​Lithium, An Oligopoly, The EV Boom And Horizon Minerals Corp

Samuel Rae  |

The commodities industry declined pretty much across the board during last half decade, with energies, metals and softs weakening on oversupply or damp demand. There's one commodity that has bucked this trend, however, and while the future for energies and softs remains uncertain, analysts agree on one thing unanimously – lithium, the commodity in question, is going to increase dramatically in both demand and price.

Back in early 1990, when the US Department of Energy was selling surplus lithium stocks and mines were closing as the nuclear arms race wound down (lithium is a key component of hydrogen bombs), the lithium industry looked as though it was set for a steady but continuous decline. Then, in 1991, Sony Corp (ADR) (NYSE:SNE) introduced the lithium ion battery, and the landscape for the metal changed practically overnight. All sorts of small, electrical devices started to rely on lithium ion batteries for power, and in turn, these batteries (and the companies that made them) relied on lithium production. Throughout the mid to late 1990s, the personal electronics boom supported the lithium industry, then in the mid-2000s, the global explosion of cell phone demand took the industry to the next level. All of a sudden, nearly every individual in all developed nations, and with developing nations not far behind, had a lithium ion battery in their pocket.

The third industry event is about to take place, many would argue its well underway, and that's electric vehicles (EVs). As pioneered by companies like Elon Musk's Tesla Motors Inc (NASDAQ:TSLA), and as now being pushed forward by practically every large automaker, EVs are set to replace fossil fuel powered cars over the next half century. Without lithium, however, they can't run.

That's what's going to push lithium prices to the next level, and the investment landscape is ripe with opportunity to take advantage of this increase. Options include Lithium ETFs, EV makers and EV retailers.

For the focus of this piece, however, we're going straight to the source, and targeting junior lithium explorers.

With such a large increase in demand, big names are scrambling to try and secure rights to potential future supply streams. It's not that simple, however. The current supply is pretty much under oligopolistic control, with only four producers currently controlling about 85% of supply.

Sociedad Quimica y Minera de Chile (ADR) (NYSE:SQM), FMC Corp (NYSE:FMC) and Albemarle Corporation (NYSE:ALB) dominate production, extracting lithium from salt lakes in Chile and Argentina. Albemarle also operates a brine operation in Nevada, the only producing operation in the US, Clayton Valley.

Australia’s Talison is number four, producing at Greenbushes mine in Western Australia. Having said this, Talison is 49%-owned by Albemarle and 51% by China’s Tianqi Lithium, the latter of which absorbs pretty much all of the produced resource for Chinese consumption.

This oligopolistic structure makes pricing opaque (there's no spot price, and even listed prices are generally concocted by way of second hand volume/price reports) and this, in turn, makes forecasting any sort of large scale cost impossible.

Companies like Tesla, however, are attempting to overcome this opacity and supply control. They are securing rights to claims that are as yet not producing, establishing prices before the lithium is even out of the ground.

This presents an opportunity to take positions in the small explorers that hold claims to potential lithium resources, and take the gains as the big names come in and secure their supply by paying for exclusive access to the lithium these claims produce.

This strategy is already in full swing across the junior landscape, and a number of companies have picked up market capitalization boosts on their new affiliations with big name demand. PURE ENERGY MINERA COM NPV (OTCMKTS:PEMIF), for example, and LITHIUM X ENERGY C COM NPV(OTCMKTS:LIXXF), each of which have deals with Tesla related to claims they hold in Nevada.

We've been on the lookout for a company that fits this profile, but as yet has not benefited from wider market attention. The company in our crosshairs is Horizon Minerals Corp (OTCMKTS:HZNM).

Until the beginning of this month, Horizon was an active explorer in the space, but hadn’t any claims to speak of, and this meant it didn’t fit our primary criterion of having claims to potential lithium resources in Nevada. On October 6, 2016, however, the company announced its acquisition of 1,003 claims covering 20,600 acres of land in the Great Basin, a region of Nevada that surveys conducted by the USGS suggest is lithium rich.

This claims acquisition turned the company from prospect to opportunity overnight. With the claims in place, Horizon became an instant target for companies like Tesla, or other EV makers looking to secure lithium claims, and in turn, became a target for the speculative investment community.

Of course, the value of the company to a big name relates directly to the claims it holds, so let's take a look at where they are, and what makes them attractive to Horizon.

