- Toyota has projected capturing 20% of the global hybrid vehicle market, while its various companies are increasing their involvement in the lithium space.
- A review of the Orocobre Limited and the Salar de Olaroz property located in Argentina.
- Toyota's involvement in the project, and what this means for Toyota's lithium supply and Orocobre.
Orocobre Limited (OTCPK:OROCF) is an Australian-based industrial minerals company that has established a presence in the Puna region of northern Argentina. Orocobre is presently constructing and operating a portfolio of lithium, potash, and boron projects and facilities, with a core focus on the development of its flagship Salar de Olaroz lithium property. Salar de Olaroz is expected to enter production in 2014 and produce around 17,500 tonnes of low-cost, battery-grade lithium carbonate annually. The lithium carbonate produced at the Olaroz property is expected to end up in lithium-ion batteries that will power next-generation automobile.
Investors who are firm believers in the lithium battery, stationary energy storage, and electric vehicle markets will see the ultimate potential in Orocobre. Orocobre is not only of interest because it will be the next low-cost producer in the lithium industry, but because it is executing on the project development, remains fully financed, has strong household-name project partners, and off-take customers in place, along with a strong partnership with the local government.
In 2012, Toyota Tsusho Corporation entered a definitive shareholders' agreement with Orocobre on the Olaroz Project, which gave Toyota Tsusho (OTC:TYHOF) a 25% interest. Toyota Tsusho, which is one of Japan's leading global trading houses, is 22% owned by Toyota Motor Corporation (NYSE:TM) and 11% owned by Toyota Industries (OTCPK:TYIDY). Toyota Tsusho facilitated a low-cost financing package from Mizuho Corporation Bank (NYSE:MFG). The relationship with Toyota Tsusho, the direct link to Toyota Motor, is the most intriguing aspect to Orocobre: Toyota Motor, which is by far the most progressive automaker in the EV market today, has been making significant strides in developing and delivering EV, PHEC, and HEV automobiles. It recently announced it will make a significant investment in expanding its lithium battery manufacturing capabilities, and has switched a number of its next-generation vehicles away from Nickel Metal Hydride (NiMH) batteries to lithium-ion batteries. Furthermore, Toyota has made a US$50million investment in Tesla Motors, with Tesla supplying Toyota with power-train equipment under a 3-year agreement worth about US$100million (Seeking Alpha: Toyota's Lithium-Based Future).
At the state level, Orocobre was successful in attracting Jujuy Energia y Mineria Sociedad del Estada (JEMSE), the mining investment company owned and controlled by the provincial government of Juju, Argentina, as a minority shareholder in the project. This was a step to further de-risk the project and the geopolitical issues that challenge Argentina. JEMSE has a 8.5% interest in the project.
Construction on the US$229million project began in late November 2012, with initial battery-grade lithium carbonate production scheduled to begin in 2014. The company has been issuing regular construction updates, and on April 9, 2014, reported that 85% of construction was finished, with the lithium carbonate plant being the main outstanding work area to be completed. The project is expected to produce strong post ramp-up EBITA margins of an estimated $4,000/t Lithium Carbonate Equivalent (LCE), with operating costs in the $2,000/t LCE range, excluding any potash credits, versus LCE expected pricing of around $5,500-6,000/t. The project is expected to have initial annual production of 17,500 tonnes of LCE.
For investors who are confident believers in Toyota's strategic move into the alternative vehicle market, keeping a close eye on Orocobre's developments in Argentina is a natural fit. Toyota is already signaling its commitment to the space, which will represent a significant ramp-up in Lithium Carbonate demand to power its growing fleets of electric vehicles. The additional upside for Orocobre is if Toyota's batteries begin to be distributed and integrated into other applications such as stationary energy storage markets or directly to other automakers. Toyota's Chairman, Takeshi Uchiyamada, has stated that they are forecasting that the company's global market share for hybrids will soon increase from 13-14% to 20%, which will surely be enough to put Orocobre on the global investment community's radar. Not to withhold the risk, which is that there is still significant currency and geopolitical risk involved in making investments in Argentina, the current Argentinean peso crisis continues to deepen, making it extremely difficult for companies to move capital in and out of the country, while also decreasing the value of the capital that does make it into the country. This will lead to cost overrun on all mining projects. Additionally, a much-touted crisis may be heading for Argentina, which could keep investors at bay until the presidential election in 2015.
Editor's Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks.