Consolidation Potential For Lithium Juniors GXY.ax, LI.v, ILC.v, ORE.ax, RM.v
Deep Value, Commodities, Gold
Seeking Alpha Analyst Since 2006
We have been talking here about the security of supply of strategic commodities for quite a while. All major players in Lithium batteries market prefer to keep chips close and bought strategic stakes in lithium developers. Now we have a consolidation in Lithium junior miners started by Galaxy Resources. From the four Lithium darlings we are following here: International Lithium, Rodinia Lithium, Lithium One and Orocobre - Lithium One is taken out now.
James West - the founder of Midas Letter - still has his golden touch.
James West has been talking about Lithium One and International Lithium in his recent Energy Report and now one of his picks in this sector is bought out.
Galaxy move will add Lithium and Potash brine in Argentina to the portfolio of hard rock mining lithium in Australia, lithium chemical plant in China and lithium battery plant in the making in China as well. Can we talk about vertical integration in the Lithium industry already now?
Consolidation Potential for Lithium Juniors
Resource Investing News
By Dave Brown - Exclusive to Lithium Investing News
Last week, Galaxy Resources Ltd. (ASX:GXY) acquired Lithium One Inc. (TSXV:LI) in a friendly deal for approximately $112 million. The acquisition provides Lithium One shareholders with 1.8 Galaxy shares per common share in an all-share deal that implies a 27 percent premium for Lithium One shareholders on a 30-day volume weighted average price basis. It will be interesting to observe the perception of the deal from the market, as Galaxy has requested the suspension of trading preceding an announcement to raise capital.
Galaxy owns the Mount Cattlin hardrock lithium mine in Australia and a lithium carbonate processing plant in China. The company, which has indicated a production capacity of 17,000 tonnes a year, has off-take agreements with Mitsubishi Corp. (TYO:8058) in addition to Chinese battery manufacturers. Lithium One owns the James Bay hardrock project in Quebec, in which Galaxy already held a 20 percent stake, along with the Sal de Vida brine project in Argentina.
Potential risk of dynamic policy
Last week, representatives of 33 indigenous communities living in the Northern Argentinian provinces of Jujuy and Salta turned to the Supreme Court to claim their right to be consulted for exploration and development of lithium projects. This move comes following last year's declaration by the governor of Jujuy Province that lithium is a strategic mineral under Decreto 7592/11, asserting that all present and future lithium projects must be studied by a special expert commission before being approved by local and national authorities.
It is of interest for investors to note that Galaxy and Lithium's Sal de Vida project is located in the neighboring province of Catamarca, while Orocobre Ltd. (ASX:ORE,TSX:ORL) has operational exposure in the Salta region.
Recent historical context
Over the course of last year, a number of lithium exploration and development companies engaged in strategic alliances with consumer electronics companies, industrial conglomerates, and battery manufacturers in order to develop lithium resources. There have also been cooperative ventures between electric vehicle initiatives, automotive and battery manufacturers, universities, and governments to further prospective development and research.
A report from Ernst & Young showed that strategic merger and acquisition activity focused on simultaneously driving down operational costs and achieving growth. Sensible, lower-risk transacting was at the top of the agenda. Outside of the lithium industry, these factors gave rise to an increase in large-scale domestic consolidations, offering the promise of synergies and operations in a familiar environment. These deals provided a low-risk way to achieve growth and leverage existing knowledge or positions in the market.
According to the report, approximately 2.6 percent of the mining and metals merger and acquisition activity last year occurred in the rare earth and lithium sectors.
Potential positive implications of Chile's recent policy provision for lithium extraction may help to foster additional merger and acquisition activity within the junior mining sector. The most attractive targets will likely be those with exposure to advanced-level projects in jurisdictions that have favorable operating environments. Direct consolidation between lithium exploration companies and lithium producers could mean additional investment interest as opportunities may look more worthwhile for investors.
Securities Disclosure: I, Dave Brown, hold no direct investment interest in any company mentioned in this article.
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