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Howard Klein #02 - Lithium Gaining Traction in the US

September 21 2020, 11:13 GMT+01:00

You can also catch Klein's last interview with us about how lithium is mined in different parts of the world and who the key players are. Find it here.

Klein also penned an excellent article on our website covering hot topics like the lithium brine vs lithium hard rock debate. Check it out here.

This is a man who provides a really actionable analysis of the lithium market with technical detail. We were glad to get him back on the show to discuss the latest happenings in the space. The big focus today is on 'market sentiment'; it can make or break a company, and in recent years, sentiment around lithium as a whole has been negative courtesy of oversupply and consequent depressed prices. COVID-19 was another short-term kick in the teeth to the lithium demand story, with EV consumption taking a hit whilst global economies attempt to recover. However, on the supply side of things, a lack of investment into new lithium projects, combined with impaired lithium production across the globe, is emphasising the supply-demand deficit and heating things up nicely.

The long-term picture for lithium demand also looks very rosy, with EV penetration set to be 25% by 2030. On the subject of the main lithium players, the Q2/20 financial results came out a few weeks ago, and Klein was eager to deconstruct them into meaningful information for lithium investors. As just mentioned, capital for new lithium projects comes at a substantial premium, so Klein helped us understand the terms of some of the few recent financings to take place in the lithium sphere. We also cover lithium clays and DLE: direct lithium extraction. Could these new technologies also apply to brine extraction? Is lithium production about to get a whole lot more economic? Are lithium mining companies going to grow their margins

We Discuss:

  1. 3:34 - General Sentiments on Lithium: Does Anyone Care?
  2. 10:33 - Lithium Hydroxide Companies: Ignore the Rest?
  3. 18:13 - Getting Financed: Options for Lithium Companies
  4. 27:05 - The Mysteries of Lithium Clay: Which Companies Can Solve it?
  5. 32:51 - DLE: What is That?
  6. 38:35 - Navigating the Market as an Investor: What to Look for?

Matthew Gordon: I want to have a run through of this from an investor's perspective and help share some of the things which are happening out there. First of all, general sentiment: no one seems to care about Lithium still, do they?

Howard Klein: No, that's not fully accurate. For some reason, a bunch of Robin Hood traders seem to have cottoned on to at least one stock - Lithium Americas, through the Tesla enthusiasm. In the United States, people are starting to pay attention, maybe not in the UK or in Australia, by Elon Musk, Tesla stock has gone ballistic and he's been talking about Lithium and Nickel, both on Twitter and in his quarterly conference call. The fact that Tesla is doing so well demonstrates that his cars are selling well. Data points in China and Europe in terms of the sales have been pretty good in the last few months, July and August. The fact that he was profitable in Q2 compared to the rest of the auto sector, which was not the fact that he announced, the Austin Gigafactory, and I think Rodney may have mentioned he's planning to build the Semi there and the Cyber Truck - those are very big batteries. The sentiment toward Lithium is improving in the United States selectively, it's not reflected in most stocks yet.

The Q2 earnings came out of Albemarle live-in. Ganfeng’s were also out this week, actually. Ganfeng’s were more positive in their commentary than Albemarle and Livent talked about a relatively murky, no visibility, high inventories, et cetera. In fact, in Albemarle's case, they announced an idling of their North Carolina hydroxide plant for 4 months, as well as their silver peak. In my mind that is largely a tactical move by them ahead of their year-end contract negotiations with their buyers, because they had to make some price concessions on their Lithium hydroxide contracts last year, and going into next year, they don't want to have to do that.

The market's going to be tightening fairly soon. Morgan Stanley's China analyst is becoming, not yet in the market, but I'm watching this, Ganfeng I call the leading indicator. The people who are analysing Ganfeng at Morgan Stanley, and as I saw some notes from Diara overnight, Ganfeng was talking about Australia being an undersupply of Spodumene in 1 to 2 years. Ganfeng has 50,000 tons of hydroxide coming on stream later this year, their sales and market share are growing enormously in Korea and Japan. SQM is gaining market share in China, of a low-priced carbonate, a low-quality product, but Ganfeng is selling a higher-quality, higher-priced product to Western OEMs and Korea and Japan. If you're focused on that, which I am, I'm focused mostly on companies that can sell to Tesla, to Volkswagen outside of China, and how that's looking. Most of that is hydroxide, and the data points coming from Ganfeng are good. The note I think I just sent you, Morgan Stanley was talking about that inventories of Spodumene have been depleted from 5 months to 3.5 months just in July and August.

