Lithium Investing: 2018 Key Trends In The Lithium Mining Markets

by: Livio Filice

The global automotive industry continues to announce the release of new electric vehicle product offerings which is spurring investment into battery capacity.

The stationary energy storage market continues to assist in placing pressure on the lithium supply chain.

China will remain at the center of the electric vehicle market as the nation moves to meet 10% electric vehicle supply requirements.

Argentina is expected to continue to draw investment from explorers and producers.

The Olaroz-Cauchari basin will be the focal point within the Argentina region of the lithium triangle.

Over the past year, the lithium industry has seen several positive changes, such as automakers committing to build lineups of electric and plug-in hybrid vehicles. These commitments from automakers have activated the battery supply chain from lithium extraction and exploration to battery cell and module manufacturing. In addition, secondary applications for lithium batteries, such as electric buses and stationary energy storage, continue to make great advances due to decreasing battery and electric motor pricing. Recent emission control scandals and growing international pressure on the automotive industry to cut exhaust emissions has assisted in expediting the introduction of electric vehicles.

In Q4 2017, Britain and France both said that new petrol and diesel cars will be banned by 2040, while China continues to build its new economy by forcing automobile manufacturers to build more new energy vehicles by 2020 or purchase credits from other producers. Overall, it has been a positive year for lithium investors in senior and junior producers and exploration companies. Lithium has remained in tight supply over the past few years while demand has started to increase, which has helped increase prices from $5,000 / T LCE to around $13,000 / T LCE in November 2017.

Build Out Of the Automotive Supply Chain

Throughout 2017, automotive companies grabbed headlines as they announced soon-to-be-available electric and plug-in hybrid vehicles. Dozens of new energy vehicles are expected to be available by the end of the current decade. Volkswagen Group (OTC: OTCPK:VLKAY), on the heels of a major diesel scandal, has shifted gears as they announced plans to build 3 million EVs a year by 2025. Jaguar, Renault-Nissan, and several other key players have also all announced plans to build EVs and some will build or expand their own battery manufacturing capacity. Ford (NYSE:F) and GM (NYSE:GM) have announced plans to quickly roll out a combined 29 electric vehicles in the Chinese market over the next two years, which will allow the companies to meet the 10% electric vehicle production run rates. Automotive companies and their strategic sourcing arms view lithium batteries as a critical component in their ability to ramp-up battery production.

For batteries to be available for integration into automotive manufacturing processes by 2019 - 2020, battery cell and pack manufacturing capacity needs to be increased in 2018 - 2020. Battery material companies, such as LG Chem (OTCMKTS:LGCLF), Samsung (OTCMKTS:SSNLF), and Panasonic, are all poised for growth if they can best position themselves for the upcoming automotive battery boom. In 2017, LG Chem announced plans to invest $1.6 billion in a new factory located in Poland, which will produce 100,000 EV batteries. Furthermore, the company is looking to make investments in China to increase battery manufacturing capacity. Panasonic (OTCMKTS:PCRFY) has committed to increasing production at Tesla's (NASDAQ:TSLA) Gigafactory in Nevada from an annual run rate of 35 GWh in 2018 to 105 GWh by 2020. In China, CATL has disclosed plans to undertake a $2 billion IPO to roll out an expansion plan to increase production from 7 GWh to 50 GWh by the end of the decade to support the shift to electric vehicles.

The battery materials business is significantly increasing global output to meet the automotive industry's demand due to increasing interest in electric vehicles. The battery material business will generally plan for future production increases and requires the time to source strategic components and materials, such as lithium, which is exceptionally difficult to source in high volumes with technical specifications. The increasing amount of new electric and hybrid vehicles is activating the entire lithium supply chain. Last year, it was reported that LG Chem could not maintain battery production to keep up with demand for a Hyundai electric vehicle.

2017 was a year of announcements from automakers, while I expect that 2018 will be a year of continued product announcements and shifting government policies. It is in my opinion, that based on the increasing number of electric vehicles that have been announced, the battery market will continue to make announcements around the expansion of manufacturing facilities around the world.

