March 13, 2018
We were one of the first to call that Consolidation is on its way in our 2018 outlook. Since then, many sites and analysts have also predicted it will happen. This following article is the first of a multi series focus on consolidation in the lithium space.
In this first article, we present the background on the current relationships, factors, and elements that are in play before discussing our thoughts on what’s to come. We start with an overview of some of the more prominent tie ups at current standing and why there’s a lot of collaboration in the industry.
This is an industry which often encourages collaboration for several reasons.
- Lithium projects can require large amounts of funding which leads to a need for a larger and more financially secure company joining in.
- Like financing, often times companies which are just starting in the mining process, need offtake partners to prove to current and future investors that their project will successfully start production in the near future.
- Lithium is unlike any other mining industry as it requires a lot of technical expertise and knowledge in order to produce it successfully to meet the specific chemical needs of the customers. This is especially the case when it comes to brine based projects vs. hard rock projects. Additionally, downstream capabilities is another area which requires a deeper technical understanding. Achieving 6% spodumene concentrate is no guarantee in and of itself for the hard rock producers, and reaching battery grade is certainly no cake walk for any producer. Of course, while the features of the ore body have something to do with those processes, technical expertise also plays a role. So joining forces with other companies who have the necessary experience and understanding is very beneficial in that regard.
- Finally, many companies within the mining space are trying to increase their technological know how which they argue will help drive down costs of production. A good example of this is the many partnerships which Lithium Australia currently has in place. And in our recent conversation with SQM, they echoed this sentiment, acknowledging that what they bring to the table is their vast technical expertise, understanding of the markets, and relationships with industry participants, all developed over decades of experience.
What are the other factors that are currently increasing the odds for consolidation?
There are several reasons and they are as follows:
- First off, there is still a great concern about supply in the marketplace. Even with all of the talk of oversupply, car companies (Volkswagen as a key recent example) are in need of a stable supply moving forward. Much of the current supply has already been spoken for- recent examples are Pilbara Minerals whose supply is 100% taken, and Albemarle, whose expansion projects which haven’t even come online are already locked up with customers. The largest and most powerful members of the Lithium industry have spoken of consolidation and have reasons to be clearly believed.
- Albemarle (ALB) has spoken about acquisitions and as of it’s latest quarter, has over $1.1 Billion dollars (USD) on hand. Of the 200 Lithium companies around the world, many of them can be purchased with this amount of cash and stock (if necessary).
- SQM has stated publicly that they are looking for a third JV partnership in addition to its current ones with Lithium America’s and Kidman Resources.
- The spinoff of FMC’s lithium business is another catalyst for consolidation. Spin Offs many times enter the marketplace looking to make acquisitions or are often acquired in their own right. There are many, many example of spinoffs which are acquired before they spin off, or once they’re officially listed separately from the parent company (FMC in this case). Many choose to go the opposite route as well, and acquire other companies once they are listed separately. We’ll be monitoring this situation closely as it progresses this year.
- For companies such as ALB, SQM and FMC, it’s often easier to acquire a company which has proven it has a strong resource with a low cost of current/future production, completed the necessary studies, customers in place, and mining licenses secured than the alternatives not boasting such attributes.
- Companies within the Lithium Junior space are actively looking to take advantage of the record pricing and record demand to sell their company, or partner with others. An example is LSC Lithium which has stated publicly that they are looking at “strategic alternatives” (press release August 18, 2017) and “review of strategic alternatives in Asia” (Press release January 31, 2018), which often means they are exploring such deals.
- Finally, the recent downturn in the Lithium stocks has presented an opportunity for acquirers to jump in when the market has cooled off for almost all of the junior miners.