This message, hopefully in the ears of your listeners outside of China, will start to resonate. And this is corroborated by Rodneys’ research. He thinks hydroxide is going to turn a lot sooner. He's talking about the second half of next year, but the data points that these things could be brought forward. Again, this is battery-grade hydroxide, I'm not speaking about any other product. And that product is only about 60,000 tons of the 300,000-ton Lithium market, but it's the one that's growing the fastest. If you just look at the demand from Tesla for hydroxide toward Q4, 2021, if you look at all of their plants and their plans, they're going to consume as much hydroxide as is the current market alone.

Matthew Gordon: Hydroxide is the way forward. So, what happens to the rest of these Lithium companies?

Howard Klein: It's a tough question to answer. There are lots of Lithium companies, in my mind, hydroxide-focused companies are the ones that you should be focused on. There are only 3 battery-quality hydroxide producers: Albemarle, Livent, and Ganfeng. They're suppliers. I would throw Mineral Resources into that mix because Mineral Resources is a Spodumene supplier to Ganfeng and they're also partnered with Albemarle. Although they don't make hydroxide, they're correlated to hydroxide, plus it's a very well-managed company that has iron ore and mining services. So those four companies are well-positioned. They are at various valuations: Ganfeng is much more highly valued than Livent. I think Livent is actually well priced here for a hydroxide upturn, and the commentary that they had in their conference call was very positive. Outside of them, within the developing space, Lithium Americas has gone up a lot in value despite the fact that they've had relatively bad news.

Matthew Gordon: Are you saying we should, ignore all those other companies because there's no money to be made, or are you saying they all have some value, but not as valuable as the hydroxide producers?

Howard Klein: I would not say that the other companies have no value, but if you're an Argentine brine producer, and I know, I watch a lot of your videos and I raised money and advised a number of companies in Argentina, Chile. Lithium Power is a company that we still advise. They have the Maracunga asset in Chile, they're waiting for a deal with Codelco, and it's been taking a really long time. So, that's a good asset. The world will need more brine assets. The world will need more carbonate as well as we'll need more hydroxide. There's no question about that.

Which project? There are a lot of projects; picking the winners within the Argentine Brines and the Chilean Brines is a more challenging dynamic, but Millennial Lithium, who you've had on the program, we've done work for them. They are well-capitalised. They still have the cash in the bank. They can wait. Right? So, balance sheet matters. If you're an investor and you're worried about dilution. Neo Lithium has a lot of cash on the balance sheet. Those three: Lithium Power. Millennial and Neo Lithium are our three companies, which are good companies, good management, good projects, but waiting for how long? I don't know. The carbonate is going to take longer in my opinion. And while you are waiting for that, new things are happening: Direct Lithium Extraction is becoming interesting and people are thinking about, actually, those are the strategies of Millennial and with Lithium Power and Neo Lithium are still using conventional brine technology. There is a bit of a movement, like why are you still using that technology and not trying some of these other promising DLE technologies?

There's a whole host of risks connected to Brines in South America that make them more challenging. VW did a tour of the Atacama to see from a sustainability perspective if it's okay. They didn't say it's not okay, but they didn't say it's okay. They came out with a kind of muddled opinion like it is to be seen whether or not we're going to invest in South America.

But on the other hand, VW and BMW have outwardly said, we're partnering with Ganfeng and we understand getting Lithium from hard rock is sustainable and scalable. They're voting with their wallets and their verbiage that hard rock is where these Western OEMs are going. I don't see a quick turn. I could be wrong. Like I said at the end of last year in January: all the Argentina Lithium stocks soared. In January, February, it was kind of game on. If you're a contrarian, you could say, everyone, hates Argentina. Everyone hates Chile. As a trade, it may work, but the likelihood that you're going to see a strategic deal into those countries is lower than you're going to see in other assets, in other countries. And if it does happen in South America, it's most likely going to be Chinese. In my opinion,

Matthew Gordon: Brine is known for cheap. You're saying companies are now voting with their feet, in terms of this whole ESG component. That is all going to be a big component of funding decisions for Brines going forward.

