Lithium Investing: Toyota Hits Records Hybrid Sales; Increases Position In The Lithium Supply Chain

Summary

• Toyota has experienced record electric hybrid vehicle sales; released its new energy vehicle strategy until 2030.
• Company has increased its investment in lithium chemicals company, Orocobre.
• Advanced lithium exploration and early stage producers are best positioned to benefit from emerging demand.

The lithium industry is off to a red-hot start in 2018 as Sociedad Quimica y Minera, (SQM) the world’s largest producer of the white metal, struck a deal with the Chilean authorities to increase output over the next years. This news was expected for some time and is welcomed as the battery supply chain nervously awaits new lithium supply to come to market in the next year. To have a major, proven supplier announce that it will continue to defend its leadership role is an event that the industry needs to ensure that the new energy vehicle and stationary energy storage market takes flight in the coming years.

The market also received news that Toyota Tsusho will acquire a 15% stake in Orocobre(OTCPK:OROCF)for a total investment of A$282 million, which will allow the companies to significantly increase output at their flagship lithium brine asset, Olaroz. Production at Olaroz will increase from around current production rates of 14,000 T LCE per annum (nameplate 17,500T/year) to 42,500 T LCE starting in 2019-2020. Toyota Tsusho will also take the exclusive marketing rights for all lithium chemicals produced from the expanded facility. Lastly, the Joint Venture is moving to build a lithium hydroxide facility in Japan, using a combination of debt and available government incentives to cover the vast majority of the capital expenditures.

Shift in investment focus to advanced lithium exploration companies

This allows for me to believe that existing 2018 advanced lithium exploration and producers will quickly separate themselves from early stage contenders who will be sure to fall off the global stage. Should this materialize, then valuations for late stage exploration companies, such as Advantage Lithium (OTCQX:AVLIF), Nemaska Lithium (OTC:NMKEF) and Lithium Americas(LAC) amongst others, will appreciate while investment funds will leave highly-speculative, early stage exploration companies. This is a shift that I strongly encourage as there have been far too many companies that have recently entered the lithium exploration business with no strategic partners and are making misleading statements to investors – something that will come to an end in 2018.

Lithium supply chain eager to obtain access to the white metal

Toyota Tsusho has so far done an excellent job in marketing the lithium chemicals produced at Olaroz. In fact, the company is so bullish on the current and future prospects that they have taken a 15% stake in Orocobre and are now planning to bring a lithium hydroxide facility to market over the next few years. This is a clear indication that demand for lithium carbonate will continue to be strong and that the market requires an increase from existing producers, something that Toyota Tsusho will look to fill. It is also a clear indication that the battery and material manufacturers along with OEM’s in the value chain in the remains eager to secure lithium supply, which could translate into opportunities for advanced stage lithium exploration companies to secure strategic relationships through capital investments or acquisition.

Although lithium supply is increasing, much of the supply is allocated well ahead of any material being produced, through off-take agreements. Lithium Americas entered an off-take agreement with Ganfeng for its portion of lithium production at its Cauchari project. Ganfeng is one of the largest Chinese battery material producers that requires a sizable supply of secure lithium. On the same token, Orocobre has been working on an exclusive marketing agreement with Toyota Tsusho, which receives a commission for materials sold. However, it is my expectation that lithium chemicals produced by the Joint Venture in Argentina and Japan would be used directly in batteries for Toyota Motors' (TM) expanding electric vehicle lineup.

In 2017, Toyota experienced record sales in hybrid electric sales which topped 1.52 million units with an 8.8KWh storage capacity rating. With an annual production of 10million vehicles, hybrid electric sales now represent over 15% of the company’s production capacity. In total, the 2017 sales of hybrid vehicles required a total of 13GWh of battery manufacturing capacity. In 2016, Toyota announced that they would begin to integrate lithium batteries over NiMH with the initial production facility capable of producing 100,000 units/ year and a second facility expected with a capacity of 200,000 units to be brought on-line by 2019. The 300,000 unit production capacity could represent 2.6GWh of battery requirements although it is still unclear how Toyota will source or build out its battery manufacturing capabilities.

In December 2017, the company announced the electric vehicle strategy which includes:

• Committed to building 1 million zero-emission vehicles by 2030 along with a total of 5.5million electric vehicles which include hybrid models.
• 10 pure battery electric models are to be available worldwide by the early 2020s, starting in China, followed by a role out to Japan, India, United States and Europe
• By around 2025, every model in the Toyota and Lexus line-up around the world will be available either as a dedicated electrified model or have an electrified option.

The point being drawn is that Orocobre’s production, much like Lithium Americas, could be allocated for a single user of the chemical. Based on the product development roadmap for both Toyota’s electric vehicles and Olaroz Phase 2 along with the Japanese hydroxide facility, there are some parallels between the various development efforts. All indications are that Toyota now feels comfortable with lithium based battery technologies while experiencing record demand for its line-up of hybrid vehicles. To support the transition to lithium the company is heavily investing throughout the supply chain which should allow the market to expect additional news on its production strategy in the near term.

Off-take agreements ensure that the project can be financed as a bankable customer has been identified for future materials produced from a site, but it also ensures that new supply is allocated for a single or small group of partners rather than flooding the open market with unallocated material.

Closing window of opportunity for lithium exploration companies

The underlying takeaway is that companies downstream in the lithium supply chain continue to look for new supplies of the white material, which presents an opportunity in 2018 for junior lithium exploration companies to complete strategic arrangements and raise the necessary capital to move their projects forward. Even with SQM’s announcement, there is still significant room for a group of core players to enter the production stage over the next few years. Major users of lithium carbonate and hydroxide chemicals will continue to seek out a diversified supplier network rather than sole sourcing their requirements. There are other investment companies looking for deep exposure that will allow them to capitalize on the shift to electric transportation; these companies are likely looking to deploy capital through construction financing and share ownership or company acquisition. Users of the material, such as battery and material manufacturers, who are deploying a significant amount of capital into expanding manufacturing capabilities, could also continue to seek out off-take agreements or other strategic relationships.

In 2017, the market saw very strong lithium prices, which have carried over into 2018 and, with no major new supply coming to market in 2019, strong prices should persist going into 2020. It is in my opinion that these lithium chemical production plants take years to finance, commission and ramp up to name plate capacity. If the world was to see oversupply in 2020, then new production would need to come online in 2018, which is certainly not the case. New plant and expansion efforts will begin construction in 2019, allowing for meaningful new capacity to enter the market in 2021 and beyond.

However, the window of opportunity for these advanced junior lithium exploration companies is slowly closing. The window for early stage lithium explorers has already closed, so the focus is on advanced lithium juniors or companies that can offer a strategic or unique value proposition through a valued relationship or land holdings. In my view, the Toyota Tsusho investment signals that OEM’s and other strategic players are still concerned over the availability of high volume lithium chemical supply. Collectively, this should allow for investment capital to continue to be deployed into companies with good projects that are well advanced, and the timing is perfect for advanced juniors to establish relationships that will lead to off-take agreements and capital investment by the end of 2018.

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Analyst’s 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.