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House Mountain Partners Founder Chris
Berry says Asia's need for strategic resources could push the cost of energy
to the breaking point, and more efficient electricity storage to power
vehicles is critical. High-capacity batteries depend on several metals,
including lithium. In this exclusive interview with The Energy Report, ,
Chris shares some of his favorite lithium companies and why he sees dramatic
upside potential in each one.
The Energy Report: You propose that development of lithium-ion
batteries for electric vehicles (EVs) will drive increasing demand for
lithium. But even assuming these new batteries, ultimately, have storage
capacity of three, four or five times that of conventional nickel-metal
hydride batteries (NiMH), they still have to be charged with power that comes
from a source like coal, hydro, solar, wind, nuclear or whatever. My question
is how do EVs alleviate the drain on resources? What's the benefit?
Chris Berry: You know that's a great question because it's one that a
lot of people struggle with, me included. People say that with electric
vehicles you're just trading dependence on oil for a dependence on coal or
other dirty fuels to power your car. I don't see one form of energy winning
over all others.
I think coal and nuclear will probably lead the way in powering electric
vehicles and providing electricity in the coming decades. But there's
definitely going to be a role for renewables, such as solar, to play in
places like Phoenix, Arizona and hydropower in the northwestern United
States, for example. One thing to remember is that, as the rise of the middle
class in Asia continues, there certainly will be increased auto demand coming
out of these countries, which means increased fossil fuel demand. This gets
us back to your question, the net benefit of using EVs is resource
sustainability and finding the right balance of baseload power sources. You
can charge a battery from many different power sources; and, as battery
technology continues to advance, so too will the power sources. But there
likely won't be a singular winner.
TER: Does your investment theory assume that higher oil prices will
spur development of lithium-ion (Li-Ion) battery technology?
CB: I think that's one of the keys but I'm not sure what the tipping
point is; for instance, I don't know if it's $150 or $200/barrel. Higher oil
prices are already filtering down to higher gasoline prices at the pump. As
gas prices continue to rise, people start getting a little antsy and that
filters up to politicians who can spur research and development (R&D)
through increased funding on the Federal level. I just hope it's not a matter
of too little too late, as development of Li-Ion battery technology is a
global competition involving multiple countries throughout the world.
TER: What's being done now to advance lithium-ion battery technology?
CB: There's a global competition unfolding right now to own the
next-generation battery technology. Four countries are the real players here.
South Korea and Japan are producing Li-Ion batteries currently, while the
United States and China are playing catch-up. The competition is focused on
finding a battery chemistry around which you can build an entire industry. If
you own the intellectual property, you can own the supply chain, which
creates manufacturing jobs—something we've lost in this country over
the past decades.
Currently, China is investing more in battery technology than any
country—to the tune of hundreds of millions of dollars—even more
if you consider its entire cleantech spending budget. In 2010, China invested
$34 billion in cleantech research of which battery technology is a part. In
the mid-1980s, the country created what it called the "863 Program," which still exists
today under the Five-Year Plans it uses as a guide for economic policy. The
12th Five-Year Plan, by the way, which was just released is thought to be the
"greenest" in China's history. That could say something about
Chinese leadership's priorities. The 863 Program has a mandate to develop
high-tech and cleantech industries; so, if you want to know what China is
spending R&D dollars on and where it is focusing, looking at this data is
a good start.
In the U.S., President Obama helped spur development of lithium-ion battery
technology with the American Reinvestment and Recovery Act of 2009. To
establish a battery-manufacturing base, $2.4 billion in grants was earmarked.
The Argonne National Laboratory is also at the forefront of the research to
find that next-generation breakthrough. Billions of dollars in grants have
also gone to the private sector in the U.S. I've called this a 'Manhattan
Project' or 'Cold War' because, really, we are trying to outspend and
out-innovate foreign competitors to own this intellectual property. That's
the name of the game going forward.
TER: As an investor, do you have a preferred type of lithium ore? Hard
rock, brine or clay? Which is best?
CB: I'm not sure if one is better than the others; I think each
deposit has its own pluses and minuses. Typically, brines are the cheapest
from a cost-per-ton standpoint but it can take up to
18 months to produce the lithium. On the other hand, hard rock producers can
adjust to a spike in lithium demand more quickly because they can increase
the rate at which they mine the ore. But they have a higher—arguably
the highest—production cost among any of these ore sources. Clay is
right in the middle.