Howard Klein: I'm not saying exactly what you said because it's to be seen whether or not anyone's going to pay up for sustainability. I'm not saying that VW has said I'm willing to pay more for sustainability. What I'm saying is that hard rock to hydroxide is cheaper. And there is one hydroxide. Brine to hydroxide is not cheaper. If they only want hydroxide, they don't want carbonate anymore, I’m talking about Western OEMs for their cars outside of China. Layer on sustainability factors like do they want to deal with geopolitical risks? Do they want to deal with indigenous people risks? Because it's not clear, how you're damaging or not damaging the Salar and the water. There's a lot of question marks about that, but if it was definitively cheaper then they'd probably look at it more seriously, but it's not cheaper. And the cheapness also ebbs and flows; there are currency considerations that are influencing, there are Royalty considerations. There are export tax considerations. Argentina is not in good financial shape. This is an export industry that they already put an export tax on, but because the peso has declined in value, they're getting less hard currency taxes from that export tax. The probability of raising in export tax in the Fernandez administration in Argentina is high. The predictability of the cost where the medium to the long-term basis that a BMW or a Tesla would want is very variable and unpredictable. There's a whole host of factors arguing against South American brine for Tesla, European, American cars that people are driving.

There's a definitive appreciation for hard rock, but these new DLE has suddenly become interesting, intriguing. Hasn't attracted a ton of capital yet, but it's being looked at

Matthew Gordon: Are those projects getting financed

Howard Klein: There probably are 20 that are mothballed, but there are another 20 that are real, and of that five or six of them have raised meaningful capital in recent times.

Matthew Gordon: Like who?

Howard Klein: Sigma Lithium in Brazil just raised USD$45M from Société Générale at a 5% interest rate, this is traditional project finance alone, and that's for a Spodumene-only project, not even making Lithium chemicals. Spodumene, everybody thinks is in massive oversupply and previous Spodumene debt funding that went to Altura and went to Pillsbury who were in the 12% to 15% interest rate category a few years ago. The Nordic bonds and American hedge funds financed with very expensive, mezzanine-like funding for Spodumene projects in a much hotter market. This is a much weaker market. And here you have Soc Gen, and this is very important as well: the Europeans are getting with the program that hard rock is sustainable. This was green financing. This money was investing in Lithium is green, right? And investing in Lithium hard rock is green. And so Soc Gen 5% interest rate is very low, very attractive. They required Sigma to put another USD$10M of equity underneath, which Sigma was able to raise at a premium to their last raise 2 years ago. They did it at USD$2.15 compared to USD$2 where they raised money a few years ago in a much hotter market.

Here's a Brazilian Spodumene asset, Brazil is not the greatest country risk, but it's a good project that's partnered with Mitsui, so they got that done. They've raised USD$55M just in the past 2 months, they're now kind of fully funded and ready to kind of go into construction. In an oversupplied market, a company getting funded, where Spodumene prices are like USD$400 and they're talking about producing at USD$200. So that's a good sign.

Pilbara, an already producing company, but they have significantly curtailed their production - very significantly. They had to raise equity because they were struggling to meet their interest payments. They were just about to have to start paying in principal on their Nordic bond, which was at 12% and they managed to get that completely refinanced at 5%. Again, in a terrible Spodumene price market. And that was led by BNP Paribas, again, sustainable finance. So that was a USD$100M refinance.

Further, Nemaska just announced they got a bid from Pallinghurst, a major private equity group, up to USD$600m in combination with the Quebec Investment arm, Investment Quebec. People were talking about, Nemaska is a basket case what's happening in Quebec? Forget about Quebec for the next 5 years, but again – hard-rock project, while Bucci, with the converter to hydroxide, has had an outcome.

