The only junior lithium producer in the world: Orocobre Limited (OTCPK:OROCF)
I've been studying lithium all through 2016. Lithium and lead are key to renewable energy, like wind and solar. These "clean" power sources need enough power density in battery storage to make them economical on a large scale, and that will come from lead and lithium.
Orocobre is the only junior lithium producer in the world. It went public in December 2007, and made the leap from explorer to developer to producer in seven years, when their Olaroz lithium facility came onstream in Argentina.
They are now very focused on expanding the successful Phase 1, and have targeted a 2019 timeframe for Phase 2. Phase 2 will involve a duplication of the current plant with some enhancements for 17,500 tonnes of lithium carbonate production and a possible lithium hydroxide plant in Japan.
Being focused on production, they farmed out their key development and exploration assets to Advantage Lithium (OTCQX:AVLIF).
I was able to grab 75 minutes of CEO Richard Seville's time on Skype as he rested in London after a long flight.
We had a great chat, which you can read below, covering:
- The challenges of getting the Olaroz mine into production
- The challenges that current industry producers will have expanding production
- How they wanted to joint venture their best development asset and top exploration projects
- Why they chose Advantage Lithium
- The synergies between the Olaroz Lithium Mine and the Cauchari deposit that was joint-ventured to Advantage
Keith Schaefer: Richard, you've been producing lithium for 18 months at the Olaroz mine in Argentina and you must be happy with the way the lithium market price has evolved for you guys. Your timing has proven to be really fortuitous. Was your team expecting this kind of price rise in lithium or hoping for it? How close to reality has it been to what you expected when you were building Olaroz?
Richard Seville: First, I acknowledge it's been a great benefit to us and life would have been a lot tougher if-it was tough enough as it was Keith-but life would have been a lot tougher if the market hadn't got tight. And outside of price, it meant customers were patient as we disappointed [in development/construction timeline]. If it had been an over supplied market then it would have been very difficult to maintain a relationship with customers. e.
But because the market was so tight and they needed our product-then everybody was patient and that's a very helpful dynamic to be ramping our plant up.
Richard: Of course, it makes a lot of difference if you're running $10 million a month [revenue] rather than $6 million a month.
Keith: Oh yes.
Richard: So that's been a great benefit. And we actually had a good feeling for where this [lithium price action] was going after we did the research in 2013 into the so-called over-supply that was going to be coming on. And we did detailed research into the permitting in Chile and concluded there was no new product coming on for a long time.
We concluded that pending approvals would not be coming for some operators, and so although they were promising product for the coming year for their customers it was never going to arrive. .
So we changed our strategy on contract negotiations and deferred any finalization. Consequently, we didn't have to get or give any discounts in the market. And we deferred as much as we could because we felt the market was going to get hot-which it did-based on our analysis.
So the project was one of those moments when you look back on it where we did the hard analytical work, drew a conclusion, acted on our judgement, and it worked and went according to expectations.
I don't mean picking a certain price I just mean a general trend. I'm quite proud of that actually and sometimes the detail work is really valuable. We've redone it recently to understand the hard rock sector and the conversion plant capacity in China. Although that's harder than what we did in Chile I think we got a pretty good understanding.
That again supports the view that supply growth is being over estimated and over simplified and that it will take longer-just like we did-and there will be delays because of complications in China and offtake and everything will slip because it always does.
So when you look at the supply/demand curve, our view is that it [lithium market] goes very tight for a number of years. And the first relief, if it is relief, will really be that period around 2020.
Keith: Wow that's great for you guys. And your Olaroz mine expansion will be ready when?
Richard: We've just completed the scoping studies and we are looking at doubling lithium carbonate production to 35,000 tons per annum and potentially building a lithium hydroxide plant in Japan, integrated with down-stream manufacture of cathode. We move into design then and all being well we'll have first meaningful production in 2019.
If we weren't there with Phase 2 at Olaroz, it [the lithium market] would be impossibly tight. I mean you need everything to be going well to deliver [global] 10% CAGR in lithium production. There are more of existing committed expansion on things and to do better than the 10% CAGR you need projects to come on. So you need to keep up with 10% CAGR, Mt. Marion, Mt Catlin, Albemarle-you need them all to work. If they start to slip then we have a lot more tension.
