Will new policies bring Albemarle’s North Carolina mine back online?

Summary: 

  • Given the world’s ever growing appetite for lithium, new mining entrants are turning the US to look for the next big lithium projects.  
  • A dramatic reduction in tax rates will enable projects with less economically favorable resources to compete at similar margins.
  • The US government, led by President Trump is making a big push to bring mining jobs back to America.  We take a look at their effect on lithium mining in Albemarle’s currently closed King’s Mountain mine.

 

Albemarle US Operations – Will North Carolina come back online?

While Albemarle currently operates lithium production facilities in the Charlotte Metropolitan area of North Carolina, they have not yet reopened the King’s Mountain mines that they inherited in the Rockwood merger.  With many companies looking to enter the US mining space in Nevada, Utah, and even King’s Mountain itself, many are curious as to why Albemarle has not yet brought the mines back online.  Especially given the fact that they have a small mining operation already underway in Silver Peak Nevada.  Back in April, CEO Luke Kissam said that they were exploring reopening the mines, and are currently drilling to determine the feasibility of doing so.  Since then, Congress has passed major corporate tax cuts and President Trump put out an executive order to ease the regulatory processes for mines as well.  We are wondering if this could tip the scale in favor of bringing those operations back online.

Obviously, the company enjoys arguably one of the best brine resources in Atacama and one of the best hardrock resources in Greenbushes, thus enabling them to be one of the lowest cost lithium producers in the world.  However, there is an upper limit and complexities involved with continued expansion of those operations, thus forcing the company to look elsewhere to bring on new supply in an effort to maintain market share.  It’s possible that in this process the company is reluctant to bring on higher cost mining operations that would hurt margins.  However, with US tax rates dropping from 35% to 21% this year, that may help margins enough to justify reopening those mines.  Not to mention the added benefit of bringing back mining jobs to the region and getting commended by President Trump and his allies in NC who have made such promises to mining towns across America.  After all, getting a possible “shout out” from President Trump to his 46 Million followers on twitter is a powerful weapon for a public company such as Albemarle that cares deeply about its corporate image.  

In addition, here are some notable factors regarding ALB’s King’s Mountain Mine:

Geography: King’s Mountain is about an hour outside of Charlotte where Albemarle is headquartered.  Historically, the majority of the world’s lithium was mined from this region before unfavorable pricing caused mines to shutdown in the 90s.  In addition to being located in close proximity to a major city and banking center, there is a large international airport nearby, and a major interstate going through the city with another one accessible within 45 minutes, thus enabling cheaper transport of product.

Labor: With one of us having grown up in the Charlotte area, we already know that labor costs would come out to $40-50 per hour including benefits.  While it is not news that labor in the US is steeper then other less developed countries, the mining space is unique.  Comparing to other hardrock operations around the world, like Whabouchi, or Western Australia, where the operations are set up in remote places, labor expenses can be much higher, as the companies would have to provide shelter and higher rates to convince workers to uproot their lives and leave their families for months at a time.

Effect of Reduced Taxes

So how do the tax rates actually sway the company’s decision making?  Well, let’s look at their production costs in Greenbushes as an example.  They produce spodumene for approximately $200/t.  Let’s assume they sell for 800/t.  After a tax rate of 30% in Australia, they are left with $420/t (ignoring all other non-production expenses for this simple example).  To match that production profit in the US, at a corporate tax rate of 35%, ALB would need to produce spodumene at approximately $154/t, or 23% cheaper than Greenbushes.

At the new US tax rate of 21%, they could match the Greenbushes profit by producing at approximately 268/t, which is 34% higher than Greenbushes.  This is a dramatic improvement, especially combined with the other favorable factors associated with King’s Mountain operations discussed below.  Additionally, given that Greenbushes has one of the best spodumene resources in the world that is unlikely to be matched by the King’s Mountain site, this cushion created by the lower tax rate allows Albemarle to bring a less economical mine back online to contribute to their lithium production.

Even if the King’s Mountain feasibility study doesn’t show that they can produce within the $268/t level, Albemarle can make up for it elsewhere.  For example, they can negotiate favorable agreements with auto manufacturers like BMW, which operates a major plant less than 80 miles from King’s Mountain.  Honda and Mercedes operate in Alabama, which is less than seven hours away by road.  Furthermore, given the likely endorsement by the US government of mine revivals, Albemarle may be able to work out subsidies or further tax breaks to help boost profits as well.

So with labor being a positive, and the mine being in a favorable geographic location, could dramatically lower tax rates and the recent President Trump Executive Order on Mining prove to be the reason why Albemarle finally reopens the King’s Mountain mines?  Obviously, we need to wait and see if the drill results show favorable enough economics to justify doing so.  But with Piedmont Lithium expecting to profitably produce lithium in nearby mines, barring any major unfavorable results in the resource, a company of Albemarle’s size and scale should be able to follow suit, and use the potential site to help defend their market share while currying favor in the public’s eye.