The claims are broken into four regional categories (twenty acre units):

  • Crystal Basin Claims (220)
  • Scotty’s Southeast Claims (203)
  • Cholla Claims (400)
  • North Limb Claims (200)

The Crystal Basin Claim units are located in a region called Southern Nye County, which is 20 miles west of Indian Springs AF Base and four to twelve miles southeast of US Highway 95. The region has been the target for an extensive geological survey program since the late 1970s, and the USGS has established lithium deposits in the region, at various levels, in springs, well water and clays. It's as yet untouched from an extraction perspective (which makes it difficult to project from a resource estimate point of view, but also makes it attractive in that it's not yet been exhausted).

Scotty’s Southeast Claims are located in south Central Nye County, 15 miles south of Scotty’s Junction Airport, two to four miles southwest of US Highway 95. These are especially interesting, because they lie in a topographic basin which the USGS determined in 1977 as a closed basin, and logged it as being associated with anomalous lithium concentrations in surficial clays with – and here's the kicker – a maximum lithium concentration of 300 parts per million. If you are going to mine lithium, you want surficial clay lithium. It's cheap to extract, and easy to process. More importantly, however, if you are going to extract in Nevada, you want as close to 300 parts per million concentration as possible. This is the concentration at which the Clayton Valley facility discussed above is producing, and this proves its commercial viability.

Cholla Claims are located in eastern San Bernardino County between Barstow and Needles, California. These are less attractive to us right now, but only because of their location outside of Nevada and the uncertainty that this serves up from a jurisdiction, regulatory perspective. Nevada is very mining friendly; California is too, but is not renowned in the category. This said, the USGS has established some degree of lithium containing brine in the region, so while the claims are outside Nevada, there could still be substantial value to be unlocked if Horizon can pick up the right permitting and execute on a solid extraction strategy.

Finally, The North Limb claims are in northeastern Nevada, in a region called, Elko County which borders Utah. This one is interesting primarily because of how close it is to a previously USGS documented salt flat called Bonneville. Readers may already be familiar with this flat – it is a popular tourist destination. It also contains strongly anomalous concentrations of lithium, and the thinking here is that if Bonneville does, so should North Limb.

So that's the assets, what else is pertinent right now to bringing these assets to a point where they might become attractive targets for big name EV demand?

Well, the company has put together a team of experts in the space, and it's going to be the job of this leadership to carry forward into resource documentation (first step) and then extraction (second step).

Notable recent headcount acquisitions include Mr. David A. Bending, B.Sc., M.Sc., P.Geo. to its Board of Directors, who came on board as a part of the deal that saw Horizon pick up the above discussed mining claims; Mr. Gilberto Arias, again appointed to Horizon's Board of Directors, a lawyer and communications expert who is now responsible for the negotiation and advisory work associated with acquiring new lithium claims; and Mr. Francisco Alfonso Flores Aguirre, B.Sc., M.Sc.Eng, to the Horizon Advisory Board. The latter is particularly interesting, as Flores has agreed to serve as the company's liaison in its Mexico operations, which could mean one of two things – either management is actively seeking claims in Mexico, or that it is looking to negotiate the rights to lithium produced at its claims to a Mexican company.

Bottom line here is that the companies that are going to absorb lithium demand across the next 50 years by way of EV production are attempting to circumnavigate the oligopolistic nature of the current market, and secure supply at predefined prices way ahead of time. This paints junior explorers in all regions attractive, but those it makes especially attractive are those with claims at or near already proven resources, such as those in Nevada.

Horizon ticks all these boxes, and while it’s a small player in a big space right now, it would only take one decent rights agreement with a big name to dramatically increase its revenue prospects and – in turn – its market capitalization.

The author currently has no position in the companies mentioned within the article.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
SQM Suncor Energy Inc. 42.92 -0.17 -0.39 440,026 Trade
TSLA Tesla Motors Inc. 259.59 0.81 0.31 6,193,856 Trade
ALB Albemarle Corporation 96.05 0.96 1.01 759,176 Trade
FMC FMC Corporation 84.03 -0.83 -0.98 921,634 Trade
SNE Sony Corporation 56.25 0.74 1.33 1,403,682 Trade
LIXXF Lithium X Energy n/a n/a n/a 0

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