TER: Which lithium producers do you prefer?
CB: The four major lithium producers are working with the highest
grade of known resources currently. On the hard rock side, Talison Lithium Ltd. (TSX:TLH) has its
Greenbushes operation near Perth, Australia. It has 3.5%–4.5% lithium
oxide, which is extremely high for hard rock deposits and is, in fact, the
highest-grade lithium produced in the world today. That gives the company a
distinct production economics advantage. Talison is an interesting story
because it's the only pure-play lithium producer listed on an exchange
globally. It came public through a reverse takeover of a small junior called
Salares Lithium in Chile. As I mentioned, Talison is producing the
highest-grade lithium in the world and because of that, it is supplying 75%
of China's lithium needs—nobody else comes close.
On the brine side, the same can be said with Sociedad Quimica y Minera de Chile SA (NYSE:SQM;
SN:SQM) in Chile. It produces lithium from the Salar de Atacama, an extremely
high-grade brine lake. I know it can be controversial, but I prefer hard rock
production due to the ability to scale to both size and demand more quickly.
TER: Talison's market cap is just under $500 million. That really
sounds low considering it's the only public pure-play lithium company. From
what I understand, it supplies one-third of the world's current lithium
market. So what am I missing here, Chris?
CB: It's still a new story, relatively unknown. It has been public
only for five or six months now, and I think the market may not understand
the pure-play aspect of this company, which is extremely powerful. The other
three major lithium producers globally are SQM, FMC Lithium Corporation (NYSE:FMC) and
a specialty company Chemetall (Pty) Ltd., which is a division of Rockwood Holdings, Inc. (NYSE:ROC). All
three of these companies trade on the New York Stock Exchange between roughly
$50 and $80 per share but are known for the specialty chemical aspects of
their businesses. SQM is a great example. It is a huge potash producer with
lithium produced as a byproduct. Lithium accounts for just 8% of SQM's total
yearly revenue and yet the company's one of the largest lithium producers in
the world, even though the company views it as a byproduct.
So, the point with Talison is that it's the only one that owns this pure-play
production space, has the highest-grade lithium in the world and is still in
its public company infancy. As Talison continues to increase capacity and
supply high-grade lithium to China (predominately), more and more people are
going to find out about this. There's also additional exploration upside at
the Salares 7 brines in Chile that it acquired in the reverse takeover of
Salares Lithium. I think the stock is really undervalued given the
stranglehold Talison has on the lithium space.
TER: Does Talison own its entire supply chain?
CB: Not currently. The company supplies two types of
concentrates—one is a technical grade and the other a chemical grade.
The technical grade is used in glass and ceramics, which account for 30% of
global lithium demand. The chemical grade is what TLH sends to China for
conversion into lithium carbonate for batteries. Talison has begun a scoping study to evaluate the possibility of building
its own lithium carbonate plant.
TER: How much can Talison increase margins by owning a lithium
carbonate processing plant?
CB: It's hard to say without knowing the capital costs. If the company
can build and operate the plant with expenses of less than $2,800/ton to
produce lithium carbonate (which sells on the open market for around
$5,000/ton now), it could see some really healthy margins.
TER: So, at this point, Talison is more of a growth story than a value
story?
CB: I think it's a growth story, but there is unrealized value here.
The fact that Talison's customers are dependent on it for the quality of
lithium the company produces, and also that Talison is not only selling 100%
of what it produces but working to double production capacity, should only
cement its place as a globally dominant lithium producer.
TER: I note that TLH has pulled back by almost one-third over the past
three months. Was there any particular tipping point, or was this a technical
issue? (Others also pulled back during that time.)
CB: With respect to Talison, I think it's likely a technical issue.
The lithium space, in general, has had a few hiccups lately. Some interesting
companies are still out there, however. One example is Western Lithium USA Corp. (TSX:WLC; OTCQX:WLCDF),
a lithium clay explorer based in Nevada. It has a very large resource called
Kings Valley in Nevada where it has produced battery-grade lithium in pilot
tests as recently as late last year. That provides a high degree of
confidence regarding any metallurgy issues.
The company is working on a prefeasibility study (PFS) this year and continuing
to drill and increase the size of the resource. The good thing about lithium
is that, unlike rare earths, the United States is not 100% dependent on
lithium imports. There's plenty of lithium out there in stable geopolitical
locales and Western Lithium's Nevada deposit is an example.
