Although lithium is not in short supply now, electric and hybrid vehicles could soak up new production of the versatile light metal for decades to come. In this exclusive interview with The Energy Report, Economist Daniela Desormeaux of Santiago, Chile-based signumBOX, elaborates on small exploration plays that could move up.
Companies Mentioned: FMC Lithium Corporation Galaxy Resources Ltd. Li3 Energy Lithium Americas Corp. Lithium One Inc. Nemaska Exploration Inc. Orocobre Limited Rockwood Holdings, Inc. Sociedad Química y Minera de Chile S.A. Talison Lithium Ltd. Western Lithium USA Corp.
The Energy Report: Who are your clientele?
Daniela Desormeaux: Our customers are very diverse. Investment banks are looking for new investments in natural resources, including lithium, which has become important for its use in batteries for electric vehicles, and has therefore become very popular. In the last four years, more than 80 new lithium projects have been announced. So we have seen a lot of appetite for investment in lithium.
Our customers also include battery companies; they are interested in understanding the future of lithium because they have to buy it. We also have customers who are lithium producers and involved in exploration activities. Lithium is strategic in terms of its use, and that's why we have seen Toyota, Mitsubishi and other automakers investing in the industry. They want to secure their supply of lithium in the future. So, a percentage of our customers are automakers.
TER: Daniela, lithium trades on industrial supply and demand factors in a negotiated market. Without a public market for the metal or its salts, how do you value producers?
DD: Lithium is not traded on a formal market like copper and gold. So it is impossible to know, for example, how much lithium is traded in one day and at what prices. The price is determined by negotiations between producers and customers. So far, production of lithium chemicals has been concentrated among three main players: Sociedad Química y Minera de Chile S.A. (NYSE:SQM; SSX:SQM-B, SQM-A) in Chile, Chemetall, a division of Rockwood Holdings, Inc. (NYSE:ROC) in Chile and in the U.S. and FMC Lithium Corp. (NYSE:FMC) in Argentina. Meanwhile, Talison Lithium Ltd. (TSX:TLH) in Australia is the largest producer of lithium concentrates.
These are public companies that have to release information, so we can value the lithium business to a certain degree, despite the fact that lithium is not traded on an exchange. However, we don't have a daily track of what is happening in this industry in terms of volumes and prices. On a monthly basis, we track lithium exports from major producer countries such as Chile, Argentina, Australia and China.
TER: Do large market-maker companies enjoy a pricing advantage over smaller companies? Can they get more for lithium because they can supply more?
DD: Absolutely, yes. SQM and Chemetall sell more than 50% of the total use of chemical supply nowadays. They are the drivers of lithium prices. The main advantage they have is that they are both located in the Salar de Atacama in Chile, which has the highest quality lithium resources in the world and is located within the driest desert in the world.
TER: I know that electric vehicles-cars, scooters and bikes-are a major growth driver for lithium used to produce lithium-ion batteries. If these lithium-ion batteries can be charged to five times the capacity of the same sized nickel-metal hydride battery, that obviously represents a tremendous efficiency. But the power still has to be generated by nuclear, natural gas, coal, hydro, solar, wind or geothermal means. These batteries don't produce power; they only store it, so what is the value proposition?
DD: Well, electric vehicles are an option, but lithium-ion batteries also serve other technologies, such as hybrid-electric vehicles and plug-in hybrid-electric vehicles. Pure electric vehicle batteries can be plugged into a home's electricity for charging; batteries for hybrid-electric vehicles can also be used while the engine is running. So it is not just an external source of electricity. We have also to consider that automakers are researching other technologies as well, and they have made important progress on the efficiency of internal combustion engines, for example. I believe that in the future we will see a mix of different technologies coexisting. You have to strike a balance because there are tradeoffs. Yes, you have to generate the electricity, but if you consider the impact of CO2 emissions, you will conclude that electric vehicles are the best option compared with other current-available technologies.
TER: About two months ago, you gave a presentation at the Technology and Rare Earth Metals Conference 2011. You concluded that there was enough lithium in the world to meet future demand and that the price of lithium would remain the same or drop. You also said there was room for more new producers to come into the market. Those were your three takeaways. From what you said, it doesn't sound like a growth industry.
DD: In the presentation, I said that the lithium industry is a growth industry and it has a real potential because we haven't yet seen a full implementation of its uses. We are in a transition period and so we have to wait. It's like what happened in the 1990s: Sony introduced the first lithium-ion battery, and it was very successful. In less than five years, almost 90% of the batteries were based on lithium. So we saw a very fast penetration break for the lithium battery segment. We still don't know what will happen in the auto industry, but the future is promising.
