What a Crazy Quarter!

March 29, 2018


Instead of doing our usual news update, we decided to switch things up this week.  As an eventful and volatile quarter comes to a close, we think it would be helpful for readers if we went over the major news items and events that affected the lithium space.

SQM/Corfo Deal

By now, you’ve seen this announcement mentioned hundreds of times through various outlets.  But for those who are not familiar, SQM, one of the largest lithium producers in the world, struck a deal with Chilean Economic Agency Corfo, ending their multi-year standstill.  This agreement increased SQM’s total lithium production quotas through 2030, while also lifting annual quotas by about 4x to over 200ktpa. Most investors who do not follow the lithium story closely took the quota announcement and ran away with fears of oversupply, unwinding their positions in the process.  Additionally, this news roughly coincided with the beginning of the broader market selloff at the start of 2018, which combined led to massive down moves across the lithium sector.

Soon after the deal announcement, we published our thoughts here. Long story short, we believe the fears are overblown.  Bringing new supply online is still very tough, no economic agency deal is changing that in the short run.  Furthermore, the new royalty structures agreed to in the deal erodes Atacama’s low cost advantage, thus disincentivizing SQM from meaningfully expanding production in the country.  Many of the companies along the supply chain echoed much of our thoughts presented in the piece. In fact, Ken Brinsden of Pilbara Minerals summed up what we’re hearing pretty nicely when he said “No change. Business as usual!”.

Ganfeng IPO

Ganfeng lithium, one of the largest lithium producers in the world officially filed for a Hong Kong IPO, hoping to raise $1bn.  This is a big move, and should provide a lot of extra capital that the company can put to use for capital expenditures, R&D efforts, and potentially acquisitions.  And beyond all else, the initial draft of the company’s prospectus was a great read for anyone looking to glean additional insight into the battery supply chain industry.

Morgan Stanley Tries to Kill the Lithium Rally

As if the SQM news related market disruption wasn’t enough, Morgan Stanley decided to use the uncertainty as an opportunity to make a bold call.  While they certainly weren’t too bullish to begin with, they flipped bearish on many of the lithium miners, and put out a report on the lithium market as a whole where they outlined their argument for oversupply and crashing prices.  Again, for those following the space, you’ve no doubt heard this report be referenced hundreds of times since it came out last month.

We welcome all viewpoints on the lithium space, as differing views are what make a market.  So without getting upset or offended like some might have been, we put out our response rebutting their major points here.

Earnings Season

With all of the news flow impacting the lithium space, earnings season was key to watch out for in Q1.  Most importantly, It was the first time SQM spoke publicly since striking the deal with Corfo, and they definitely conveyed some important information.  They echoed some of what we’d been saying, such as the fact that Chile is now “high rent”, that new supply is coming on incrementally, and demand is not slowing down anytime soon.  

Speaking of demand, in Albemarle’s call, the company doubled their annual lithium demand growth expectations to 70ktpa!  Furthermore, they mentioned that they are fast tracking their lithium expansion projects, and that much of that new supply has already been locked up in contracts with customers.

Finally, FMC’s earnings were also strong as expected.  They reiterated their lithium spinoff timeline, and officially appointed Paul Graves as the CEO of the new company. Aside from this, there was not much new information.

Tawana Flips the Switch

Tawana Resources, who we spoke about in our 2018 outlook, officially commenced lithium production at their Bald Hill project on March 13, and expect their first concentrate shipment in April. This is exciting news from a company that basically came out of nowhere in 2017 with their fast track project.  We will be keeping readers updated as they move forward and ramp production up to their forecasted level of 155,000tpa of spodumene.

Nemaska Financing Update

Nemaska previously mentioned that they hoped to have their project funding secured by the end of Q1.  The company was quiet for much of the quarter, before putting out a press release on the 28th.  In the release, the company updated investors on their financing process.  In summary:

  • The company has signed a non-binding term sheet for a USD 150 million streaming facility;
  • They are currently in advanced discussions for debt financing aggregating USD 300-350 million; and
  • They intend to raise the remainder through private and/or public equity or debt offerings

This is an important step for the high-potential lithium project located up in Quebec.  We will keep an eye on the story as it develops, updating readers along the way.

Sigma Lithium Resources

In case you missed it, we put out our analysis on Sigma Lithium, who has been quietly developing a high-quality lithium project in Brazil.  We believe they may be the next great bargain to be had in the lithium mining sector after they list on the TSX-V in the coming month. After giving the market some time to evaluate the company and determine an appropriate market price, we will be updating readers on our thoughts surrounding the valuation. So stay tuned!

What a busy quarter it was indeed in the lithium space!  As always, we’ve got you covered on all thing investing as it relates to the sector.  Subscribe via email or twitter to get our analysis as soon as it hits the tape!