The questions are: What's the cost of production? What's the grade? Western
Lithium has said it will be able to produce at just under $2,000/ton, which
is slightly more expensive than the brines but a heck of a lot cheaper than
the hard rock guys. This company is planning to be in production by 2014.
It's doing all the right things to position itself to achieve this; so,
Western Lithium has a great chance.
Another interesting early stage play is Rock Tech Lithium, Inc. (TSX.V:RCK; OTCPK:RCKTF;
Fkft:RJIA), which is focused on hard rock lithium and rare
metal deposits in Canada. The company has a historical resource that it's
working to bring into NI 43-101 compliance by this summer. The location of
the deposits and a wealth of historic drill data are two reasons this stock
interests me. The whole lithium space has been under pressure recently as
have many lithium juniors, but I think it's been a market overreaction more
than anything specific.
One possible cause of the recent depressed stock prices could be that Galaxy Resources Ltd. (ASX:GXY) was
planning on doing a $250M IPO in Hong Kong to increase its footprint in the
lithium space but delayed it due to market conditions. I think that may have
hurt the price of many of the lithium juniors more than any other reason.
TER: Do you expect Galaxy to proceed with its IPO this year?
CB: My understanding is that the company shelved it because market
conditions weren't optimal. If things change, it may, but that's really a
question that company management would be better suited to answer. I know
Galaxy recently achieved production out of its Ravensthorpe deposit in
Western Australia, which is a positive sign; so, perhaps the IPO can wait, as
the company is now generating cash from the sale of its product. Galaxy also
has done a joint venture (JV) with Lithium One Inc. (TSX.V:LI), which is
another interesting company in that it has attracted the attention of not
only a lithium producer (Galaxy), but also Korea Resource Corporation
(KORES), GS Caltex Corp. and LG Chem Ltd. (KSE:051910; KSE:051915; OTC:LGCEY)—one
of the largest battery manufacturers in the world.
TER: Considering the mindset of North American investors, is there
something they're not seeing here? Because we're going to drive big vehicles,
so perhaps we don't see the potential in these EVs?
CB: That raises a good point. I think there are certain psychological
drawbacks to electric vehicles in this country today, and one of those is "range
anxiety." It's the underlying question, 'If I get a Nissan Leaf and the
battery dies after 75 miles, what do I do?' 'What do I do if I have to drive
300 miles?' That's why I think plug-in hybrids—those that have a small
gas tank and an electric battery—are going to be more popular in the
U.S., at least initially. I'm not sure if the size of the vehicle is as
important an issue as finding the right battery chemistry that discharges
more slowly and recharges more quickly than do current EV batteries.
TER: What about the concept of battery exchanges along the way where
you might drive 75–100 miles and exchange that battery for a charged
one?
CB: Absolutely. An Israeli company called Better Place is attempting
to address this issue. What you mentioned in your question is essentially
Founder Shai Agassi's business model. You drive and when the battery gets
close to running out, you go to a depot and exchange it for a new one.
Additionally, the company is working to set up a charging infrastructure and
make its battery-switching technology and charging stations standard across
different vehicle models.
You also raised an interesting point about infrastructure and
battery-charging infrastructure in this country. I think this whole EV
phenomenon is going to take place much faster in Asia, where the company's
building its infrastructure from the ground up. In the U.S., there's a
chicken and the egg problem. I'm generalizing here, but nobody wants to buy
an electric car until they know there are ample charging stations and better
battery chemistry in place. But governments and private industries aren't
likely to spend, time, money and other resources building charging stations
until they're confident there's enough EV demand out there. Ultimately, this
is a multidecade phenomenon. Infrastructure buildouts are happening in places
like Israel and Asia but, going forward, the real winners in this industry
will own the entire electric vehicle supply chain—from raw material
sourcing to battery manufacture to charging infrastructure. The race is on.
TER: Chris, I've enjoyed meeting you very much. This has been a
tremendous pleasure for me.
CB: Me, too. 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
13 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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DISCLOSURE:
1) Karen Roche of The Energy Report conducted this interview.
She personally and/or her family own shares of the following companies
mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of
The Energy Report: Strathmore Minerals and Mawson Resources.
3) Mickey Fulp: I personally own shares of the following companies
mentioned in this interview: Strathmore, Mawson and Uranium Energy. I
personally am paid by the following companies mentioned in this interview: Strathmore
Minerals and Mawson Resources.
The Energy
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