Finally, we talked about an advisor and investor in Piedmont Lithium, since we last spoke, they raised USD$20M in straight equity; that's not a small amount of money in this market for advanced development. They raised a lot of it in their US listing on NASDAQ, which is the first time they actually did it there, as opposed to just raising the money from sophisticated institutions like Aus. Super and Fidelity, which also participated in that raise. That important actually, from a Piedmont perspective, Aus. Super is one of the biggest funds in Australia. Fidelity - obviously one of the biggest investors in the world - there's real institutional backing for a hard rock story in North America, similar to Nemaska. So hard rock has been financed.

There've been some DLE companies like Vulcan Energy raised AUD$4 or 5M at a reasonable valuation. $25 million. Lake Resources has managed to raise USD$3 to 4M. They are making progress. It's not real dollars. A private company, Lilac, that got a lot of press because Bill Gates Breakthrough Energy Ventures came into that. There's some interest in DLE, but not big dollars yet. The only big dollars that have been put into Brines has been Livent Refinancing. They are a producing company, a big 3 company. They were financing their expansion in Argentina with a short-term revolver, which made no sense. They were struggling with their covenant because they were in debt to EBITDA. They were couldn't draw on the loan anymore. They had to refinance about USD$250M They did do a USD$250M deal. The interest rate was 4% and 8%, but it was also convertible, I think at USD$8.37. That was also sustainable finance though. It was under the sustainability guidelines. The movement in sustainability to finance Lithium mining is an interesting development that's happened in the capital markets in the past few months.

Matthew Gordon: You're feeling quite positive about the way that these big funds are looking at Lithium again?

Howard Klein: I'm not feeling positive so much yet about the big funds. Hedge funds and mutual funds selectively, like I said, in Piedmont's case, these were existing shareholders who are making bags. They have endless amounts of money and they continue to support Piedmont, but you're not seeing like Livent has 17% short interest. Albemarle has an 11.5%. Lithium America, strangely, because I looked at this: only has about 2.5%. Lithium American is very much a retail stock, and that stock has had a very volatile Robin Hood-kind of trading. But if you look at the hedge funds on Wall Street, New York and elsewhere, they're still largely listening to what I believe is the wrong Morgan Stanley, kind of South American commodity narrative are looking at the short-term price, which has been going down, in fairness. Albemarle stocks ticked up a bit, but less than the broader market. I think a short squeeze is going to happen in Livent, in Albemarle in the next 3-6-months.

Matthew Gordon: How do they solve the problem technically? What's your view on both of those companies?

Howard Klein: I've represented both of those companies. I don't represent either of them now, but very familiar with them. There was a thought that Ganfeng being partnered with Lithium Americas in Argentina and also invested at the parent level at Lithium Americas, I went to Lithium Americas site visit when they announced their Pre-feasibility Study in 2018. And at that point, they were advertising how Ganfeng had tested their clay material and it looked like Ganfeng was going to be partnered with Lithium Americas. But then Trump's trade war last year and all things, China, Strategic Minerals, et cetera, made that kind of untenable. I think Ganfeng’s taste of clay with Lithium Americas, but then their realisation that they couldn't do a deal with the Americans attracted them to Bacanora. They did a deal with Bacanora and they got a very good valuation because their valuation is very low.

Ganfeng is the most astute dealmaker in this space, in my observation. They're also the greatest technical partner that you could have for a Lithium project. Clay is very difficult, I can't remember if I said this already earlier in this interview, but Elon Musk tweeted that Lithium is abundant, but making high-purity Lithium hydroxide from clay is a challenge, right? If anyone's going to crack that challenge, it's going to be Ganfeng first, in my opinion. If Ganfeng and Bacanora approve the process, then other investors will start to believe in, let's say the management of Lithium Americas, that they can pull off something like as well.