Should this occur, it could be led by the large battery pack and cell manufacturers and automakers alike. These same companies, or their direct material suppliers, could potentially dive deeper into strategic sourcing of various minerals required to build batteries. The continuation of battery and automaker build out announcements will keep lithium in the spotlight, ensuring that project and construction financing is available and capital continues to move into the stocks of lithium producers throughout 2018.

(Argentina Lithium Tour 2017) Posing for a photo at the Olaroz basin

Maturing Energy Storage Market

After several years of rumbling within the energy space around the ramp-up in deployment of stationary energy storage systems, 2017 was the breakthrough year for the industry. Many high profile, large-scale installations were completed while a large number of new projects were announced. These projects were either driven by private organizations looking to participate within the utility service market or utilities directly acquiring assets to deploy under their umbrella. The global residential markets also continued upwards with the German and Italian markets moving forward. The industry is now seeing widespread adoption of smaller home and commercial storage systems in key markets such as Germany, Italy, California, Hawaii, and the Caribbean.

Even throughout non-core markets, consumer awareness around battery technologies created new markets that did not exist only a few years ago. The North American and Caribbean markets have also reached a tipping point as bankable product is now widely available and solar contractors, utilities, energy service companies, and other channels have embraced various user models for the technology. Today, the primary global channel for stationary storage projects remains the solar installation community, which is now well versed on lithium battery technologies and will ensure the industry continues to grow.

The primary reason for an increase in stationary storage deployments is directly linked to the decrease in battery costs, which is associated with the ramp-up in the new energy vehicle market. Battery prices have decreased over the past decade from $1,000/kWh to $300/kWh today and are projected to continue to decrease below the $100/kWh threshold by the end of the decade. Several component and system integration companies have taken the approach to supply automotive-grade batteries directly into the residential market. Although the product is not tailored directly for the use application, it does allow for a lower cost product, which is often a barrier for new technology adoption.

In my professional opinion, the American residential market will continue to grow from approximately 5,000 systems deployed in CY 2017 to 15,000-20,000 systems in CY 2018. The market opportunity can be summarized by geographical locations. Through the Caribbean region, specifically Puerto Rico, there is a very strong demand for energy storage systems due to the recent natural disasters that left the island with no power for an extended period of time. On various other islands, the utilities have dismantled net-metering programs, which encourages solar plus storage installations. In Hawaii, the grid supply option has been closed off since the fall of 2017.

Simply stated, all new solar PV projects must demonstrate that they are able to contain any excess power produced onsite, which can be achieved through the installation of battery systems. In California, the Self Generation Incentive Program has been a hit and miss, but is certainly assisting with the deployment of these new technology systems by offering a strong financial incentive coupled with the Federal Tax Credit for solar plus storage assets. Throughout the balance of the USA, consumers are embracing the technology for a number of applications, including as a backup power source for essential loads and to avoid exporting electricity back into the power grid at devaluated energy rates.

Secondary applications, such as the stationary energy storage business, are gaining significant traction due to the decreasing cost of battery technologies and increased penetration rates of renewable energy systems. Utilities, energy service companies, and large-scale project developers are also discovering the value that energy storage brings to different stakeholders throughout the energy markets, which is driving new demand, especially at the utility-scale level. Large, utility-scale projects continue to be planned and implemented with larger storage capacities. There is a clear trend that lithium batteries in stationary storage applications have taken flight but is still in the early days. It is expected that more players will enter the stationary storage market in 2018.

