January 28, 2018
As we recently noted in our SQM’s New Deal & The Lithium Market Sell off, SQM finally ended an almost four year long dispute with the Chilean Government which allows the company to dramatically increase production from around 50-60K tonnes per annum (tpa) today up to 216,000 tpa through 2025. We sat down with Ken Brinsden, CEO of Pilbara Minerals, which is one of the next upcoming worldwide producers out of Australia, to get his take on the deal and its implications for the broader Lithium market.
With a lot of fear, panic, and nervousness quickly setting into the market that oversupply would come sooner than expected, we believed that the fears were overblown. More advanced stage juniors like Pilbara, will still have a chance to come in and find buyers for their product over the next few years. Ken agreed with this sentiment, saying “The near term market (as you have described, 2-3 years) has no impact as a result of the recent SQM settlement as there will be no material change in the expected output within that time frame.”
Furthermore, many agree with us that certain points of the deal agreed to by SQM will chip away at the company’s (SQM)low cost advantage, potentially affecting the longer term market fundamentals. As Ken put it, “In the long term, any competitive cost advantage that the Chilean brines might have had historically has now been eroded. The combination of higher lease rates imposed and the additional costs to improve product grade/quality (whether within Chile itself or at the Cathode materials makers facilities) results in a materially higher cost base than that currently published for the bulk technical grade product they produce. As such, when global battery grade cost curves are published correctly in the future, you will ses a material shift up the global cost curve from Chilean players. I think that plays out well for the low-cost hard rock supply base for the emerging battery demand.”
Ken’s comments bring up an interesting point, that the SQM deals bodes well for low-cost hard rock suppliers. With the greater shift toward lithium hydroxide demand in the market, hard rock producers were already starting to gain more support from investors. After this major news story, it seems like the Aussie mining hopefuls are indeed taking a contrarian approach, believing it will further tilt the market in their favor. In fact, Ken believes that investors may be overlooking some critical information when evaluating the lithium space. According to him, “A big piece that is being missed by the investor base is the changing dynamic around the Lithium raw material supply base, as a function of the new battery demand and its relative quality constraints. Cathode materials/cell marking require an exact standard which includes continuity of supply and the highest quality possible. The hard rock supply base typically provides mining in a low-risk jurisdiction, stable production (not affected by weather constraints [like the brines can be]) and high quality output (provided the convertors know what they are doing and are deploying the right technology. This will translate to the hard rock supply base becoming the favoured [favored for our American followers] raw material source for batteries (a dynamic which I would argue is already happening.”
Interestingly, while the market focused almost entirely on the supply concerns, it seems no one is discussing the demand side of the equation. Is it still possible that the market as a whole is underestimating the potential demand moving forward? Ken seems to think so: “China will continue to surprise to the upside with the build-out of the Lithium Ion Battery Supply Chain. This will translate to the Lithium raw material consumption growth that continues to surprise to the upside.”
Pilbara Minerals will be starting production on their hard rock mine sometime in 2018 (and we look forward to bringing you further updates from Ken as we get closer to that time), and from all indications it seems that the company is charging full steam ahead with their strategy. When asked how SQM’s announcement has affected their operations or vision moving forward, Ken responded with ”No change. Business as usual!”