Investing Basics for Lithium: What to Focus On

October 13 2020, 12:20 GMT+01:00

Interview with Rodney Hooper, RK Equity Advisors. This is an entry-level interview that covers the basics of the lithium space and lithium investment tenets. However, it also serves as a useful reminder to established lithium investors about what they should be focussed on.

This is an entry-level interview that covers the basics of the lithium space and lithium investment tenets. However, it also serves as a useful reminder to established lithium investors about what they should be focussed on. It is easy to get side-tracked when investing in mining, so what components of lithium should you be focused on? We get a few clues in this conversation.

Hooper chimes in on the popular debate regarding the pros & cons of lithium brine, clay, hard-rock, hydroxides, carbonates and spodumene. That is the technical side of lithium covered. Then, we move into the commercial side of lithium investment. What sort of lithium companies should investors be looking at?

We take a good look at the fundamentals of successful lithium explorers, developers and producers. Which partnerships are key for lithium players? How can lithium players capitalise in the current depressed marketplace?

What we discuss and when:

2:06 – Coping with COVID-19: Bans and Society
5:08 – Rodney’s Background
8:17 – Back to Basics: In-Depth Look at Lithium
14:04 – Size of Market and Implications for Growth
15:02 – Know What Good Looks Like: Criteria for Success
22:18 – Cost Structures for Different Types of Lithium
26:02 – Do Your Homework: Where Does Value Lie?
28:24 – Misunderstood Clay: Young Tech and Possibilities
34:59 – Nickel’s Role in the EV Thematic

Rodney’s Background

A few years ago Rodney Hooper was involved in a lot of research around the threats and risks to the future demand for oil, and came across Lithium. In South Africa a lot of the companies were hoping that fuel cells would come through because that needs platinum says Hooper. But it was around the time that Elon Musk was emerging and the potential for electric vehicles, was becoming apparent because the cost of renewables was plummeting.

The potential to have a closed loop of batteries and charging using clean energy was starting to form. And looking amongst the energy vehicle battery metals, Lithium is the irreplaceable element of the Lithium-ion battery. In terms of impact on size of market and shifts going forward, Lithium is the most impacted of the EV battery metals.

Hooper has for the last 4-years, 7-days a week, 15-hours a day, has gone down the Lithium wormhole and never come out! Hooper says that it’s a very nuanced industry and complicated and that he has spent that time literally dedicated mainly to Lithium.

Lithium Terminology

The Lithium industry hasn't just started and evolve. It has been going since the 1950s in the States. One way to produce Lithium is out of brine and South American brine was a by-product of potassium, so one of the things that people need to understand, is the quality of Lithium that is required to supply the industrial market; grease, glass, ceramics, but it is not the same as  required in the battery industry. For the battery industry, it’s very much a specialty chemical.

lithium brine lake

Piles of salt ready for processing in Bolivia. Underneath is a pool rich in Lithium which is used for extraction

Investors are getting excited about Lithium in the Lithium-ion battery industry, which is going to compound at, call it 25%, 30% pa and that’s unprecedented. People say that Lithium is abundant, but can you commercially extract it and can you produce the product that’s needed? Lithium requires a specialty process and that’s where the margins are and that’s the excitement.

History of Lithium

Lithium started out in the US and was based on hard-rock and it was mostly spodumene-based material which was then processed into Lithium chemicals. In the 1980s the brine opportunity arose in South America, and the US pretty much shut down and it went to South America and then back again, Green Bushes in Western Australia saw the rise hard rock money. From a brine perspective, the sun and the wind does a lot of the processing. It upgrades the Lithium content in the brine without having to do anything. Whereas from a carbon footprint perspective, brine is actually quite low, but you need an enormous amount of land to have ponds as you pump it up and then move them from one to the other, increasing the grade. The issue that is always raised, and it has been raised now again in Chile, is what is the impact on the sustainability and the impact on the local community and flora and fauna of pumping brine out from under the surface.

Typically, a brine will be processed into Lithium carbonate and chloride as well, but from a battery perspective, make Lithium carbonate. You can reprocess that into hydroxide, but it’s an initial step, and then a secondary step. The other way to make Lithium is hard rock spodumene concentrate, where Lithium oxide is removed, mostly in Australia and places like Brazil. This is purified and the grade is increased to a 6% spodumene concentrate which is then shipped. It’s pretty much exclusively done in China where you need 7.5t to 8t of spodumene concentrate to put through a rotary kiln with sulfuric acid to produce carbonate.