Despite the market for stationary storage technologies reaching a tipping point, the total impact on the lithium supply chain remains limited. Should the North American market reach the projected volume of 15,000 systems at 10 kWh of storage capacity per system, this would translate into the same amount of storage capacity as approximately 2,000 electric vehicles. The 100 MWh battery plant Tesla completed in CY 2017 represents the equivalent storage capacity of 1,200 electric vehicles. On a global basis, should each of the market segments in each key geographical stationary energy storage market continue to gain momentum, then the arising demand will have a material impact on the lithium supply chain. This will be especially true for large manufacturers of battery cells and packs as they will need to make decisions on the allocation of manufacturing capacity and new investment. It is in my opinion that the battery industry will shift towards supporting automotive-grade batteries due to the opportunity. This could encourage the trend of automotive-grade material landing in non-auto applications.

Based on announcements made in CY 2017, industry observers could see an increasing number of headlines around new applications for distributed energy storage assets, such as Virtual Power Plants and the adoption of Block Chain technologies. Another interesting market in 2018 will be the utility-scale industry, which will make up most of the headlines as projects are announced and installed.

China - Domestic lithium carbonate pricing and electric vehicles

In the second half of 2017, the Chinese government provided an extension to the domestic automakers on the timing to meet certain new energy vehicle mandates. The government has confirmed that automakers that produce over 30,000 units per year in 2019 will need 8% of their fleet to be new energy vehicles. This figure will grow to 10% per year in 2020. The primary reason for the postponement was that the global lithium supply chain, from lithium carbonate to battery materials, could not ramp-up quickly enough, so a delay was enforced. The Chinese are not alone in attempting to build their electric transportation industry, as many other countries and companies are moving aggressively to introduce new products.

Collectively, these factors have placed significant constraints on the lithium market, sending pricing over the past two years from around $6,000 / T LCE to $13,000 / T LCE as of November 2017. In October 2017, it was reported that lithium carbonate prices in the Chinese domestic market skyrocketed to over $18,000 / T LCE while international prices remained around $11,500 to $12,000. It is now expected that the price outside of China will gradually catch up to the Chinese internal price. Over the next year, the key driver for additional lithium within China will be linked to an increase in battery production for various applications, plus new facilities will require a stockpile of inventory to ensure that new battery factories have sufficient lithium feedstock to keep production moving.

China is already the world's largest user of lithium in industrial applications, electric transportation, stationary energy storage, and consumer devices. However, the country only produces a small amount of lithium from brines and this production output is not expected to rise over the next few years. It is clear that China is looking outwards to meet their lithium supply requirements due to a lack of technical expertise to develop their lithium assets. The Chinese have taken various approaches to sourcing the strategic chemical, including acquisition and investment.

In 2012, Australian lithium hard-rock miner, Talison Lithium, was acquired for$847 million and has recently announced plans to increase production through a$400 million investment at the Western Australian Greenbush project. In early 2017, Lithium Americas announced a financing and offtake arrangement with China's Ganfeng Lithium. Under the terms of the agreement, Ganfeng has invested an aggregate amount of $174 million in exchange for 19.9% of the outstanding shares of Lithium Americas, the right to buy a fixed portion of the lithium carbonate produced at the Cauchari project and provide a $125 million project debt facility. In late 2017, Chinese investment group, NextView, acquired Canadian-based lithium exploration firm, Lithium X (OTCMKTS:LIXXF). Lithium X was focused on the development of a 2 million T LCE lithium brine project located in the Northern Argentine province of Salta.

The chart above illustrates China's aggressive plan to increase lithium battery production capacity, which has primarily been driven by the mandates imposed on automakers to produce 10% of their fleet in the form of electric vehicles. This will assist with increasing global production from 28 GWh in 2016 to 174 GWh in 2020. Panasonic, LG Chem, Boston Power, CATL, LISHEN, CALB, BYD, and Samsung are all presently increasing production capacity within China. With China ramping up its battery manufacturing capacity to meet the emerging demand for new energy vehicles and various other applications, it should be expected that demand for input materials will also increase in parallel with these activities. Even with the increase in lithium hard-rock output coming from Western Australia, it is still expected that it will not be not enough to meet the short-term requirements. This will ensure that the prices continue to firm up at increasing levels over the next 12 months.

