Brazil and India continues and other economies recover,
the case for lithium is strong. Lithium can play a huge role, whether or not
it's in electricity generation, electricity storage, or the transportation
sector. I don't want to underestimate how critical a viable transportation
sector is to any economy. If you think about supply chains and what they mean
to a given economy in terms of the movement of raw materials, the
transportation sector is absolutely critical to maintaining or sustaining any
increased quality of life.
TER: I know you travel to Latin America at times. Exports from Chile
and Argentina are up over last year, and the lithium industry looks very
positive down there. What's going on in South America? Is this a resource
issue, a policy issue or both?
CB: I think it's a mixture of both. When you talk about Chile and
Argentina, they are two of the top lithium producers and exporters in the
world. Most, if not all, of the producers are brines and they are solidly
economic. You have healthy demand for lithium and lithium carbonate coming
from Asia so that's, in my opinion at least, why you are seeing these export
numbers increase from Chile and Argentina. Both of these countries have
mining as a central driver of their economic growth. Various provinces in
both countries have been mining metals—lithium, gold, copper, you name
it—for hundreds of years. They also understand how important mining is
to local economies. I know, for example, in some provinces in Argentina, the
mining industry accounts for up to 70% of the local economy. So it's an
overwhelming engine of growth. That's not lost on local and national
politicians in these countries. These countries are stable geopolitical
jurisdictions with a set rule of law and very clear royalty schemes. That is
what attracts foreign direct investment and creates jobs.
TER: I don't know if you go to Australia, but it's friendly to mining
as well, isn't it?
CB: I was actually in Australia visiting Talison
Lithium Ltd.'s (TSX:TLH) Greenbushes project in April. Australia is an
extremely mining friendly country. What is interesting there, however, is
that the last few heads of state have tried to push ahead with a carbon tax.
It's no surprise that the proposed higher taxes have been viewed unfavorably
by large producers with operations there—Rio Tinto
(NYSE:RIO; ASX:RIO) and BHP Billiton
Ltd. (NYSE:BHP; OTCPK:BHPLF) for example. It remains to be seen what will
come of this legislation, but it is really one of the only potential
stumbling blocks I see in an otherwise solid mining jurisdiction.
TER: Speaking of Talison, its chart is an inverse or mirror image
pattern to Sociedad
Química y Minera de Chile S.A. (NYSE:SQM; SSX:SQM-B, SQM-A). I was
comparing them because they are the two largest producers of lithium. Over
the past six months, Sociedad Química is up 10%, and Talison is down
41%. Talison is the world's largest producer, and it's set to double
production by 2013 with expansion of its Greenbushes project you just spoke
about. Why has it underperformed so badly?
CB: I have followed Talison for a long time and visiting the site
provided a lot of new perspective. This is a company
that has been producing high-grade lithium for 25 years. It has a very strong
technical team that knows exactly what it is doing. It is mining an asset
that is actually the highest grade hard rock lithium in the world. I don't know
if that is necessarily lost on the market, but in the mining industry one of
the themes in terms of evaluating a project is that grade is king. If that's
the case, then Talison is a runaway winner. You have an asset with a
substantial mine life with an incredibly high grade in a safe geopolitical
jurisdiction that supplies China with upwards of 75% of that country's
lithium needs. Think about the growth taking place in China in cleantech
research and the battery manufacturing business. The overwhelming majority of
the lithium used here comes from Talison.
Talison is the only pure-play lithium producer in the world. So comparing it
to a company like FMC or Sociedad Química or Rockwood is not exactly
fair because those are chemical companies that produce fertilizers and other
chemicals aside from lithium.
TER: At the risk of comparing apples and oranges once again, Sociedad
Química is a brine producer of lithium. Talison is a hard rock
producer. Which method do you prefer?
CB: On a cost per-ton basis and on a
head-to-head evaluation, the brines are cheaper. But it can take 18 months to
extract and evaporate the brine and produce lithium carbonate, whereas with
hard rock you can do it much faster. How Talison competes with brine
producers is interesting. In many cases, it can out-compete brine producers
because it is producing such high-grade product. Even though mining may be
more expensive for Talison compared to a brine
producer, its higher grade allows it to capture a higher margin for the end
product that it sells.
TER: Chris, what other companies are you talking to investors about?
CB: One, in particular, that we are focusing on right now is Lithium One
Inc. (TSX.V:LI). This is a company that has two
assets—a brine asset in Argentina, which is its centerpiece project,
and a hard rock pegmatite property in the James Bay region of Quebec. The
company is planning on producing lithium carbonate and potash from the
Argentinean property named Sal de Vida. In the lithium space, I like to see
this because if you can produce a byproduct profitably, that is going to
lower your overall cost of production. Additionally, you have very strong
management in Paul Matysek and Patrick Highsmith.
TER: Do you give Lithium One an advantage because it produces from
both hard rock and brine?
CB: The company isn't yet producing from either, but plans on
production from the brines first. I suppose there is an advantage in having a diversity of supply, but the real advantage will be that
it will be predominantly producing lithium from the brine along with potash
and lowering overall cost of production. So that is the advantage. This asset
borders a property from which FMC is now producing and has substantial grades
of both lithium and potash.
