June 18, 2018
With an idea to bring together and present thoughts from the heads of lithium miners in various stages of production, we present to you the first edition of our Lithium CEO Roundtable. Due to the insightful answers that will surely be useful to investors following our site, we’ve decided to bring the answers to you uncut over a two-part series this week.
Before we begin, we’d like to thank the following group of CEOs and Managing Directors for sharing our vision for this piece:
- Guy Bourassa (pictured bottom left): President and CEO, Nemaska Lithium
- Richard Seville (top left) : Managing Director and CEO, Orocobre Limited
- Ken Brinsden (bottom right): Managing Director and CEO, Pilbara Minerals
- Calvyn Gardner (top right): CEO, Sigma Lithium Resources
The big elephant in the room is the Morgan Stanley downgrade of the lithium sector. What are your thoughts on this and what are they missing?
Nemaska: I believe that Morgan Stanley is relatively new to the lithium space and the authors of this report lacked the depth of knowledge of the lithium sector and what it takes to bring new lithium slats production on line, be it a hard rock mine or a brine project. It is challenging to bring new production on line and to immediately achieve nameplate capacity. One has to look no further then Orocobre, which is the newest producer, who just reduced their yearly production guidance to 12,000 tonnes of carbonate from their nameplate of 17,000 tonnes, after more that 3 years of ramp-up. Also achieving the customer quality specification for batteries and qualifying as a new supplier in this market is extremely challenging, This is why at Nemaska Lithium we built the Phase 1 Plant to allow us to run a small scale semi-commercial operations to work out the technical issues in advance of building the full scale commercial facility. Also it allows us to send product samples to customers thereby starting the qualification process as new lithium salts provider.
Another fallacy in this report is the assumption that both Albermarle and SQM will immediately ramp to their production to 500,000 tonnes by 2021 and flood the market with product and crash the price of lithium carbonate to US$7000/tonne. Both companies have said they intend to increase production in step with the market and have no intention of flooding the market with lithium salts. In addition, both companies have indicated that increasing production will require massive investment and is technically very challenging. Remember also that SQM is leasing their property and will be renegotiating their mining lease with Corfo in 2030. SQM has also clearly mentioned lately that they do not intend to increase their production to more than 100,000 tonnes from their actual 48,000 capacity. The risk of investing large sums on money into this project for expansion has to be carefully weighed by SQM. Finally roughly half the world’s production has cash costs around $6,000/tonne so selling it at US$7,000/tonne as suggested by Morgan Stanley will not allow for much margin and potentially take some production off line all together.
According to Benchmark Mineral Intelligence’s report of April 2018, Lithium Hydroxide FOB North America is selling for US$16,500/tonne and Lithium Carbonate FOB South America US$14,500/tonne. The Chinese prices are higher and the market remains very tight.
Orocobre: The rechargeable battery market has continued to forge ahead generating strong lithium demand. While many large cathode customers reportedly attempted to build lithium inventories during the December quarter, stocks were quickly run down as the Chinese government clarified the EV policy regarding ‘New Energy Vehicles’ (NEV). This resulted in many customers returning to the market earlier than lithium suppliers expected at a time when lithium producers volumes were fully-committed. Uncommitted supply from smaller Chinese brine and lepidolite / spodumene conversion plants that intermittently sell into the spot market during the year was also limited as operations were impacted by the Chinese New Year and Spring Festival holidays.
Further investment is required in downstream conversion capacity to address the existing bottleneck for spodumene conversion. In response, many of the existing conversion plant operators announced expansions of varying scales and timeframes. Historically, actual effective conversion capacity has been significantly less than claimed nameplate capacity. Therefore, the actual conversion capacity realised in the short to medium term will lie somewhere between the existing capacity and claimed new nameplate capacity.
The consensus amongst suppliers is for market demand to be at a level of 14% CAGR or above. In the short term, demand will be driven by electric vehicle uptake and increasingly car manufacturers are announcing higher sales targets, new EV models and greater investment, upgrading advice from as recent as the December 2017 quarter. In addition to the mandatory EV sales requirements and credit system clarified during the quarter, China most recently announced it would remove foreign ownership caps for companies making fully electric and plug-in hybrid vehicles in 2018, for makers of commercial vehicles in 2020, and the wider car market by 2022. These ownership restrictions were imposed in 1994, limiting foreign carmakers to owning no more than a 50 percent share of any local venture and forcing foreign carmakers to work with Chinese firms.
In addition to demand from electric vehicles, the energy storage sector began to gather pace on a global scale. A number of key developments occurred during the quarter supporting the view that lithium demand from ESS may materialise earlier than most forecasts:
- Tesla deploys 143MWh of energy storage products in Q4 2018; Completes 129MWh energy storage installation in South Australia
- Tesla forecasts energy storage sales tripling in 2018 to 1,230MWh
- French utility EDF to invest US$10b in 10GW of ESS by 2035
- Hurricane Irma pushes Florida and Caribbean islands to integrate ESS
- AES and Siemens launch new ESS start-up, Confluence
- Sonnen announces new South Australia facility to build 10,000 residential ESS systems per year
- Tesla to install and aggregate 50,000 residential ESS systems in Australia
- NY State commits $260m on ESS; targets 1500MW by 2025
- Massachusetts sets 200MWh ESS target by 2020
- California targets 1,825MWh by 2024
- Over 2,500MWh of utility scale projects have been announced; construction in 2018 and beyond
- European, American, Australian residential segments set for record year
Robust demand from the electric vehicle and energy storage sectors compared to realistic forecast growth in both brine and hard rock supply, lead us to conclude that the market will remain tight until at least 2020.