I have great respect for the management of Lithium Americas. Rene LeBlanc, Jon Evans – these guys are very well-skilled, but no one at that company has ever built a project or undertaken a project of the magnitude that they're contemplating with their Thacker Pass. At their draft EIS, they had some hearings, they're in this period where they're awaiting comments, they're trying to get permitted, but this is a very big project. Having represented that company for 7 years and just spoken to a lot of strategic investors, a lot of hedge funds, mutual funds and say, hey, come and invest in this. And they're like, wow, there's hard-rock, there's Brines. Clay is hard, it sounds good but there are lots of hard-rock stories out there right now that are less risky. Why wouldn't I just do that? The premise sounds great, but if Gangfeng proves it with Bacanora, I think those sceptics will say, oh, if they've done it - okay, great. Ganfeng has proved it. This is in America - that's great. I think Lithium Americas is going to continue to have a challenge. I could be wrong, but companies like Piedmont are speaking to the same people that Lithium Americas are speaking to. If you're a strategic investor and you're thinking, should I try clay or should I try proven hard rock, which am I going to do? I think on balance, and the valuation is very different, but there's a lot of retail enthusiasm for Thacker Pass because it's in Nevada, Tesla's in Nevada, it’s had 10 years of this connection so it's good marketing.

I'm watching Bacanora, which is a very low valuation. I believe it's already permitted, Thacker Pass, isn't even permitted and it's not a slam dunk that it will get permitted on the timeline that they're anticipating. From a value perspective,  Bacanora is much more attractive, but I wouldn't rush into their stock now either because they're still waiting to redefine their definitive Feasibility Study with Ganfeng’s impact, but they're going to come to market at some point and say, this is the cost, and Ganfeng is going to write a cheque to build this. Bacanora is going to need additional funding for it. At that moment, that might be the right time to enter Bacanora, my preference in clay would be Bacanora, certainly before Thacker Pass.

Matthew Gordon: The Robin Hood effect, is that what you're saying?

Howard Klein: I would say, be careful.

Matthew Gordon: Why don't you tell people what it is and the state of the market?

Howard Klein: I don't know about bursting to talk about it, but Direct Lithium Extraction, I'm not a technical guy at all, but it has the promise of, there's a lot of assets in the world that are in, let's say, first-world jurisdictions: safer jurisdictions, closer to where car manufacturing and cell manufacturing are happening. Livent, a producer for the past 20 years, never really talked about Direct Lithium Extraction using those words. But their methodology of producing Lithium is different than the pure evaporation ponds that are used by SQM and Albemarle in Chile. They've cottoned on to DLE. You don't have to use the pond. It's more environmentally friendly, it's more sustainable. It's good marketing for Livent to say DLE has the perception that it's more sustainable.

Until recently, in a similar way that clay is unconventional, unproven, the concept of DLE has never been proven before. There have been companies like Tenova Bateman and Pasco who have had partnerships in Argentina. Eramet is another company in Argentina that has Direct Lithium Extraction technology different than evaporation ponds.

Actually, that story – Eramet, the most amount of money that was ever invested, I think in a DLE project was Eramet. They invested about USD$150M. Earlier this year they said, they're not out advancing the project. So DLE hasn't attracted a ton of money. However, Livent is saying, you know what? For the past 20-years, we've been doing DLE. They're positioning DLE as conventional even though it's not fully conventional.

Standard Lithium is a company that Elon Musk tweeted about. He was reading a technical article, and in a couple of days when he had Lithium on his mind, he said, oh, Lithium is not rare, it's common, Lithium is everywhere. Standard Lithium, this looks like it has potential. Standard Lithium has partnered with Lanxess - a German company with an asset in Arkansas. They are taking a Bromine, ex-oilfield, but they're producing Bromine from it. And the Lithium is kind of a waste, right? So Standard Lithium said, we could take your waste and turn it into sellable Lithium. And with their Toronto Venture Exchange-listed company, they raised USD$30 to $40M. They built the demonstration plant. They're still at PEA level. There's still a lot to prove, but Lanxess basically said, if you prove the concept, we'll fund it. Lanxess will get 70% of it and Standard Lithium will get 30%.

The fact that that stock has risen and has been performing well, combined with the breakthrough energy ventures, Bill Gates invested USD$20 million in a private company called Lilac which is partnered with a company called Lake Resources in Argentina. Lake has managed to raise USD$4M to $5M. There's a company called Vulcan in Germany that managed to raise USD$4M to $5M. And they came out of nowhere. That's a geothermal brine. There's geothermal Brine there's oilfield Brine, there's DLE that could be applied to conventional Salars.