Argentina, Argentina, and Argentina

Argentina was probably the hottest topic in 2017 with retail investors looking to gain exposure to the booming lithium market. After reporting on the Argentine lithium business for five years, I had the opportunity to visit the famous Lithium Triangle located in the Northwest mountain region. Two key macroeconomic factors created demand in Argentina. First, lithium demand skyrocketed as the automotive industry made announcements around new energy vehicle product offerings, which created a flurry of activities downstream. Second, in 2015, Cristina Fernández de Kirchner, a populist president, lost the general election. Argentina's new business-friendly leader, Mauricio Macri, has worked aggressively to attract investment into the overall economy, which has spurred activity in the lithium exploration and production markets.

Political economic actions allowed for more favorable currency controls, which devaluated the peso and started a shift towards scrapping export taxes. There have also been favorable actions towards maintaining and accessing information on land claims, harmonizing tax regulations, and standard royalty rates that are clearly making it easier for exploration and existing mining companies to shorten development and construction timelines. The overall impact is that the world can expect some relief in the years ahead in bringing meaningful lithium capacity to market.

With Argentina now open for business, the timing could not be better as the country hosts one of the largest global reserves of low cost lithium product. Today, there are only a few lithium production companies operating in Argentina, including FMC Corp. (NYSE: FMC) and Orocobre (see "Lithium Mining - Reviewing Opportunities within in the Production Oligopoly"). FMC operates a well-established lithium brine at the Salar de Hombre Muerto, which was successfully expanded in recent years. Today, the facility produces 22,000 T LCE up from 17,000 T LCE, or a 30% increase. In 2016, Albemarle Corp (NYSE: ALB) ventured into Argentina by securing an exclusive exploration and acquisition rights package to a lithium resource in Antofalla. The company believes that the lithium resources at Antofalla will be certified as the largest in Argentina.

The prices for these diversified chemical producers have more than doubled in the past year, so appetite for higher risk equity options has been in high demand. A number of companies have identified shell listings as a good vehicle to quickly raise capital and head down to Argentina with the goal of acquiring land packages. There are now dozens upon dozens of junior lithium exploration companies that have raised several million in funds, secured land packages in prolific lithium basins, and are now going through initial drill programs.

To be clear, nearly all of these companies do not have the technical expertise to move a project forward through the completion of a Feasibility Study, so there will likely need to be some form of consolidation in Argentina over the next few years. From a quality investment standpoint, it is important to identify companies that have relationships in place with key individuals in the region, off take partners who have committed to purchasing the lithium materials produced, and a technical partner in place to assist with the development of the project and who can also bring the necessary construction financing to move the project forward.

Looking forward, Argentina is well positioned to draw foreign investment into lithium exploration, extraction, and processing. In 2016, the nation generated over $1.5 billion in lithium investments, which will continue to rise as existing producers, such as Orocobre, move to increase their output and other near-term producers, such as Lithium Americas, are scheduled to invest hundreds of millions in the region in the coming years. The Argentine government now expects to achieve annual production rates of 145,000 T LCE in 2022; this will ensure that Argentina remains a hot-spot for retail and institutional investors alike as they look to profit on this emerging region of the world.

Cauchari-Olaroz remain centerfold for brine-based investment

The large focus in Argentina is around the Cauchari-Olaroz basin, which has attracted large sums of capital from companies such as Orocobre (OTCMKTS:OROCF), Lithium Americas (OTCMKTS:LACDF), Advantage Lithium (OTCMKTS:AVLLIF), SQM (NYSE:SQM), Ganfeng, and Toyota Tsusho (OTCMKTS:TYHOF). At present, only Orocobre is operating in the region while Lithium Americas is currently planning out the construction of their facility in conjunction with SQM and Ganfeng. Advantage Lithium, which is essentially a spin-out of Orocobre, has been established to further define the basin and mobilize plans to increase lithium brine output from Cauchari or build a third standalone brine facility in the basin. The role of each party within the basin is still emerging as Orocobre has divested non-core assets to entirely focus on the Olaroz project while moving upstream in the chemical business.