Pilbara: My helicopter view across the industry:
- On the supply side most are overestimating the ability of the brine operations to respond with significant supply growth in the short and medium term. In the long-term, there may be no economic imperative to invest to grow brine production as it will not be the lowest cost product to entry for Hydroxide to cathode materials, and
- Hard rock supply is likely being underestimated for the same reason, i.e. it is the lowest cost source of supply for Hydroxide to cathode materials, it’s a more stable source (in both volume and quality terms) and it’s predominantly mined from universally respected, safe and stable political environs.
- But aside from all that, Asia is being grossly underestimated as to how quickly the lithium ion supply chains are growing. That is driving demand that will continue to surprise to the upside. China was already the world’s largest lithium raw materials market in 2016, however in 2017 demand growth grew by 50%. Nobody has that in their models.
Sigma: Firstly, the adoption of electric vehicles is being underestimated as well as the future impact of power storage on global lithium demand. Secondly, I believe new supply especially for the brine expansions is being overestimated as there are a number of miners that will be unable to produce battery grade material while some incumbents face technical challenges too.
On top of this, a large percentage of production coming from South America is not battery grade and has to be “upgraded in China”. However, in saying all this, the growth is in LiOH for high-energy density batteries. The brine producers must produce carbonate first and then convert it to hydroxide. Hard-rock producers can go straight to hydroxide. This really eliminates the price advantage of low-cost brine producers, allowing low-cost hard-rock producers to compete favourably.
Ultimately, the financial markets are having trouble pricing in the lithium boom – some are bullish on lithium prices like UBS, while other energy analysts predict a lithium war will break. We need to remember there are more than one billion cars in circulation today and this is expected to double by 2040. On top of this, the auto sector is already investing billions of dollars in new electric vehicle plants. Ford, for example, is betting its future on electric vehicles already and is driving its green agenda hard. According to Ad Age, car manufacturers as a sector rank among the biggest advertising spenders on the planet as developed and developing nations eye new electric vehicle enforcement legislation by 2030.
We think consolidation will continue to be a big theme in 2018. How do you view M&A activity in the lithium space, and what factors are generally considered when you look to do deals (or when others evaluate you for deals)?
Nemaska: There is potential for consolidation in the lithium space but I believe it will not necessarily be by existing producers but rather by end users looking to secure supply. In that case they will be carefully evaluating the asset be it deposit or LCE production assets to ensure they can secure supply of quality lithium salts. At Nemaska Lithium our immediate focus will be to put Whabouchi Mine and Shawinigan plant into production, Once we have a handle on this we will look at expansion of Shawinigan facility and possibly acquiring other assets to feed that added capacity.
Orocobre; We believe lithium companies with proven asset, low-cost production base, and experienced management will be in a good position to capitalize on the growth in the space.
Pilbara: We are busy delivering what we can at Pilgangoora and Mt Francisco and therefore have plenty of organic growth to keep us active.
On the outside in- if you are trading on 15times multiples in the US, why wouldn’t you be looking at hard-rock assets in Australia (especially given the hard rock dynamic outlined above for the Hydroxide market), when you can buy that near-term cashflow on 5 times multiples. Crazy good deal to me!
Sigma: I do think there will be consolidation especially amongst hard-rock producers. Important parameters are de-risking, low cost, and time to production. For Sigma, our goal is to fund our significant hard-rock Brazil project through the capital markets. We listed in early May after raising C$20 million and are currently finishing construction of our pilot plant in Minas Gerais state. Next year, we will build out our world-class industrial-scale mine and start producing by the end of 2019.
China obviously makes up a large chunk of the demand side and they continue to be very active. Can you go into your working relationships with Chinese firms and what they bring to the table? Are there certain hurdles to working with them or their government?
Nemaska: We have discussed a number of scenarios with several Chinese groups which include share ownership, offtake and Joint Ventures. To date none of these discussions have materialized into a an executed agreement outside our agreement. The main hurdles with any Chinese firm is the required approval by the government to invest in projects outside China and the time it takes.
Orocobre: We do not comment on our working relationship with individual customers. It is worth noting that Orocobre has a geographically diverse customer base with customers from Japan, South Korea, Europe, USA and China. We sell into industrial, chemical and battery markets, and our average price continues to improve – currently seeing consistent approximately US$14,000/tonne contract pricing (average across all products).
