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Lithium continues to be in high demand as battery
application growth outpaces the economy. In this exclusive interview with The
Energy Report, Jonathan Lee of Byron Capital calls on his engineering and
manufacturing background to explain the factors shaping the evolution of this
growing market. He also brings us up to date on several promising companies
blazing trails in the lithium industry.
Companies Mentioned: FMC Lithium Corporation - GS
Yuasa Corp. - Lithium Americas Corp. - Lithium One
Inc.- Orocobre Limited -
Rockwood Holdings, Inc. - Rodinia Lithium Inc.- Sociedad Química y Minera de Chile S.A. - Talison Lithium Ltd.-
Toyota Tsusho Group - Western Lithium USA Corp.
The Energy Report: Thank you for joining us this
afternoon, Jonathan. You have a technical background in engineering and
manufacturing in addition to your experience as an analyst. This gives you a
unique perspective in evaluating investment opportunities. What do you look
for specifically in a lithium company?
Jonathan Lee: Numerous factors. Our strategy is to find low-cost
producers within a sector. Then from a capital cost side, it's always more
beneficial to have a lower capital cost to get a better return on equity and
make the project more feasible. We like to have low capital expenditures and
operating expenditures. Beyond that, it really comes down to valuing the
company and trying to make sure that the equity is purchased at the right
price. The two major factors that contribute to a better return on equity are
good assets and low costs.
TER: Are you looking across the broad spectrum of levels of
development, from prospectors to companies that are already producers? Or do
you narrow it down to more advanced companies?
JL: We look at everything from exploration to producing companies.
When we look at producing companies, a lot of times there is less
technological risk or execution risk involved. At the earlier stage, there's
a lot more risk entailed in proving out the deposit, proving up a resource
and gathering more metallurgical information, etc. Earlier-stage companies
usually are valued less and have the potential of higher returns but also entail
more risk.
TER: Lithium has been a hot topic in the past several years. For those
readers who are not all that familiar with it, can you give us a little
background on the metal, its uses and what people should be looking at when
considering lithium investments?
JL: Lithium is a metal that's used in a slew of different products.
Batteries are a big percentage of it, roughly 25%-30% of production. Glass
and ceramics are also a big usage because it lowers the heating temperature,
which saves energy. It's also used in lubricants and castings. A variety of
products utilize the element, but these end users make up the majority.
TER: Is battery usage growing faster than other applications?
JL: Yes. Although penetration into automobiles is not great as of yet,
there is significant growth in consumer applications for lithium-ion
batteries, and you're seeing that growth year over year. We think that's
going to continue to grow as things get switched over from, say, nickel-metal
hydride rechargeable batteries to lithium-ion batteries in consumer
electronics.
TER: With all the market turmoil that we've had here since you last
spoke with us back in April,
can you bring us up to date on what's been happening in the battery materials
industry in the past six months? Have there been any major changes?
JL: There are only four major lithium producers. Chemetall
and FMC Lithium Corporation (FMC:NYSE) publicly stated in July that they
were raising their prices, partly because of increased demand. That
definitely helped out along with rising raw materials prices. Soda ash
(sodium carbonate) has increased dramatically, thereby increasing the cost to
produce lithium carbonate. Because demand is still strong, they've been able
to raise prices and pass on those extra costs to customers. If you look at
companies like Talison Lithium Ltd. (TLH:TSX), which we currently cover and
have a Buy recommendation on—it is also selling at capacity. You're
likely to see FMC increase its capacity by 30% next year. So the overall
strength of the market is definitely there in the short term. We believe
producing companies, such as Talison, will be able
to take advantage of that market demand.
TER: Has anything happened recently on the technical front to affect
the lithium market in either a positive or negative way?
JL: As kind of a leading indicator of where the market is going, you
can look at the amount of money that a company is going to spend on new
lithium-ion plants. GS Yuasa Corp. (TYO:6674) is increasing the capacity of its
plant. It's spending roughly $300M on that plant. When it's up and running in
2014, that will be a significant buyer of lithium for batteries. Panasonic,
although it's scrapping its plant in Japan, is also expanding in China. More
and more battery producers are increasing capacity, and that's a clear signal
of where we think the market is going.
TER: A number of companies are mining lithium deposits, mainly in
South America, but also in Canada. Do you foresee a supply glut in the market?
JL: Most of the mining companies could come into production within the
next year. Demand should increase in step with supply. Talison
is increasing its production as is FMC. The markets have a pretty good way of
clearing out producers that aren't able to compete. That is why locating
potential low-cost producers is part of our investment strategy. Just like
any other market or mining sector, not all exploration juniors make it to
production. We try to find those companies that will be in the lower quartile
of relative production costs.
TER: You mentioned that a couple of the major producers raised prices.
Is lithium mainly a negotiated or supplier price-based market rather than one
driven by investment demand?