Years ago, some news articles questioned the ability of the world lithium supply to meet future requirements. I think that many people overestimated the growth in the demand of lithium and underestimated the amount of lithium resources in the world. That's why we saw predictions of near-term high price grow. That's absolutely not going to happen. My perception is that the future is promising and lithium demand will show interesting growth rates because it has many applications in addition to batteries. On the other hand, lithium is abundant as evidenced by a total of 80 exploration projects that have been announced globally in the last few years.
TER: Can you address some players?
DD: These companies are not producing lithium right now, but are exploration mining companies working deposits and projects around the world.
Galaxy Resources Ltd. (ASX:GXY) is an Australian company that extracts lithium from Mount Cattlin in Western Australia. The company is building a lithium chemicals plant in China and has already shipped lithium concentrate mineral to the site. SignumBOX ranks Galaxy as number one of all of the lithium mineral projects.
Nemaska Exploration Inc. (TSX.V:NMX; OTC:MNKEF) has a good deposit in Canada. The company also has an important investor in China (Chengdu Tianqi), which holds 10% of the stock. Nemaska's Whabouchi Lithium Project is ranked number three at signumBOX.
Companies with projects based on less expensive salar-bearing brines production include Orocobre Ltd. (TSX:ORL; ASX:ORE), Lithium One Inc. (TSX.V:LI) and Lithium Americas Corp. (TSX:LAC). All of these companies have projects in Argentina with strategic partner offtake agreements-Orocobre with Toyota; Lithium Americas with Mitsubishi and Magna, and Lithium One with LG International, Kores and GS Galtex.
In Chile, Li3 Energy (OTX:LIEG) is considering extracting lithium from a deposit in the northern Salar de Maricunga area. However, current mining regulation (which was established after SQM and Chemetall started to produce in the region) lists lithium as a strategic mineral that cannot be exported. I strongly believe that this situation is going to change in the near future since it could cost the government its global lithium industry leadership position.
Western Lithium USA Corp. (TSX:WLC; OTCQX:WLCDF) plans to produce lithium in the U.S. from a hectorite deposit located within the McDermitt Caldera Complex. The company claims that it would be competitive in terms of lithium carbonate's cash cost; nevertheless, they may not be as competitive as producers from brines.
TER: Do you believe that Li3 is closer to production than the hard rock mineral companies we just talked about?
DD: It's difficult to say because Li3 doesn't have the permit to extract lithium. The company has the mining rights and a strategic partner, but it needs a permit from the government. As I said earlier, I think the government will eventually allow new companies to extract lithium. If Li3 gets the permit, it could succeed, but it is very difficult to say when this will happen.
TER: You mentioned Nemaska Explorations. I understand that the company is spinning out its non-lithium properties into a new company, Monarques Resources. I'm wondering if you believe this will make it easier for the company to move its Whabouchi Project into production by 2013.
DD: At this stage, it is difficult to say. As I said before, the Whabouchi Project is very well ranked by signumBOX because of the geological characteristics of the deposit and the presence of China as a strategic investor. But this is a relative ranking, which gives an idea about which project is more likely to eventually become part of the lithium supply. It doesn't indicate when it will occur. It is also important to note that the survival of many of the projects that are under evaluation will depend on the price strategy that current lithium producers decide to deploy.
TER: 2013 sounds near term compared to some others. Is that something investors can hang their hat on?
DD: Well, 2013 is short term and I believe that the biggest potential for lithium demand will be after 2015 when electric cars become more commonplace. So, I don't see much room for the entry of these projects in the short term.
TER: Nemaska has formed a strategic partnership with China's Tianqi Group, which could purchase as much as 50% of the company's lithium production. It sounds like a big advantage.
DD: Tianqi is an important Chinese operation that produces lithium chemicals from lithium concentrates, so they have the experience and the knowledge of the Chinese market. China is the largest consumer of lithium concentrates, which are mainly used as raw materials for lithium chemicals but they are also used in several industrial applications. In this context, it is crucial for a lithium concentrate producer to have a strategic partner or investor in China.
TER: Daniela, I've enjoyed meeting you very much.
DD: Thank you.
Daniela Desormeaux is an economist and an expert in industrial chemicals and natural resources. Prior to starting with signumBox, she was strategic marketing manager at SQM, where she was responsible for market intelligence on lithium, iodine and other industrial chemicals. Before joining SQM, she was an economic analyst at Cámara Chilena de la Construcción, a Chilean trade association focused on the housing and construction industries.
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1) George Mack of The Energy Report conducted this interview. He personally and/or his 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: Talison Lithium Ltd., Nemaska Exploration Inc., Western Lithium USA Corp.
3) Daniela Desormeaux: I personally and/or my family own shares of the following companies mentioned in this interview: None. From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise. Interviewees may also receive compensation for investment banking and related services.
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