And to do anything better than that you need to start to provide some relief or better than 10% for 2018/2019/2020. You need rapid development of other projects.
Keith: So there really is a window here for the Cauchari asset that you joint-ventured with Advantage Lithium. It's right in the wheelhouse.
Richard: There's a real window there, exactly.
Keith: Now you said you had some issues getting Olaroz up and running, some delays. What were the lessons you learned in the delays you've experienced in getting to full production capacity?
Richard: Well we learned that expertise doesn't rely necessarily on the engineering houses you rely on. If you look around the world you'll see lots of examples of projects that didn't go quite right for whatever reason. It might blow out cost wise or take longer and that would be more an implementation matter. But if you don't reach production rates according to plan smoothly that's often an engineering design issue. We had lots of compounding minor engineering issues.
Having said that Keith, we beat ourselves up about our ramp up because it wasn't what we desired. The funny thing is when I'm comparing it against other projects our own progress wasn't bad on a comparable basis but it wasn't as fast as we wanted or expected. I thing we underestimated the complexity.
Richard: Now the reasons for this is there is a level of complexity in the plants that needs to be worked through. You have new components and new process routes; you've gone from small scale to sophisticated modern scale. It's not easy. When there have been 20 [modern lithium facilities] built and you know all the issues then your results will be more predictable but at the moment that's not the case.
There's nothing earth shatteringly challenging, but the application of well managed engineering in new situations is where you underestimate the challenges. So I think it's more a matter of underestimating rather than being able to learn anything magic.
Keith: Right and that makes sense. This is a relatively new industry that's just getting its first global scale push and so that makes total sense to me.
Richard: It was hard work. As having to deal with the normal things of any project development the technical challenge and needing success on exploration, driving feasibility studies, etc. we also had to deal with delays in our permitting due to the provincial government wanting to negotiate a return on its mineral resources and hence why we have the government as our partner.
Then we had to deal with all the difficulties of a national regime that was restricting imports and access to US dollars to pay for them during construction. Then we had to deal with the challenges of building a plant at 4,000 meters on top of the all the challenges when things haven't been done before. And then you have to consider the level of experience of the work force. There has been a lot of learning over the last 18 months.
This is a lot harder than building a regular gold plant. These things are one-of-a-kind and the last one was built 20 years previously with FMC and SQM at about the same time.
And the pitfalls that we've had to deal with because of the intellectual property of these plants lies within the operating companies and not within the engineering houses and so all that nuance of design that avoids errors you shouldn't make exists within the operators rather than the engineering houses.
So Phase 2 for us will be very de-risked compared to Phase 1 because we now have that learning of that IP.
That said, we are now in a position where we are consistently producing at around 80% utilization rate with cash margins in the order of US$6,500 per tonne and we expect our production rates to increase while we are seeing product prices increase, so things continue to improve. It is satisfying to see the business move from a development phase to one where we are being judged on revenue, cash generation and margins.
Keith: What would the lessons be for you if you're talking to other companies like Advantage Lithium and giving them some feedback on how to do business in Argentina? What would you say? What lessons would you impart to other companies moving forward to production in Argentina?
Richard: That's a good question. Well, stick to your principles —especially those which are immoveable — be constant, and don't flip-flop around. Be patient and get used to a noisy environment with lots of volatility.
Keith: You're a producer; you want to focus on production and on the mine expansion. So tell me about how you accumulated your development and exploration assets that you are joint venturing-was it over time or all at once?
Richard: We were there with Olaroz in 2006 and the core assets in it and then again in 2008 we created this joint venture exploration company with Miguel Peral to go and acquire more assets.
Richard: We spent a lot of money acquiring good properties on a number of open stakings as well before it became popular. So we put together this very good portfolio. When the market slowed we dropped anything we didn't really like and held onto the good stuff.
So the things we've dealt with David [Sidoo, CEO of Advantage Lithium] are all the things we can see the potential for a real prize.
Cauchari is obviously the first, but the other 2 - Inchausi and Antofalla, are properties that are on the salar, and there is lithium there. But they are longer development timeframes obviously because we haven't drilled it yet. We have no idea what the geology or hydrogeology is, or depth of basins.
But we do know the brine is a bit different and will require the development of another processing route compared to what we have at Cachauri and Olaroz.