JL: Yes, it's mainly supplier-price based. It's sold over the counter,
and we doubt there is going to be any type of LME (London Metal Exchange).
It's not going to be an exchange-traded material because customers have
specific criteria for batteries on the chemical side as well as the physical
side. A lot of the juniors that we cover are working with trading or
industrial companies or even an end user like the Argonne National
Laboratory, which has an agreement with Western Lithium USA Corp.
(WLC:TSX; WLCDF:OTCQX). Determining the physical and
chemical characteristics of lithium products will be based on customers'
needs. Because each customer has different needs, we think that it will
remain a negotiated market, and people will pay different prices for
different chemical and physical characteristics.
TER: Back in April, you told us about the four major companies that
dominate the market, which are Sociedad Química
y Minera de Chile S.A. (SQM:NYSE; SQM-B:SSX; SQM-A) a
Chilean company; FMC Lithium Corp.; Chemetall, a
unit of Rockwood Holdings, Inc. (ROC:NYSE);
and Talison. What are the prospects for smaller
companies now entering the market?
JL: Recently, demand has been strong and the majors are expanding. But
we believe there will be space for companies to enter the market because the
four majors will, at some point, max out on capacity. We think there is space
for some of the juniors. In the short or medium term, you may see companies
that have strategic investors who may pay up for the security of having that
supply in an offtake agreement. If one of those
strategic investors makes a more substantial equity investment in the near
future, we think that shows that the customers are more worried about the
security of supply rather than price. And that could bode well for some of
these juniors.
TER: You've done some research reports recently on Talison
Lithium, Lithium One Inc. (LI:TSX.V) and also
Western Lithium. Of course, Talison is one of the
majors. What can you tell us about Lithium One and Western Lithium, which are
not in that category?
JL: Lithium One is a junior brine exploration company in Argentina. It
just released its preliminary economic assessment (PEA), which showed
positive economics. It showed it could be a low-cost producer of lithium as
well as potash. Its estimated production includes a substantial amount of
potash, which, on the byproduct credit basis, significantly reduces the cost
of lithium production. It's similar to the model that SQM uses in Chile,
where it has potassium and lithium co-products that make for positive
economics. We think it's definitely tangible given that its salar looks very much like FMC's salar.
On Western Lithium's front, it signed up with the Argonne National Laboratory
to collaborate and work on creating better lithium products. Because lithium
is a non-commodity with respect to its chemical and physical characteristics,
having that knowledge of what its customers want is a significant turn of
events.
TER: How close are these companies to production?
JL: Most of them are at least a few years away from production. I
guess the closest one out of the brine projects would potentially be Orocobre Ltd. (ORL:TSX;
ORE:ASX). It's in negotiations with Toyota Tsusho Group (TYHOF:OTCPK) to finalize
its offtake and strategic investment. Even after
that is done, you still have to construct the mine, pump brine into the ponds
and evaporate it for at least a year. So you are looking at a timeframe of at
least two to three years to production. I think it would be one of the
earliest companies to come to production. Most of them are fairly far off.
TER: What kind of capital costs are associated
with putting these operations into production?
JL: It really depends on the size, but a lot of their economic
assessments have come in roughly between $200-$360M,
ranging in size from 15,000-25,000 tons. And those estimates seem
fairly reasonable. Financing is going to be one of the risks for companies
getting projects up and running. Mining is a capital-intensive business.
TER: Are there any other lithium development names that you think are
worth considering at this point?
JL: The other two names that we cover are Lithium Americas Corp. (LAC:TSX; LHMAF:OTCQX) and Rodinia Lithium Inc. (RM:TSX.V;
RDNAF:OTCQX). Lithium Americas has a strong management team with
a property adjacent to Orocobre with very similar
brine chemistry, and it already has strategic partners in Magna International
Inc. and the Mitsubishi Corporation. Rodinia has a
brine project in Argentina, which is highly prospective. It should have its
PEA released within this quarter. That should bode well for it and prove up
its economics as well.
TER: How would you summarize your reading on the lithium business at
this point?
JL: I think the lithium business is strong. I'm seeing strong growth
in the near term. With the consumption of lithium in consumer batteries,
you'll see substantial growth, especially with the implementation of
transportation vehicles. Companies are committing hundreds of millions of
dollars in capital to build these plants. We think that's a leading indicator
of where demand is heading.
TER: As far as you are aware, is anyone developing any competing
technology?
JL: No. When you look at where lithium is on the periodic table, it's
on the top left, so it's the cathode of choice because of its energy density.
TER: It looks like lithium is here to stay for the foreseeable future.
JL: We believe so as well.
TER: Very good. We appreciate the update and your current thoughts.
Thanks for talking with us today.
JL: Thank you.
Jonathan Lee is
a battery materials and technologies analyst with Byron Capital Markets in
Toronto. As a member of Byron's research department, Lee's primary focus is
on the battery materials sectors, which includes lithium, vanadium and
cobalt.
The
Energy Report
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