Near-term catalysts for this company are a preliminary economic assessment in
Q311 and a prefeasibility study in the middle of
2012. We are looking for positive catalysts over the next 6–12 months
here.
One of the other things we really like about Lithium One is the fact that it
has done strategic joint ventures for each of its assets. For the Sal de Vida
property, it has partnered with a Korean consortium of three different
companies—LG International Corp., Korea Resource Corporation (KORES)
and GS Caltex Corp. The consortium will fund the project to feasibility in
exchange for up to a 30% ownership of the property. The key benefit for the
consortium is to lock up a secure supply of raw material. For Lithium One,
the company is carried to feasibility. It is important to consider how a
company is going to ultimately start generating cash. Is it going to continue
to dilute through share issuance to get there? In my opinion, Lithium One has
really executed a masterstroke in negotiating a
partnership with this Korean consortium.
On its James Bay asset in Quebec, Lithium One has done the same thing with Galaxy
Resources Ltd. (ASX:GXY), which is a company that just started producing
lithium in Australia on its own. Galaxy can earn up to 70% of the James Bay
property by completing a definitive feasibility study by the end of 2012. So
Galaxy can ensure security of supply and Lithium One is carried to definitive
feasibility on the project.
Another interesting company is Western
Lithium USA Corp. (TSX:WLC; OTCQX:WLCDF). It's a little bit of a hybrid
as it's not a traditional brine or hard rock play. This is a very large clay
asset in Nevada called Kings Valley. Western Lithium recently updated its NI
43-101 resource estimate, which I think was received positively as the
tonnage and grade of the deposit increased, which helps the already good economics
of the project. When you talk about lithium, one of the keys is security of
supply. When the electric vehicle revolution really takes hold, the idea of
having a ready domestic supply of the key asset
lithium carbonate is of paramount importance. I'm currently reading a book
titled "Bottled Lightning: Superbatteries, Electric Cars, and the New
Lithium Economy" by Seth Fletcher. In the book, the "story" of
Western Lithium is told and WLC CEO Jay Chemelauskas is featured prominently.
The book is an interesting read on the history of lithium's role in
electrification and more importantly, it's future.
TER: What about earlier stage plays?
CB: We have talked about Rock Tech
Lithium Inc. (TSX.V:RCK; OTCPK:RCKTF; Fkft:RJIA) before. This is a very
early-stage play. It's not quite as far along as Lithium One or certainly not
as far as Talison. Rock Tech is a hard rock explorer
and it has several assets in Ontario and Quebec. The primary property is the
Georgia Lake lithium deposit about 200 km. north of Thunder Bay, Ontario. It
has a historic resource, and it will be updating and releasing information on
that before the end of the year. So we will get an idea of the tonnage and
grade of its Georgia Lake asset. It also has an asset in Quebec that borders
Lithium One's hard rock deposit. You can take a look at the tonnage and grade
specifics for Lithium One at James Bay and infer what Rock Tech might have if
the geology underlying the deposits is consistent and continuous.
TER: Will that upcoming resource estimate be an NI 43-101? What has
been the historic estimate?
CB: It will be a qualified NI 43-101 resource estimate. The historic
estimate at its Georgia Lake prospect is 9.8 million tons of lithium oxide at
a grade of 1.18%. Rock Tech is conducting bulk sampling, and has produced
very high-quality lithium carbonate from one of the bulk samples. So the
metallurgy there is very close to being understood, and that is a huge key
with a lot of these lithium plays.
TER: Do you expect Rock Tech's NI 43-101 to be a market-moving event?
CB: I think it will be significant because what you are looking at now
is historic or backwards information. So you have an idea of what this
company has and what the size and grade are, but you don't really know. So an
NI 43-101 is certainly a significant step in Rock Tech's future. I don't know
if I would necessarily say it is market-moving. One of the keys with juniors,
whether you are dealing with lithium or gold, is patience. A lot of times
patience can wear thin, but I think with a company like Rock Tech, patience
may ultimately be rewarded despite the fact that the lithium space has too
many participants
TER: Thank you very much, Chris. It has been a pleasure.
CB: I think a lot of what you guys do at Streetwise. Thank you.
With a lifelong interest in geopolitics and the financial issues that
emerge from these relationships, Chris Berry founded House Mountain Partners in 2010. House Mountain firmly
believes that the emerging quality-of-life cycle emanating from Asia is a
"game-changer" that will affect everyone throughout the world for
decades. With that in mind, the firm focuses on the intersection of three
topics: 1) The evolving geopolitical relationship between emerging and
developed economies; 2) The commodity space; and 3) Junior mining and
resource stocks are positioned to benefit from this phenomenon. Chris spent
14 years working across various roles in sales and brokerage on Wall Street
before founding House Mountain Partners. He holds an MBA in finance with an
international focus from Fordham University and a BA in international studies
from the Virginia Military Institute. Chris is also a member of the Canadian
American Business Council. He invites readers to receive a complimentary
subscription to Morning Notes, which provides analyses of emerging geopolitical,
technological and economic trends. Go to www.discoveryinvesting.com.
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Energy Report
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