That is why Cauchari is up there, up front, and we have already worked on brine chemistry and the mineral processing is already determined. We've built a plant around the same brine chemistry already.
And because of its proximity [to the Olaroz mine] it has the potential to piggyback on the capital we we've already put into Olaroz either just on infrastructure or potentially to use Olaroz through another expansion as the processing plant for the brine pump at Cauchari, or Cauchari could be independent. We have to see how it goes. There is certainly a lot of optionality which could result in a fast track.
Keith: OK, those are the assets. How did you decide to get value out of them?
Richard: So we have these wonderful assets but no way of advancing them when they want to be advanced. I mean we don't want to sell them either.
So we went through this year  being hounded by people all the way through the year…and that kind of refined our response as a reaction to circumstances.
The best way to create value and maintain exposure was to find the right people to rapidly push these assets along without it being a distraction or a corporate management time suck being the key thing.
Keith: You would have had a lot of people to choose from-everybody wanted these assets. I assume you were getting lots of calls over the last 9 to 12 months? Did it reach a crescendo at some point?
Richard: Well it was getting pretty intense from July/August to October where I think we landed in October.
Keith: How did you choose Advantage Lithium as your partner?
I've only known David Sidoo at Advantage a little bit, maybe about six months, but I liked him immediately. I think he's a good guy and I think he does business in the same way we do. I like his nervous energy and I like the people who come with him-Callum Grant and Ross [McElroy]. And Miguel Peral, who will move across to work with Callum gave them a big tick.
And when you start to look at the team, and the ability to create a company, rather than just a transaction-David was the obvious group for us to work with, out of all the people who approached us.
When you start to look at all those things that make partnerships work and companies grow. I have to say that just from the little time I've been running around the world with him, Toronto or Hong Kong; I still maintain that position. I'm sure it's going to be a very good relationship.
Keith: Tell me a little bit about some of those things that make partnerships more than just a transaction. In your experience in doing business what are some of those things?
Richard: You have to be able to get on. You have to have the same kind of principles and values and you don't want big egos around the place. And you have to be able to have an honest exchange of views without taking offense — all those things. If you're going to have a partnership it's about being able to work together in let's say harmony and you can have moments of disagreements but you move on and solve it rather than playing politics and the factoring of egos or where things become dysfunctional.
All of our shareholders I have spoken to are very supportive of the transaction. And there's a number who can invest outside Australia who will be participating in the [Advantage] fundraising. So they don't just like it from the Orocobre point of view but they like it to put their money into it too. And these are smart guys.
Keith: Were the other suitors just like Advantage in the sense of junior companies are actually industry players or commodity players…what was the breadth of people looking at those assets?
Richard: There was one large industry player and there have been 6 or 7 if not more junior players either are up and running or want to be up and running.
Keith: Okay. Let's talk about the lead asset in the Advantage Lithium deal, Cauchari. What kind of timeline and cost to get that asset to pre-feasibility and bankable feasibility?
Richard: I think you can do a scoping study or 'pre-feas' within 15 months. The permitting is just done and ready to go and we started that some time ago. It's fortuitous that the EIS approval for the exploration program is imminent and so AAL can get drilling there in March and that will provide all the detail.
The biggest thing that needs to be done, of course, is to set the direction on the mineral processing. If you do the scoping pre-feas in 15 months and your feasibility could be done in, say, 12 months after that.
Let's say you can have your feasibility done in 2 and a half years potentially, and that's shorter than in the presentation. The reason for that being the presentation numbers were down in isolation which is a very busy time as we finalize that and the presentation is done without our input and when I say "our" I mean Orocobre input.
Richard: So I think that can be done faster.
Keith: Richard, thank you. Anything else you want to add?
Richard: We've been looking for the right way to advance these projects, and that's where Advanced Lithium comes on with all those very important things we talked about with David and his character and other people and how we can partner.
I'm pretty confident it's going to be a good relationship that will add value.
Keith: Thanks again for your time today, Richard. God bless.
Richard: Cheers, Keith.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Disclosure: The Oil and Gas Investments Bulletin is a team of writers. This article was written by Keith Schaefer, Editor/Publisher. We did not receive compensation for this article, and we have no business relationship with any company whose stock is mentioned in this article. The author of this article has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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