(2017 Argentina Lithium Tour - View heading into the Lithium Triangle)

Advantage Lithium, presently going through exploration activities, has announced multiple positive drill results on the properties that straddle the Lithium Americas site. It is expected that Advantage Lithium will complete the drill and pressure test in the first half of CY 2018, which will pave the way to the completion of a resource estimation and scoping study. It is in my opinion that, in parallel with these efforts, the company will announce an Asian partner who has the financial backing to support the construction of a standalone facility and consume lithium materials produced at the site. Although it is still too early to draw conclusions, the company is well funded and has the necessary technical expertise and local relationships in place to move the project forward into the first half of CY 2018.

Current status in the Cauchari-Olaroz Basin

In 2016, SQM purchased a 50% ownership stake in Minera Exar SA, the local operating business of Lithium Americas, for a net cash consideration of $25 million. Since the transaction closed, the companies have moved forward to update the definitive feasibility study with the objective to outline a plan for 40,000 T LCE per year. Cauchari-Olaroz is projected to be the world's 3rd largest lithium brine resource with permits for construction and development in hand. Early in 2017, Lithium Americas, a lithium exploration company that focused its flagship lithium project at the Cauchari lithium salar, was able to make significant headway toward production.

After years of stalled activity due to an unfavorable Argentine political landscape, the company was finally successful in recruiting Chinese lithium giant Ganfeng as a project partner. Established in 2000, the Ganfeng Group is the largest integrated lithium producer in China, with a total annual capacity of 30,000 T per annum of LCE. Ganfeng's products include lithium metal, lithium hydroxide, lithium carbonate, lithium fluoride, and lithium chloride. Orocobre's flagship project, Olaroz, was constructed with an annual nameplate capacity of 17,500 T LCE. In 2017, the company's maiden year of production, total output amounted to around 11,500 T LCE, which is still a great distance away from Olaroz's nameplate capacity. The company has indicated to shareholders that the vast majority of the start-up bottlenecks are now in the past.

It's expected that the company will begin to reach near nameplate capacity toward the end of FY 2018, representing year-over-year growth in annual production. Orocobre and Toyota outlined an aggressive three-pronged expansion plan that would be fully implemented by the end of the decade. First, the company will double annual output at Olaroz by increasing the nameplate capacity to 35,000 T LCE by way of a $160 million investment. At present, the permits for the Olaroz Stage 2 expansion are in place, which significantly de-risks the timing of the development.

Second, a 10,000 T/year lithium hydroxide plant will be constructed in Japan, utilizing heavy government incentives that will offset a significant portion of the capital cost. Third, the proposed annual product mix of lithium carbonate will be 17,500 T battery-grade from its existing operations and 17,500 T industrial-grade, of which 9,000 T will be allocated to supply the upcoming hydroxide plant in Japan. In March 2017, Orocobre and Advantage Lithium announced the completion of the sale of certain non-core, exploration, Argentine properties to Advantage Lithium.

In consideration for the land package, Advantage issued over 46 million common shares to Orocobre, the retention of 25% in the project, and a royalty fee on production. In the first half of 2017, the company was successful in closing a $20 million financing round, which is dedicated to advancing the Cauchari property. Based on a projected 2018-19 budget of $7-10 million, the company is well capitalized to produce a feasibility study. The company recently announced that it had reached the $5 million expenditure target at Cauchari, earning the company a 75% interest in the project.

(Argentina Lithium Tour 2017 - Salt Operation in Jujuy, Argentina) With a tremendous amount of new capital being invested in the basin by this group of companies, it is clear that they will be the primary focus in the lithium brine market. It is expected that, in 2018, the Olaroz-Cauchari Basin will continue to develop into a leading global region for low cost, high quality, battery-grade lithium carbonate.

Disclosure: I am/we are long OROCF, AVLIF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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