Ken Brinsden – Leading WA’s Next Big Miner

Pilbara Minerals is a new junior miner currently constructing the Pilgangoora lithium project in the Pilbara region of Western Australia. They are one of the next miners to enter the market, currently on track to begin commissioning in Q2 2018 with one of the more favorable hard-rock projects around.  Given the potential of their company to enter the market and help satisfy Chinese lithium demand within the next 6-12 months, it’s no surprise that their stock is up over 200% since the beginning of September, and over 100% year to date.

We sat down with Ken Brinsden, CEO of Pilbara Minerals, and had a very interesting discussion.  He gave us his thoughts on EV’s, the lithium industry, and how Pilbara Minerals fits into the overall picture.  We hope you enjoy the interview below and stay tuned for our upcoming analysis of the company in the weeks to follow.

The Lithium Spot: Can you comment on how construction is progressing along on
your Pilgangoora project and if you are still on track to begin production in 1H2018?

Ken: There’s great progress being made currently with our construction site. The
footprint of the plant is coming out. The concrete is being poured. The first blast
happened last week. We’re starting work on the crusher and mining should start the 3rd
week of November. We should be commissioning in Q2 of next year (2018) and
shipping product that same quarter too. So it’s all going well, and it’s great to see it
unfold. And hopefully it’s exciting for our shareholders as well.

The Lithium Spot: Can you expand on the partnership with Great Wall Motors: What
do they bring to the table, and how it helps Pilbara?

Ken: They are an extremely innovative company and very forward thinking. They have
grabbed the bull by the horns. They believe firmly that the battery is the new
engine. They want to understand it. They want to add value to it. They are heavily
investing in R&D in battery technology and Lithium mining and moving from their initial
pilot scale thinking into a much larger perspective. They are very keen to secure their
supply chain.

Going back a step, Pilbara early on wanted to have offtake partners from a
diverse sales base and segmented throughout the Lithium Supply Chain. We first
started off with the chemical converters with partners General Lithium and Ganfeng
which are also great partners. From there, we thought about who else in the supply
chain could we sell to in order to establish some more diversity and get more engaged
with the battery industry and with China. Great wall came to the forefront since they are
growing into the Hybrid and EV marketplace. It is also worth touching on that Great
Wall motors is also different than a typical company in this space such as Tesla and
GM. They don’t want to encumber their customers with EVs that may be, in the short
term, infrastructure constrained. So they’re using the hybrid technology as a stepping
stone to the full EV. And as a result we all fret about whether it’s 5% EV penetration, or
7,9, etc. in the coming years. But I reckon what we should be talking about is 30, or
50% of cars sold in China being hybrid. I reckon that’s where most of the batteries get
consumed since the Chinese automakers are very heavily invested in that area.

Great Wall Motors and China in general are thinking first Hybrids and then plug
in. 30-50% being sold in china will be hybrid and that’s where most consumption of
batteries will occur. Great Wall Motors are very heavily invested in R&D in this
area. The cars themselves that they’re rolling out are basically engineered to carry any
platform: either hybrid, plug in hybrid, or EV. And their intention is that they’re all
manufactured on the same production line. And as a result, they have ability to turn out
significant scale and also very low costs.

In summary, this was a really good deal for the company and good deal for Great
Wall too.

The Lithium Spot: With many lithium companies seeking partnerships and deals with
auto companies (Toyota/Orocobre, Tesla with a few different suppliers), is it becoming
more of a necessity to do deals like this? Does it help from a credibility standpoint,
allowing miners to stand out from the herd of new potential entrants?

Ken: It is no doubt that Great wall is a sophisticated company. They are smart, have
strong English skills, and are pretty profitable too. It seems it is becoming a necessity.

I think people are starting to get it, but unless there are more sophisticated
relationships like this that unfold, and I’m not just referring to us, I’m talking about
across the board. Large scale lithium mining and expansion opportunities have to have
capital deployed in the very near term, otherwise, it’s clear that there will be insufficient
supply. We saw that equity markets were ready for [Pilbara] at beginning of year. Yet, it
was hard to raise debt. If capital freezes up or doesn’t continue at the current pace,
then we will have a big supply issue in the next few years.

That’s why I think the players downstream (Ex: Car and/or battery companies)
have no choice but to mobilize more capital upstream (Ex: Lithium Producers). They
are doing it in R&D, and in their factories factories like Tesla and the likes. But they have to let some of it go upstream, otherwise the raw material supply base won’t be developed in time.

