Survival Strategies in the Atacama Desert: Chilean Lithium Miners Manage by Playing the Regs

The Mining Report |

Lithium is an essential component of batteries for small electronics and large electric vehicles as well as for materials for the housing and construction industry. In this interview with The Mining Report, economist Daniela Desormeaux, founder of signumBOX and widely quoted expert on industrial chemicals, shines a light on the lithium industry for investors looking for a new opportunity.

The Mining Report: Daniela, thanks for joining us. What is the condition of the lithium space today?

Daniela Desormeaux: Last year, lithium demand was lower earlier in the year than we expected. It was lower because the environmental and economic conditions were weaker than we previously thought. Now, demand is recovering, especially in the segment related to batteries and other applications that have glass and ceramics.

Nevertheless, demand is closely related to the situation in China. Everything that is going on in China is very important for lithium demand, especially when it comes to demand for electronic devices and batteries. Now, we have a scenario where demand will grow about 6–7% this year. However, if China grows at a slower rate, the demand for lithium, of course, will slow down as well.

On the other hand, the economies of Europe and the U.S. are recovering. So in those industries related to construction and housing where lithium is very important, we have seen a recovery as well because Europe and the U.S. are growing faster than in recent years. That's why we are more optimistic this year. We think that the demand will grow because of the U.S. and Europe, but we have to be very careful about the situation in China. This is on the demand side.

On the supply side, new supply is coming into the market, mainly from Australian spodumene, which has a higher cost of producing compared with brine. Lithium can be obtained from brines contained underneath salars and from pegmatites, of which the most common source is spodumene.

This new supply coming into the market has higher extraction and production costs compared to current lithium producers that extract lithium from salars in Chile and Argentina. So we are seeing more competition in the market, but at a higher cost. The situation has pushed prices up, but the market is becoming more competitive. We think that the market is balanced. The increased demand will be satisfied with this new supply, but with a little pressure on prices because of the higher production costs.

TMR: You said the main source of demand in China is batteries. For what purpose—cars, electricity storage?

DD: Currently the most important application in batteries is electronic devices and laptops: smartphones, mobile phones, cameras, laptops and tablets. Tablets are very important now.

The lithium content in a battery is a relatively small quantity because the batteries themselves are small. But there are a huge number of smartphones, a huge number of tablets. These applications are the most important for batteries. If China grows slower than, for example, 7.8% or 7.5%, which is the estimated growth rate for this year, of course, consumption related to electronic devices also would expand at a lower rate. Obviously, this would impact lithium consumption because it's historically related to electronic devices. So if device consumption falls off in China, the situation would impact the battery industry.

In the case of electric cars, these are huge batteries compared to the batteries for electronic devices. But this industry so far is developing; we haven't seen mass commercialization of these cars on the streets. Most of the automakers are developing electric cars, but the battery component, which is the most important, is still expensive. So these cars are still expensive.

The best technology for the battery is still not known; there is no consensus on which battery is better for electric cars. Five years ago, many analysts thought that we were going to see plenty of electric cars on the streets by 2015. But so far, we haven't seen that. One of the reasons is the financial crisis in Europe. And after the crisis in the U.S. and the crisis in Europe, most governments didn't continue giving special incentives for this kind of purchase. So these cars are still very, very expensive. That's why we haven't seen this industry commercialize this kind of car on a massive scale.

We think that commercialization is going to happen, perhaps by the end of the decade. We still have to spend time and money with research on batteries. I think this has a promising future but not now because there are still many issues that need to be solved. The safety of the batteries is one issue. The cost of the batteries is another issue. I think the industry is not ready to start a massive commercialization of electric cars.

TMR: You said the source of demand in the U.S. and Europe is different from China's? Can you elaborate on that?

DD: What I meant is that growth will be driven by other sources. Now, in the U.S. and Europe, we have seen that construction and housing activity are recovering from the crisis. The use of lithium, for example in glass and ceramics, is very related to housing and construction activities. That's why we believe that this recovery in the U.S. and Europe will have a positive impact on the use of lithium in those applications related to this industry. Batteries are important in the U.S. and in Europe, but the most important developments for batteries right now are in Asia, not in the U.S. or in Europe.

TMR: Lithium-ion batteries have dominated the industry for a long time. Are there any other technologies that are on the horizon for batteries that could displace lithium?

DD: We have seen some research about other technologies, but no viable commercial replacements for lithium. Lithium technology has a lot of advantages, and the research now is on trying to increase the battery performance and safety. After what happened with the Boeing 787 Dreamliner with the lithium battery, researchers are trying to focus on the improvement of lithium-ion batteries. There are other developments, but I don't see these other technologies replacing lithium-ion batteries in the near term.

TMR: The price of lithium has fluctuated greatly in the last decade. What are you forecasting for the price?

DD: I think the market is going to be balanced. The increasing demand will be satisfied by new supply. We are not going to see a tight market as we saw in the past. As I mentioned earlier, the new supply that is coming into the market has a higher marginal cost.

In this industry, the price is driven by two factors. One factor is the balance between supply and demand. The second factor is the marginal cost of the last market entrant. If this new supply that is coming into the market continues to be produced from these minerals, which carry higher extraction costs, prices will be pushed, not because there isn't enough supply, but because of higher production costs.

So it will depend basically on the commercial strategy of the lower-cost producers, who are mainly in Chile. If Rockwood Holdings Inc. (ROC) and Sociedad Química y Minera de Chile S.A. (SQM)  decide to lower prices, we could see in the future lower prices. But doing that is not so simple. If Sociedad Química y Minera de Chile decides to lower prices, it should increase production.

