The Lithium Supercycle

Back in early July, as part of one of my ‘ASX Weekly Wraps’, I wrote to you all about the new revolution and ‘supercycle’ I believed was to come in the Lithium space. The catalyst for this was to come from the electric vehicle revolution as a result of the need to create a cleaner environment for us to live in. In fact the International Energy Agency (IEA) suggests that by 2040 we need 600mill electric vehicles (EV) to replace their fossil fuel counterparts if we wish to stop the globe warming by 2 degrees Celsius. This article, as I promised you in my latest weekly wrap, is just an update on how the industry has progressed since then from a sector and stock point of view. The first article I wrote can be found here for reference.

Demand & Supply

In 2017 we are set to produce approx. 220-240k ton of lithium carbonate equivalent (LCE). Former Lithium America chief technical officer, David Deak, believes we will need to produce 3.1mt of LCE on average over the next 20 years just to meet demand for the EV revolution.[1] A study done by UBS, using the new EV from Chevy Bolt as a guide, suggested the following increases in materials will be needed at a 100% EV penetration.[2]

This means LCE production would need to lift from the current 220,000t to over 6.3mt in order for us to be able to meet 100% EV penetration on a global scale. Now this is some time off, we are talking 2050+, but it does highlight the monstrous task ahead of us. UBS has also forecast that by 2025 we will hit 14% (30% in Europe) EV penetration and 51% by 2040. Current EV penetration is just at 1%. These forecasts have been lifted by 50% from older ones in recent months.[3] As you can see the notion of where we are at in terms of LCE supply & demand moving forward is starting to catch on. It could be compared to what happened in the iron ore market in 2000 – 2011 when supply finally caught up with demand. This means shortages in lithium supply will not remain the status quo. There is lots of lithium out there. It is a common element in the Earth’s crust, but what is currently readily available to us in mines across the globe will probably fall short of demand for some time. In fact we are likely to remain in severe deficit until 2022, possibly longer. It takes roughly 5 - 7 years from find to mine when talking lithium, hence for extra supply to reach the market will take some time. New mines due to hit production in the next few years will simply be there to meet the extra demand until then. It still won’t be enough and the lack of lithium supply will probably be what slows EV uptake in the near term. Car manufacturers simply won’t be able to get their hands on enough to ramp up production.

The chart above shows the forecast sales of EV until 2030. As you can see by 2030 we are forecast to sell 24.4mill EV per annum. This means there needs to be enough lithium to supply 35 factories the size of Tesla’s gigafactory in the US by 2030. The current investment in new mins to supply that lithium, and all other materials used in the batteries, is estimated to be in the range of $US350-$US750bill. [4]

Probably the most important part of the EV revolution is it has Government and corporate support. Just recently France and the UK announced they aim to stop the sale of fossil fuel cars by 2040. Norway has pledged to do the same by 2025. China is currently working on a target, but sources say it could be as early as 2025 as well. Then we have the car manufacturers and their targets. Volkswagen plan to have every car they produce incorporate an electric motor, whether it’s hybrid or full, by 2019. Porsche has pledged to have 50% of its production be EV by 2023. Mazda plans to only sell EV by 2030. Then of course we have Tesla which has 400,000 pre-orders for its new Model 3 car that has just hit production. This support is integral for EV uptake and there is now a clear movement away from fossil fuel cars into the EV space.

China is expected to be the driving force behind the EV revolution and is probably in the best position to do so capacity wise. Chinese battery manufacturers are ramping up production to 120GW/h per year which is 3.5 times the size of the Tesla factory in the USA and will support the production of 1.5mill EV per annum.[5] This puts Australia in an enviable position, just as we were with iron ore and China’s steel boom in the early 2000s.

Obviously with the short supply the LCE price has only gone one way, and that is up. In August alone we saw a 9.6% increase on the average contracted price per ton of LCE. The price surged from $US14,250t to $US15,625t. This is a trend that has seen LCE rise from sub $10,000t to its current price in the last 12 months. In China prices are said to be higher such is the demand and competition for supply. Battery companies are paying as much as $US22,000t for LCE and $US23,000t for lithium hydroxide.