We feel we’ve done a great job in developing a mine quickly. We started in late
2013, but that’s still 4.5 years to commissioning. And I think the brine operations, you’d
say take much longer than that. Probably a minimum 7 years, maybe as high as 10
years before they actually produce at nameplate capacity. And if you think through the
implications as to how quickly, especially the Chinese, are building out the lithium ion
supply chain, It only takes eighteen months to two years to build out chemical facilities
or cell making facilities. And yet it takes 4.5-5 years for hard rock, or 7-10 years for
brine operations. So there is a gross mismatch, and the industry really needs to get
moving to see that capital get deployed.

The Lithium Spot: Shifting the conversation a bit to production- There has been a lot of
talk about Hydroxide becoming more and more popular for EVs, which obviously
benefits hard rock producers, leveling the playing field a bit in terms of production costs.
Could you share your thoughts on this battle between hydroxide and carbonate, and
how that affects the overall industry production picture?

Ken: Yes it seems clear to me that hard-rock operations are absolutely going to steal
market share from the Brine operations. Part of it will be about the speed of the hard
rock mines to market. But I think in the end the key will be the quality. The minerals
you mine out of the ground in hard rock operations are just lithia and silicas. Whereas
the brine operations have every salt known to man in the water as it comes out from
underground. And as a result, the purification step is more complex to get to higher
purity products. And that’s where the playing field gets leveled from a cost point of
view. If you’re measuring at the right base, ie battery grade, then inevitably the brine
operations are more expensive than what they’re showing today because somebody is
spending more money on those brines to get them to battery grade, which is not shown
in their current cost base on every analysts global cost curve. In which case, if you’ve
got a low cost hard rock operation, then I’d argue you can be ultra competitive, if not
cheaper, especially on hydroxide, in comparison to a brine operation.

And I wouldn’t mind betting that’s at least in part a bit of the reason why ALB and
SQM are now actively investing in hard-rock operations. Because they know there is a
new paradigm in the quality required in the lithium raw material supply chain, and it’s
probably the case that hard rock operations are best at responding to that new quality
paradigm. And actually if you think through the logic in this, the situation gets worse for
brines over time. Because the logical conclusion to draw is that the battery industry
requires higher and higher specifications over time. Who’s to say that the new
standards in 3-5 years time is not super-battery grade, 99.8 or 99.9% purity, because
they want the ability to create higher value batteries or batteries with more power in
them, or batteries with a lower cost, or all of those things, and having a higher quality
product makes more sense.

Well if that’s the case, the industry that’s best able to respond, the supply chain
that makes more sense to produce that higher quality product, is actually hard-rock
operations. And that’s why, I think in the end, they probably become the preferred
lithium raw material supply base for the battery industry.

The Lithium Spot: Orocobre mentioned a few things in their recent earnings release pricingwas up again, but more notably they felt that no new supply came online during
the quarter from the big producers, which contributed to continued tightness in the
market. Do you believe the bigger producers are beginning to exhaust their expansion
capabilities and are struggling to bring new supply to the market? Does this level the
playing field for new junior miners like Pilbara?

Ken: It’s been a challenging season in South America (where ORE, SQM, ALB and
FMC are located). They’ve all had their challenges with weather events with Albemarle
struggling getting to nameplate capacity in La Negra 2, and Orocobre and SQM have
had their issues as well.

I’d like to think it’s a statement of fact, that a hard rock operation is more like a
factory than a brine operation. It’s just more certainty, it’s a known quantity what you’re
taking out of the ground, what you’re processing, and ultimately what you’re delivering
to a ship. Whereas, the brine world is a bit like farming. You’re somewhat subject to
the vagaries of the weather, and that’s what’ll determine your production rates and
output. So I feel like the certainty of outcome that comes from a hardrock operation has
to have some inherent value, especially when you’re talking about something as precise
as ultimately what it is to construct a battery and then of course a car. So I feel like that
level of certainty has to be valued over time.

What does it mean to be a Junior? Having come from the iron ore industry, I can’t help but feel there are some parallels that are worth sharing. The incumbents in
the industry I suspect had somewhat of an arrogant approach to the industry up until
maybe as late as 12 months ago where they thought they had this under control, they’re
okay, reassuring their big customers that the product is coming. And then all of a
sudden China jumped out of the box, and surprised the market as to how quickly
they’ve grown. As a result of this arrogance, the junior industry now has this amazing
opportunity to build out Tier I assets which would not have otherwise been thought
about before this whole market has taken off. Pilbara is an amazing place to work:
leveraging existing infrastructure to ultimately create a really high quality, low cost mine, with incredible scale. And that’s the opportunity being a junior, being nimble, and being prepared to invest and grow quickly. And out of all that, I feel like we are going to
create an amazing business.

The Lithium Spot: We believe that the big producers are going to start getting more
creative in finding new ways to supply the market. Do you see M&A activity heating up
in the space going forward as the cash rich majors seek new projects? Where does
Pilbara fit into that?

