Lithium Unicorns and Alternative Energy Storage

by: John Petersen

Last summer, I questioned whether global lithium supplies would be adequate to satisfy exponential growth in the Li-ion battery sector. I raised the question because of a 2006 report, “The Trouble with Lithium” written by William Tahil of Meridian International Research, which concluded that world lithium reserves were not sufficient to sustain EV manufacturing using Li-ion batteries and suggested that Zinc-Air and NaNiCl batteries might be better choices. Commenters responded by citing a 2008 report, “Lithium Abundance – World Lithium Reserve” and a follow-on report “An Abundance of Lithium” written by R. Keith Evans, both of which appear to have been commissioned by someone in the Li-ion battery industry in an effort to first question Tahil’s findings and then portray him an ignorant conspiracy theorist who should be ignored. To quote Shakespeare, “Methinks the lady doth protest too much.”

Since this was obviously a hot button issue and I didn’t have enough facts to argue with people who might be better informed, it seemed prudent to back off on the lithium supply question until I knew more. On January 7th, a new Seeking Alpha article, “Jack Lifton: The Technology Metals Age” was brought to my attention by Paul Killinger, a fellow Seeking Alpha author. Since the Lifton interview confirmed one of my worst suspicions about global lithium supplies, I’m going to reopen the lithium supply issue and take a closer look.

The Securities and Exchange Commission has complex rules and disclosure requirements for companies that engage in extractive industries. The purpose of the rules is to keep companies from exaggerating their potential by focusing on resource quantities without analyzing the underlying economics. A lawyer friend from Houston likes to remind me that there’s a metric ton of gold in every cubic mile of seawater; the problem is that nobody’s found an economic way to produce it. I ran into a more typical case in the early ‘80s when a client discovered a big high-grade gold deposit and came to me for help with financing. By the time the engineers were done with their preliminary analysis, it was clear that the gold couldn’t be extracted from the ore without releasing huge quantities of arsenic. That made the deposit and its millions of ounces of known gold resources worthless.

While an in-depth discussion of the SEC’s natural resource regulations would be impossible in a Seeking Alpha article, there are two touchstone regulatory definitions that I think every investor in a battery company needs to understand. The following definitions were taken from revised oil and gas accounting rules that the SEC adopted on December 31, 2008. While the definitions are couched in terms of oil and gas operations, the overriding principles apply to all natural resource extraction activities.

Resources. Resources are quantities of oil and gas estimated to exist in naturally occurring accumulations. A portion of the resources may be estimated to be recoverable, and another portion may be considered to be unrecoverable. Resources include both discovered and undiscovered accumulations.

Reserves. Reserves are estimated remaining quantities of oil and gas and related substances anticipated to be economically producible, as of a given date, by application of development projects to known accumulations. In addition, there must exist, or there must be a reasonable expectation that there will exist, the legal right to produce or a revenue interest in the production, installed means of delivering oil and gas or related substances to market, and all permits and financing required to implement the project.

My initial response when I read the Tahil report was that the author was evaluating global lithium supplies from a reserves perspective. He focused on where the principal sources for the raw materials currently used in Li-ion batteries were and what the future development potential of those sources was. His discussion concentrated on the economics of lithium production and the ability of proven resources to support increased demand. His outlook was not favorable for the widespread use of Li-ion batteries in EVs, but he offered reasonable alternatives that were not resource constrained. Overall the report struck me as balanced.

My initial response when I read the Evans reports was that the author was evaluating global lithium supplies from a resource perspective. In fact, the author said so in his introduction, “we did not feel constrained by the strict definition of reserves favored by the USGS and Bureau of Mines.” I was also troubled by a subsequent paragraph that said:

The technology of producing carbonate from spodumene is well understood and it is this writer’s opinion that should demand grow at anything approaching the demand scenario postulated by Tahil, spodumene sources will be reactivated or developed. It will probably need somewhat higher prices to justify the necessary investments but it should be noted that a significant percentage of Chinese chemical production is currently from spodumene.

I am gravely concerned when Li-ion battery executives use a report that would not pass muster with the SEC as proof that their companies don’t face any supply issues, particularly when the report acknowledges that price increases will be required to justify the resumption of mining and processing of alternative resources.

After reading the two conflicting reports, the nagging question lurking in the back of my mind was simple: “How much will lithium prices need to rise to justify development of the spodumene resources that Evans wrote about?”

Lithium is the lightest metal known to man and No. 3 on the Periodic Table of Elements, which means it reacts with water and combines with other elements the same way hydrogen, sodium and potassium do. The lithium salts currently used in Li-ion batteries only require simple separation and processing before they can be used in a battery. Spodumene, on the other hand is a stable lithium aluminum silicate ore that has to be mined, milled, refined and then converted into an entirely different class of compound before it can be used. While simple logic tells me that using a salt in its native form is far cheaper than a multi-step process that converts a silicate ore to a salt and then uses the salt, I don’t have enough of a mineral processing background to judge whether the cost differential is trivial or major. I’ve spent several months looking for an answer and finally found one in the Jack Lifton interview:

As for Ford (NYSE:F), I thought it was committed to the lithium battery. I was very, very surprised to find that it’s committed to the nickel metal hydride battery and that the lithium battery is something in the distant future. Now lithium is found as a primary material but it’s found in the mineral spodumene, which is used primarily in the glass industry. It’s very expensive to extract lithium from this mineral for use in batteries. Since 1994, brine mines have been the largest source of lithium for batteries. The largest group of brine mines in the world is in South America. (Emphasis added.)

Another fascinating aspect of the Lifton interview is his discussion of resource availability for lanthanum and other key metals used in Ni-MH batteries. Overall, I think the Lifton interview presents a very troubling look at issues that are far to quickly glossed-over by both Li-ion and Ni-MH battery advocates.

In a recent Seeking Alpha article, I discussed long-term trends in global oil prices and suggested that while I was not qualified to venture an opinion on “peak oil,” the trend struck me as compelling evidence that the world passed a “peak cheap oil” inflection point about 10 years ago. After reading the Lifton interview, I wonder whether we haven’t also passed “peak cheap Li-ion” and “peak cheap Ni-MH” inflection points.

If Mr. Lifton’s description of the cost of producing lithium from spodumene is even close to accurate, the happy talk about future “economies of scale” that we hear from Li-ion executives is not entirely honest. They’re talking about unicorns and supporting their position with a report that would not pass muster with the SEC. While I was willing to remain quiet about raw material supply issues in the past, I think I smell smoke. I believe these resource issues need to be studied in depth by independent experts before we follow the yellow brick road over the edge of a cliff.

I’m a believer in the upside potential of companies like Exide (XIDE), Enersys (NYSE:ENS), C&D Technologies (CHP) and Axion Power International (NASDAQ:AXPW) because they use plentiful domestic raw materials to make inexpensive products. In light of the Lifton interview, I think companies like Altair Nanotechnologies (NASDAQ:ALTI) and Ener1 (NASDAQ:HEV) may face raw material supply risks that investors don’t fully understand. I’m not as concerned about China BAK (NASDAQ:CBAK), Advanced Battery Technologies (OTCPK:ABAT), Hong Kong Highpower (NASDAQ:HPJ) and Valence Technology (VLNC) because China also has significant lithium salt deposits. However, I think pigs will fly before we see China exporting raw materials to the U.S.

Disclosure: Author holds a large long position in Axion Power International, recently bought small long positions in Exide and Enersys and may make other energy storage investments in the future.