Lithium Brine Production

In the last article I did on the lithium market I covered the hard rock production process. This was mainly because it was more relevant to Australia and the ASX as all lithium production here does come from hard rock. It’s just as important to cover how the brine production process works as there are some important brine producers/explorers on the ASX that we get benefit from.

Basically lithium in brine form is contained in massive naturally occurring salt pans, mainly in Argentina and Chile, at high altitudes and low rainfall. In order to extract the lithium the water from these bodies is pumped into evaporation ponds, which evaporate over a number of months (9-12 usually) to produce a brine which contains roughly 1-2% lithium. This is then sent through to a processing plant and made into LCE and lithium hydroxide. A very simple process but one that is very technically hard to get correct. The main problem with lithium brine is availability of engineers who are technically savvy enough to get the process right in the most efficient and low cost manner. This is why it can take a brine mine to a little longer to get going than hard rock as it takes some trial and error to get evaporation rates at their premium plus then the processing. However the best brine mines will be lower cost than the best hard rock, mainly due to the fact that there is no overburden to remove in order to get to the mineral. Capex numbers are often lower as well.

What you are looking for in a lithium brine mine is a concentration of around 200 – 1,400 milligrams per litre of lithium in the actual salt pans. It also needs to be at of a higher altitude and low rainfall for optimal evaporation. This is why Chile and Argentina are so popular and hold most of the world’s current lithium brine production. It’s almost a Goldilocks scenario. You also want the brine to be mostly free of impurities. The main concerns are magnesium and boron which are filtered out in processing stage. These can be difficult to remove in high quantities and will only increase production costs. You also want an easy supply of soda ash which is the main ingredient used to turn the lithium brine into LCE.[6], [7]

The main downside to lithium production mines are that you need to convert the brine to LCE first before you can go to hydroxide, unlike hard rock where it can be converted straight to hydroxide. Also you are more at the mercy of the weather. A colder than usual summer or longer winter, with more snow, can slow the evaporation process affecting the amount of lithium you can produce for the year. In Orocobre (ASX: ORE) case this year their production was slowed due to the fact they couldn’t get enough soda ash supply to the mine site due to heavy snow. Something a hard rock producer in Australia does not have to worry about.

Exposure to Lithium on the ASX (Update)

The last time I wrote about the Lithium Supercycle I singled out a few stocks that, I thought, were best poised to take advantage of the then upcoming lithium bull market. This was on the 03/07/17 and since then every stock has performed exceptionally well and beyond my expectations as you can see below.

The worst performing stock in ORE has gained +28% whilst the best in AVZ is currently up +214%. Now let me be clear. Everything I have written and continue to write is ‘General Advice’ only and does in no way pertain to your personal circumstances or financial goals & objectives, you should consider these matters yourself before deciding if the investment is appropriate for you. Should you wish to see how this may fit into your own financial goals & objectives you should speak to me first to ascertain if they are appropriate for you.

Since my first article I have researched and invested many of you in other stocks outside of the aforementioned. Once again they fit the theme of near term producers who can possibly take advantage of the lithium supply shortage in the next few years.

Tawana Resources NL (TAW) $0.24

TAW are the 50% owners of the Bald Hill Lithium and Tantalum project in WA (hard rock). The other 50% is owned by Alliance Mineral Assets who are listed on the Singapore stock exchange. They have completed a PFS based upon a 12.8mt @ 1.18% Li and 58ppm Tantalum. This resource is expected to grow as further drilling is completed over the next 6 months and they aim to get the resource to 40-50mt at around the same grade. Off-take agreements are in place already for the first two years of $US880t for a 6% lithium concentrate. The project is situated on an old tantalum mine hence capital costs to get the project running are very low approx. $50mill. Catalysts will come from drilling results, resource upgrades and an updated feasibility study. They are aiming to start production in 2018.

Sayona Mining Ltd (SYA) $0.016

SYA 100% own the Authier Lithium project (hard rock) in Canada which has a JORC resource of 17.2mt @ 1.02% Lithium. This one comes down to management with most of the board coming from Altura Mining (ASX: AJM) and a founding member of Orocobre (ASX: ORE). This is what has attracted me to this company mainly. They are also in a mining friendly environment which has great expertise in processing a 6% lithium concentrate into LCE. This is very early stage and not much has been done to this project. Management obviously have a big focus with AJM at the moment. They are currently updating the PFS before starting their DFS in early 2018. Once again drilling results, resource upgrades and PFS/DFS results will be a catalyst for SYA. They may need to raise some cash soon though.