As sustainability is gaining traction and as people like you think that Chile, Argentina has the cheapest Brines, there are big knocks and worries about the traditional Salar technology where you're really only recovering 30%-50%. So DLE has potential: it's faster, you don't have to wait 2 years, it's in good jurisdictions, and it produces higher recovery and a cleaner, consistent high-purity Lithium. So, this is interesting.

The last thing I’ll mention, we've done some work for this company in the past, not currently representing them, E3 Metals in Alberta. This is an oilfield brine. What's interesting about that is they partnered with Livent. Livent is the technology leader in DLE. They're now saying we've been doing DLE for years They made a small investment; up to USD$5.5M, they've put in, I think, USD$1.5M so far, but that stock, E3, is sitting there at below USD$10M market cap, whereas some of these other stories I mentioned have started rallying a bit, like Standard Lithium and Vulcan. But people seem to be ignoring this one that's partnered with Livent, one of the big 3 Lithium hydroxide producers.

Matthew Gordon: What you said at the beginning, I've got to keep coming back to this, 4 companies effectively: Ganfeng, Livent, Albemarle, and Mineral Resources? Was that the 4th?

Howard Klein: Mineral Resources are correlated to hydroxide.

Matthew Gordon: How do we pick companies that we can make money on outside of your top 4? What are we looking for?

Howard Klein: Ganfeng is listed in Hong Kong. If you can invest in Hong Kong that's okay. I've invested in Ganfeng. In China, it's like impossible, but I prefer these five companies listed on the US exchange, properly listed with reasonable liquidity. Your choice: there's Albemarle, Livent, SQM. I don't love SQM for a variety of reasons. I think I mentioned before, Livent is poised for a hydroxide price spike and short squeeze. I like that story quite a bit, it's risky still because it's Argentina, but they got their financing out of the way. And the overhang of the convert is behind them.

Albemarle - very good company. It's the proxy, it's the most liquid. As I said, I'm an advisor to Piedmont so take this with a grain of salt, but Piedmont, at USD$65M valuation for a plain vanilla Spodumene to hydroxide story - there are very few pure ways to play hydroxide or Spodumene at a low valuation in a good jurisdiction. At USD$65M market cap, just last year, Kidman got bought at 10 times that valuation and Albemarle paid nearly USD$2Bn for Mineral Resources’s Wodgina asset in terms of economic value.

When the market turns and if I'm right about Ganfeng saying that in 1 to 2-years, Australia is going to be in short supply, the probability that Piedmont attracts a bid similar to Kidman or Wodgina is high, and the evaluation - they own 100% of their project. They have 100% of off-take to give. 100% equity structure. There's no debt, there's no risk of them going bankrupt. And they just raised USD$20M to further advance their studies. And they just announced a further drilling campaign to enlarge the size of the resource. I think Piedmont's, to be honest, a no brainer.

Lithium Americas has been a good trading stock. I mentioned that in our last conversation, it more than doubled in 3-months. Now I think it's overvalued. I think there will be a turn in hard-rock sentiment. Altura and Pilbara might be good plays. Altura still has to restructure their debt so there's some consideration there, but they got a further reprieve from their bankers announced this week, so that's interesting.

There are some places like in Quebec, like Critical Elements and Frontier - again, hard rock, good jurisdictions, you people aren't paying attention to that might be of interest. And a few South Americans, as I said, I like Lithium Power. If they cut their deal with Codelco. Again, these stocks are cheap. Millennial and Neo Lithium have cash, they could weather the storm. They don't have debt. And then, as I said, in Bacanora’as case, I would just wait to see what happens with the Ganfeng DFS, and what the costing is, and when they do that capital raise.

Matthew Gordon: Thanks for that. I think we had better cut there; I have taken enough of your time today

Howard Klein That sounds great, Matt. I really appreciate sharing our thoughts with your audience and I love the relationship. So happy to be back.

Company Website: https://www.libull.com/

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