Ken: It seems like the logical outcome, doesn’t it? If you are trading at 20X earnings
and you can buy something for 4x or 5x earnings, wouldn’t you do it everyday? The
other dynamic here is that, especially ALB they’ve been very forthright in their views
about what portion of the market share they would win over time. But clearly the market
is growing much faster than they expected when they developed that strategy, because
there’s just absolutely no way that they can maintain 50% growth market share in the
current market, as it’s currently growing, without acquiring. They can’t do it and they
can’t do it with the projects that they have. They’ve thought about Greenbushes as
being a fantastic expansion opportunity, and I’m sure it is. But it’s actually not the
world’s best place to be building a mine. It’s a large, old mine now, that’s probably got
some legacy issues. It’s very deep, big cutbacks required, it’s a quite constrained in
relation to how close it is to the town of Greenbushes.It’s not that easy to get to the port
(which is a challenge for miner since it usually raises your overall costs and lowers your
gross margins). Whereas in the Pilbara, where I’d expect you to get probably 2 big
mines developed in the next 2-4 years (ourselves at Pilgangoora, and probably the
Wodgina mine). Those mines combined will dwarf Greenbushes, that’s my
view. And actually it’ll become the world’s largest lithium raw material supply
base by a long way. So I think that’s the opportunity that we’ve got in the North
Pilbara, and the leverage that comes out of being in such fantastic location and with
such an incredible resource.

The Lithium Spot: According to Goldman’s latest research piece on EVs, range anxiety
is not as big of a concern as it once was. Are you also hearing this shift in consumer
preferences from your partners and peers in the industry?

Ken: We haven’t talked about this that much in the industry. I think it might be
overblown for different reasons. I think what’s going to surprise the market is how
quickly the Chinese build out scale in the lithium ion supply chain, and how quickly they
reduce the cost for batteries. I reckon that’s probably the key point that’s being
underestimated in the market: the combined effect of scale in China, and probably the
cost in the batteries, the speed with which they come down. And with that comes the
ability to make a car that has significant range anyway, because the batteries are so
cheap. So out of all that, I’d say yea okay, it could very well be a dynamic in the market,
but in any case I think that’s going to get broken down pretty quickly because, again,
China is going to surprise to the upside as to how quickly they build that capacity, and how quickly they lower the cost of the batteries.

The Lithium Spot: Can you give us an update on where you see the overall financial
markets with regards to the ease and availability of funding for Lithium producers?

Ken: In the same way that equity markets have improved, I’d argue debt markets have
improved for the lithium world. We definitely broke some new ground in raising our
bond. Our bond is trading up to 108, so clearly the market is saying some new ground
was broken there, and that bond has absolutely performed. It’s not often you see a
bond trade up to 108 within six months of the raising. Presumably with the success of
that bond, you’d say okay that’s probably opened up bond markets for other
players. We do keep closely engaged with debt markets, we want to understand what’s
going on. And given that we’re gonna be in the position in some point in time in the
future to be able to either refinance that or resolve that bond. But in any case, the bond
has traded up substantially, so yea I think that’s an indication that probably markets are warming up to the lithium story.

The Lithium Spot: You mentioned Great Wall, and them securing their supply
chain. We’re curious, which other metal do you see having the greatest challenge from
a supply perspective?

Ken: At the Cathodes conference a few weeks ago, I heard some interesting
presentations. A lot of speakers referenced the direction that li-ion battery technology is
taking and especially where the cathode would settle. And it’s pretty clear that
everyone’s pushing very hard to try and commercialize the (nickel-cobalt-manganese)
8:1:1 ratio. And the benefit that comes with the 8:1:1 is that it just happens to do both
things, it lowers the cost of the cathode materials, but it also optimizes the energy
density, so it seems like that is the logical place for everyone to pursue. And it also
happens to be probably the best result with respect to the lithium raw material supply
base because it is nickel rich. Nickel is actually the easiest of the commodities to
respond to. It’s relatively low cost to establish the nickel sulphate supply base. You
don’t really have to spend that much money to pump the material out, and the materials
should be readily available. That might explain the run in recent nickel pricing and

Cobalt is always probably going to be problematic, and again that forces people
down a path where they try and avoid it. So I’m not convinced that cobalt itself, is a
long term thematic in the li-ion battery story. I think it’s got it’s day in the sun, and it
might yet have more, but I think it’s going to be fluky because of the way that market
works. So I’m not convinced that from an equity investment point of view, it makes a
whole lot of sense.

And the other one, manganese, is relatively easy to source. So out of all that, it
probably still paints a picture that lithium is the place for those that are in
the longer term supply growth story, and the orders of magnitude that the market
has to grow to satisfy the underlying demand. Hopefully that gives you some
confidence that you are on to the right subset of the story!


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