Lake Resources (LKE) $0.061

LKE are in a very early exploration stage. They have a huge amount of land in Argentina (176,000Ha) and own 100% of all their projects (Brine). They have some quality ground near majors such as ORE and AGY and are part of the lithium triangle. This is what I like about them. The location of their projects do back onto some quality mines in production. There has been little work done on their projects with only samples taken and no drills. Drilling is imminent, but is being held up by permit applications which are slow to process in Argentina at the moment. They have a tiny market cap of $15mill which means they have plenty of upside if you are to compare them to other such brine producers/explorers. They also may need some cash in the near term.

Birimain Ltd (BGS) $0.47

BGS recently re-listed on the ASX after a lengthy suspension. They had some trouble with management and the accounts department. Management has since been overhauled and the issue with the accounts department sorted. They own (100%) Goulamina lithium project in Mali (hard rock) which has an indicated resource of 25.3mt @ 1.37% lithium. They have an updated PFS due any week now and start drilling again in October. Their aim is to increase the resource so it can support a 20 year mine life at 2mtpa. They are well funded with $6mill in cash and are in a stable and mining friendly African nation in Mali. Their project sits in a well-known gold region with Oklo Resources (ASX: OKU) and major gold producers. They also have some gold projects in the same region that aren’t a priority at the moment. I have steered clear of this one due to the reasons it was suspended, but feel it looks like they have cleaned up the company sufficiently now it’s safe to dip a toe in. Share price catalyst will come from drilling results, PFS, major investors, off-take agreements and eventually DFS. BGS has a market cap of $70mill+ at the moment hence a lot larger than some of the others, but probably has the better quality resource.

I feel at this stage we are yet to enter the euphoric stage of this lithium Bull Run. We know this as not all lithium names are moving. In the euphoric stage the mere word ‘lithium’ will send stocks on an upward trajectory. I am not seeing this at the moment. It is only the highest quality lithium plays that are benefiting at this stage, hence there will be plenty of opportunities to come in the near term and new names to add to the watch list.

Summary

I hope you enjoyed this update to the Lithium Supercycle I wrote about in early July. It is clear to me this lithium Bull Run has a lot more legs in it yet and could end up providing an investment source for many years to come. To me this isn’t any ordinary upswing in a specific commodity that becomes ‘hot’ for a short period of time only to fall away. Due to major disruptions in technology and supply constraints in lithium I feel this is a major re-positioning of the market and we will look back on this period in years to come as one of the most significant opportunities in our modern investment history. Please contact me should you have any questions regarding anything I have written above or if you wish to invest in the lithium sector itself. I will try and provide you with another Lithium Supercycle update again before the end of the year.

heath@hlminvestments.com.au

0413 799 315

Important Notice

Any advice in this article should be considered General Advice only and does not take into account your personal needs and objectives or your financial circumstances. You should therefore consider these matters yourself before deciding whether the advice is appropriate to you and whether you should act upon it. I am happy to assist you in this process. To do so, I will need to collect personal and financial details from you before providing my recommendations. Please note the author may own shares in the companies mentioned in the above blog.

[1] https://www.ft.com/content/90d65356-4a9d-11e7-919a-1e14ce4af89b

[2] http://www.visualcapitalist.com/massive-impact-evs-commodities/

[3] https://www.ft.com/content/90d65356-4a9d-11e7-919a-1e14ce4af89b

[4] https://www.bloomberg.com/graphics/2017-lithium-battery-future/?cmpid=socialflow-twitter-business&utm_content=business&utm_campaign=socialflow-organic&utm_source=twitter&utm_medium=social

[5] https://www.globalxfunds.com/is-this-a-turning-point-for-lithium-demand/

[6] http://www.miningfeeds.com/2015/06/11/brine-harvesting-of-lithium-vs-hard-rock-mining/

[7] https://www.thebalance.com/lithium-production-2340123