Lithium Market

Hooper tells us that the whole Lithium market is just over 300,000t. If you assume an average of USD$10,000/t, it’s a USD$3Bn market and if you compare that to Nickel, it is tiny. The Lithium market was a very small industry, and now of course, with batteries, we’re expecting the size of that market to grow like 10x in the next 10-years.

Hooper suggests that investors only invest in a company that is going to achieve battery quality and qualified material into the EV and rechargeable battery supply chain. So just as an example, Ganfeng, which is the world’s number 2 is currently trading on an EV to EBITDA multiple of 70x, because there is little competition. The markets has been slightly oversupplied and tight, but they are able to take most material and turn it into battery quality material, and that skill, and that ability has a huge value to it.

Hopper then goes on to say that there are only really 3 qualified companies into the Lithium hydroxide markets outside of China, who have the right battery-grade materials; Albemarle, Ganfeng and Livent. There are other companies that supply smaller amounts, but those 3 are dominant.

Investors need to look at companies with lots of chemical engineers and less promoters and geologists, if they are going to progress from being an exploration or development company into a genuine production company advises Hooper. You also need to look at how rigorous the metallurgical test work is that people do and at the qualification process.

Lithium Clays, Brine and Hardrock

Hooper talks about clays, brine and hardrock and their cost structures. He says that brines typically are the lowest-cost producer for carbonate, but does one look at the operating costs or does one look at what the ultimate cost is in order to deliver the final product? There are added tax implications and other expenses for shipping and importing to different countries which must also be considered. From a pure operating perspective brine to carbonate is the lowest-cost route to the point that it’s probably going to put a lot of the non-integrated producers in China who take independent spodumene and convert that to carbon, it’s going to put them under pressure.

In theory, a hardrock to hydroxide is the cheapest route, but it depends on whether you’re integrated or non-integrated where you source it, and government royalty taxes. Investors need to know all the costs in order to determine how profitable the company will be. Investors need to consider royalties, shipping, export tax, import duty and VAT too.

The million dollar question for investors is to find the best stage in terms of mitigating risk but also increasing your leverage which is the same for every commodity but with Lithium there is no way to play the raw material. If you want to get exposure, you need to actually physically pick a company because you can’t buy it as a commodity explains Hooper.

Lithium Clays

One project that is being funded is Bacanora which has Ganfeng as a partner. Ganfeng get a lot right, and they’re having a go at the Sonora Lithium clay project. Ganfeng will maximize the probability of getting it done. When it proves to be as economically viable as the Feasibility Studies says, remains to be seen. It’s a fairly homogenous deposit and in terms of what they’re mining it is fairly consistent.

Lithium clay is behind brine and behind hardrock in being tested, but it’s worth being explored and tested as it could produce the material. It goes back to the question of who is going to produce consistent battery quality and qualified Lithium into the supply chain. Bacanora has run a pilot plant of about 600t a year and that is now going from that to 1,750t to 3,500t.

Electric Vehicle Market

In the breakdown of a, high-nickel cathode battery, the biggest expense of the entire of the high-Nickel cell is Nickel, and then 2nd is Lithium. So, if you look at Tesla, if they hit 500,000 sales this year, they are about 25% of the EV market and for all the talk of Tesla killers, Tesla might have increased its share of EVs this year. Tesla is also looking to expand Giga Nevada and Shanghai and start Berlin and Port Austin, which is already under construction as well. Tesla is also going to launch the semi, which could have anything up to 800Kw to 1,000Kw hour battery in it, which is like 15 model 3's all in one. And the cyber truck, all of these need high-nickel cathode. It appears that Tesla will maintain a very high percentage of the EV market share and in terms of raw quantum numbers, Tesla is about to send Nickel and Lithium hydroxide demand into the stratosphere. If he is going to launch the semi, the Cyber, have the ‘Y’ this year and the ‘3’ back. It’s going to require an insane amount of materials.

Tesla Cybertruck Unveiling - Nov '19  

To find out more, go to the Lithium Bull website.

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