With energy and mineral prices at rock bottom, there has been very little interest for investments in the mining space. Low commodity prices have deterred capital investment in expanding production while exploration companies have failed to move their projects forward. The underlying lack of investment in the industry is due to poor project economics, which has forced many companies to close their doors, consolidate or sell off once prided assets. One company that has attracted the necessary investment to start-up its lithium brine operations is Australian-based Orocobre Limited (OTCPK:OROCF).
Demand Remains Strong for Battery Grade Lithium
One sector of the mining industry that still shines bright, or green, is the lithium market. Lithium, which is heavily and traditionally used in the industrial market as a lubricant or grease, is more commonly known for powering the emerging wireless communication and technology industry. A variety of lithium ion batteries have stormed the market in the past decade, including: mobile phones, smart phones, laptops, tablet PCs, etc. Mass consumer adoption to these products has had a significant benefit on the lithium supply chain, especially the lithium extractors.
Although these consumer technologies have been driving demand, the next wave of lithium will come from applications that integrate large-format lithium batteries. This space includes the electrification of the automotive industry and stationary energy storage systems. Stationary energy storage systems are used in a wide number of situations, including: remote power, PV self-consumption, demand charge management and other grid service solutions.
Overview of the Lithium Oligopoly
Today, the lithium extraction industry is comprised of a small group of producers who are commonly referred to as a production "oligopoly". The oligopoly includes: Chemical & Mining Co. of Chile Inc. (NYSE:SQM), Rockwood Holdings, Inc. (NYSE:ROC) and FMC Corp. (NYSE:FMC). In 2012, Australia's Talison Lithium (OTC:TLTHF) was taken out by Chinese lithium material giant Chengdu Tianqi. Rockwood is currently going through a takeover by Albemarle Corporation (NYSE:ALB), who is a global chemical company. Albemarle is acquiring Rockwood in a cash and stock transaction valued at approximately $6.2 billion.
Olaroz Lithium Project Commences Commercial Operation
In December 2014, Orocobre announced the official opening ceremony of the Olaroz Lithium Project, which is now amongst one of the few operating lithium brines in the world. The Olaroz Project is based in the Puna region of northern Argentina. The lithium brine is expecting to make its first commercial scale shipment of battery-grade lithium carbonate. Orocobre's project partner Toyota Tsusho (OTC:TYHOY) has the exclusive off-take arrangements for all the lithium carbonate produced at the Olaroz Project. It is expected that Toyota Tsusho will resell the carbonate to either Toyota to expand its hybrid electric vehicle efforts or to other Japanese or Korean battery manufacturers. It is commonly know that most of the feasible lithium deposits are located in South America while the vast majority of lithium ion battery production takes place in Asia. This leads to a clear need for Asian technology companies to acquire a secure long-term supply of lithium to ensure they can scale up their business. Lithium is not a rare commodity, but feasible locations are rare and scattered across politically unstable areas of the world.
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. Further, the project has a sustainable long life, with the Feasibility Study considering 40 years production with only 15% resource extracted.
Orocobre for Speculative Investors
With the capital investment and construction completed, the project is moving into commercial production with first shipments expected to take place in January 2015. Once the company proves that it can produce and ship large volumes of lithium carbonate, this should pique the investment communities' interest in Orocobre. Orocobre shareholders will benefit from product shipment news to Toyota, and as it ramps up production, this should be reflected in its financial statements, which are ultimately a driving factor for stocks to be propelled higher. In my opinion, it is unlikely that Toyota Tsusho will acquire Orocobre because Toyota Tsusho has the off-take rights for the project which is of most interest to a trading house. Trading houses are generally not interested in production of goods but are rather focused on business making and financing.
However, it is a possibility for one of the members of the lithium oligopoly to acquire Orocobre for its ownership position in the Olaroz Project. Based on market valuation of Orocobre, in conjunction with the confirmation of its project figures, it may be more financially sound to acquire Orocobre rather than expanding an existing operation. The investment thesis in Orocobre is that the company has almost de-risked the project entirely, lithium demand is fundamentally strong and flurries of recent industry activities could heighten the tension around this newly established industry jewel.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.