Pilbara: We have built really strong relationships with the Chinese, and there is no doubt in our minds that they have developed (and continue to develop) a major competitive advantage as a result of their chemical conversion prowess for the spodumene supply base. This will clearly give them access to a lot more product earlier that would have otherwise been the case based on brine sources of supply. They are going to easily become the dominant cell supplier globally, with downstream technologies (EV’s, energy storage and the link to renewables) that will likely be exported across the globe. Are there certain hurdles to working with them or their government? Financing has been a constraint, given the barriers to funds flow offshore. That said, they are getting better at accessing capital through western markets (Ganfeng HK IPO a great example).
Sigma: The issue of Chinese firms being able to invest outside China remains challenging, we have seen companies look to do IPOs in Hong Kong mainly to fund acquisitions and offtake agreements.
Why aren’t we hearing as much about offtakers from other regions/countries? Is China just the most interested, well-funded, and willing to pay? What is it about them that’s allowing them to secure so much of the world’s expected lithium supply?
Nemaska: On the contrary we are seeing lots of demand from regions outside China and to date both our offtakes are with non Chinese, FMC and Johnson Matthey. Nemaska Lithium also recently signed a deal with Japan’s Softbank Group which included equity and right of first offer on 20% of our annual lithium hydroxide or carbonate production. We are also in advanced discussions with other groups that are outside China in addition to discussions with Chinese groups.
Orocobre: Supporting the growth of electric vehicles is a top priority for the Chinese government as it can achieve several strategic goals: 1) reduce reliance on foreign oil/USD; 2) improve air quality and living standard for Chinese people; 3) provides the opportunity for Chinese car companies to “leapfrog” the advanced auto industries of other countries and seize the growing “new energy vehicle” (NEV) market. Chinese clearly understand the importance of securing lithium supply to fuel their EV ambition. It comes down to central planning from the government, enthusiastic participation from industry players, and large war chests that have allowed them to move as aggressively as they have.
While other players may not have grabbed as many headlines, they are certainly making their moves. Orocobre’s strategic partnership with Toyota Tsusho is a prime example. In addition to our joint venture at Olaroz, Orocobre and Toyota Tsusho are well advanced with plans for the proposed Naraha 10,000tpa Lithium Hydroxide Plant to be built in Japan. The production process will utilise primary grade lithium carbonate sourced from Olaroz and locally sourced Japanese lime. The test work demonstrated that a very high-quality, battery grade, lithium hydroxide could be produced from a customised process. Negotiations have advanced with the two possible construction contractors. A final investment decision is expected mid-year with detailed construction to commence soon after and commissioning forecast in late 2019.
Pilbara: Korea is now rapidly moving, having seen the benefits China has been able to unlock through the hard rock supply base. We believe there will be a substantial flow of hard rock sourced supply over the coming years going into Korea and especially to serve the Hydroxide market. There is already substantial growth in Hydroxide imports into this market.
Sigma: I think we are seeing other countries moving to secure offtake especially Japan and Korea, also we have seen European groups look to secure supply, even the US has got into the game buying spodumene from Australia.
How do you see financial markets as they relate to lithium projects’ ability to raise capital in today’s environment? Especially after the lithium selloff and the bearish wave has swept through?
Nemaska: The bearish sentiment is very over done and I believe the market is massively oversold. Once the market understands that the demand for lithium salts remains very tight and the both hydroxide and carbonate still command healthy prices at US$16,000/t and $14,500/t respectively I believe that the bullish investor sentiment will return. Perhaps there was also some profit taking as well as many stocks saw significant gains.
Nemaska Lithium is in the middle of its project financing and to date we are seeing a lot of traction. We just launched the debt through corporate bonds and we recently announced a new shareholder in Softbank Group. Nemaska Lithium is their first equity investment in the lithium space. Softbank views this investment has having monumental importance to the SoftBank Group’s strategy. Softbank is a very market savvy investor and I see there entry into lithium through Nemaska Lithium as a positive sign and a bellwether to other investors. Nemaska has also signed the first ever streaming agreement for a lithium project, with Orion.
Orocobre: Every lithium project is different. Orocobre is not in a position to comment on another project’s ability to raise capital. What we can say is that in January this year, Orocobre announced a significant strategic initiative to accelerate our expansion plans at Olaroz through a larger stage 2 expansion of the lithium facility. This strategic initiative involved a 15% placement to Toyota Tsusho Corp, the trading company of Toyota Motors. This initiative fully funds Orocobre’s expansion plans to bring Olaraoz to a total annual production capacity of 42,500 tonnes lithium. Just as importantly, it continues and strengthens our longstanding strategic and joint venture partnership with Toyota Tsusho.
Pilbara: It has always been difficult to independently finance a lithium project (because there is so little precedent) and I would argue that is still true today. We broke some new ground in the issue of our Nordic bond, and to date it has traded very well as we have continued to derisk the project. Hopefully that starts to break down some barriers.
Sigma: My view is that investors are coming back and looking at the sector with interest and more importantly studying the fundamentals of the industry more closely. I recently hosted a lunch at Deustche and suggested to newcomers to read the Lithium 101, a report published by Deutsche two years ago.