The company has an extraction quota in the Salar de Atacama. If it increases the production rate, this quota will expire sooner. Sociedad Química y Minera de Chile is in a difficult position. On one hand, it could be interesting to lower prices and keep its market share, but on the other hand, if it increases production to lower prices, the quota that it has in the Salar de Atacama will expire sooner. That's why we have seen that lower-cost producers have given space to newcomers. So in this situation, in the case of Sociedad Química y Minera de Chile or Rockwood, for example, they have lowered the market share, but prices remain at high levels.

TMR: What is the price range for lithium right now?

DD: It depends. When we talk about lithium, it is important to distinguish that there are many lithium compounds. You have lithium carbonate, which is the most important lithium compound. You have lithium hydroxide, lithium metal and butyl lithium, among others. But when we talk about lithium, we generally refer to lithium carbonate because it's the most important. About 60% of the total lithium in the world is sold in the form of lithium carbonate.

Lithium carbonate's price ranges between $5,500 and $7,000 per ton ($5,500–7,000/ton), depending on the grade. There is technical-grade lithium carbonate for glass and ceramics, and there is also battery-grade lithium carbonate, which has a higher purity and smaller particle size. Battery-grade lithium carbonate, of course, is more expensive, in the range of $6,500–7,000/ton.

TMR: I'd like to talk about some of the companies you cover. Li3 Energy Inc. (LIEG) is one of them. It reported at the end of 2013 that it had no source of current revenue, a cash balance on hand of $32,000, negative working capital of $11.6 million ($11.6M) and the company recognized negative cash flows from operations of $23M since it began in 2005. The company admits there are grounds for "substantial doubt" about its "ability to continue as a going concern." The share price has been under $0.03 for six months except for a one-day spike. What do you see in this company?

DD: Li3 is a junior mining company that has a lithium-potash project in the Salar de Maricunga, which is the second-best salar in Chile after the Salar de Atacama. Our signumBOX Performance Index ranks Li3 concessions as the fourth-best undeveloped lithium project in the world out of 37 other brine salars, subject to obtaining lithium exploitation permits.

TMR: RB Energy Inc.'s ($RBI) stock got a big boost the day it began trading under its new name. Can you comment on its merger with Canada Lithium Corp. and Sirocco Mining Inc.?

DD: With this merger, RB Energy will have a business model similar to Sociedad Química y Minera de Chile with nonmetallic minerals, but with one difference: RB Energy doesn't have potash (so far). Sociedad Química y Minera de Chile's synergies are based on the lithium/potash and iodine/nitrates operations that allow it to produce iodine, lithium compounds and potassium nitrate, a high-value fertilizer. In the case of RB Energy, with this merger the company will combine its lithium and iodine businesses, but I don't see relevant synergies between these two industries.

TMR: Nemaska Lithium Inc. ($NMX:CA) (NMKEF) is developing the Whabouchi mine in Québec. It recently announced the capital costs of the project. What are the catalysts you are looking for in the coming year?

DD: When larger batteries start to commercialize on a massive scale, I think the world will need more lithium. RB Energy and other projects are necessary because, otherwise, we are going to have a very tight market by the end of the decade.

Nemaska is among our three best mineral projects according to the signumBOX Performance Index. It's very likely that Nemaska is going to be part of the lithium supply in the near term but, of course, at a higher cost than current lithium produced from brines.

Generally speaking, for pegmatite projects we see that there is an opportunity in the lithium hydroxide industry because for them it is going to be difficult to compete in the lithium carbonate industry with the brine producers that have the lowest production cost. But in the case of the lithium hydroxide, the situation is different. Brine producers don't necessarily have the competitive advantage, so this can create an opportunity for these new projects.

TMR: Are there any other lithium players that you would like to talk about?

DD: Yes, I would like to comment about the recent transaction between the Australian company Galaxy Resources Ltd. (GXY:ASX) and Sichuan Tianqi Lithium Industries for the purchase of Galaxy's Jiangsu lithium carbonate plant in China. With this transaction, China will strengthen its position in the lithium industry, not only competing with South American producers but also securing lithium supply to meet domestic demand. China is focused on the development of "green" technologies, and the electrification of transportation is one example of that. Related to this, China's battery industry has grown significantly in the last years, as has the appetite for the main raw materials as well—lithium, graphite and other materials.

TMR: Thanks, Daniela. I appreciate your time.

Daniela Desormeaux is an economist and an expert in industrial chemicals and natural resources. Prior to forming signumBOX, she was strategic marketing manager at Sociedad Química y Minera de Chile, where she was responsible for market intelligence on lithium, iodine and other industrial chemicals.

Source: Tom Armistead of The Mining Report (5/20/14)

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DISCLOSURE:
1) Tom Armistead conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services toStreetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: None. Streetwise Reports does not accept stock in exchange for its services.
3) Daniela Desormeaux: I own, or my family owns, shares of the following companies mentioned in this interview: Li3 Energy Inc., RB Energy Inc., Galaxy Resources Ltd., Sichuan Tianqi Lithium Industries, Nemaska Lithium Inc. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has no financial relationships with any of the companies mentioned in this interview, apart from those related to signumBOX's subscription service. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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Companies

Symbol Name Price Change % Volume
SQM Sociedad Quimica y Minera S.A. 28.40 0.34 1.21 380,260
JPXRZ Jpm Chase Bk Rural Electr n/a n/a n/a 0

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