Lithium is everywhere. It powers the tech-saturated life we all lead. And the future of innovation across a whole swathe of industries depends on it.
This alkali metal — the lightest metal and the lightest solid element — has become crucial to the current power micro-infrastructure. It’s what in the form of lithium carbonate (LCE) allows the nifty, shrunk-down battery in your iPhone to deliver charge; it is what will, in theory, power the coming wave of electric car engines. It’s a metal, in other words, that is about to become a very public issue. To understand the shape of that issue, we spoke with Myron Manternach of Lithium Americas. Manternach is not only a mining executive — he’s also an electrical engineer. So he knows whereof he speaks when it comes to mines, battery chemistry, and power infrastrcutrue. (Full disclosure: Manternach was also a director of Octavian Advisors, the hedge fund manager formerly owned and operated by our parent company.)
“I think technology is driving new demands for materials and minerals,” says Manternach. “And I think the most dramatic case is clean energy driving demand for certain metals, in particular lithium. The laws of physics dictate it will always be the best metal for storing electrical energy in a battery. Over the past several years billions of dollars have been poured into building a better lithium battery — one that can store energy with the highest round-trip efficiency and the lowest cost.”
Betting against the laws of physics is usually a mistake. All the more so when the demand picture looks the way it does over the past near-decade. Since 2008, yearly lithium consumption globally has increased almost 76 percent, from approximately 121,000 tonnes per annum to about 213,000. Those numbers, according to analysts, are set to increase dramatically over the medium term. By 2025, current demand is predicted to more than double, heading just north of 500,000 tonnes per year. These numbers should not surprise anyone, says Manternach: “Tesla has emerged with an electric car which basically takes advantage of higher-performing, lower-cost lithium batteries. Now, the whole auto sector is doing that. The need for cleaner energy also extends into buses, power tools, lawn mowers, bicycles, electric bikes, and home storage. A lot of these small applications are adding up. It has the potential to re-design the power grid over time. Today it’s a highly centralized grid that’s synchronous — everything’s precisely at 60 hertz, at least in the U.S. A cosmic ray or a solar flare or lightning strike can disrupt the grid. It’s very fragile. Lithium batteries have the potential to placed atend users’ homes and commercial buildings to provide a store of energy. The grid could then be as simple as leaking charge to these batteries over the course of a day or a week. Ever see the movie Fletch, where the main character says: ‘Everything’s ball bearings these days’? I like to say everything is lithium these days.” He sees a steady annual growth rate from here on out of 10 percent in lithium demand.
The fuel that will be powering this steady increase in the short term comes from the electric vehicle sector. Tesla is currently the biggest player in that space, but that looks set to change very soon. “In 2019,” says Manternach, “most of the major automotive companies are going to introduce an all-electric vehicle. And between now and then we are going to see also, as Volvo has promised, that drive trains in traditional cars will be going all-electric. That’s a migration path for the auto companies to then go all the way to full electric. Some analysts think that by early 2020’s we will see the vast majority of vehicles being produced become electric. You may still see some internal combustion engine vehicles, but they will be strictly for long-range applications.”
What about the supply side of the question? 2015 saw global production of 175,000 tonnes, which increased to roughly 200,000 in 2016. By 2020, the year after the first big wave of all-electric vehicles from the dominant players in the auto market hits the streets, production is projected to rise to 360,000; by 2025, to 650,000 tonnes. Until there is a significant comedown in the cost of recycling lithium from batteries, new lithium demand will be met with unrecycled lithium. Manternach cites a current per-tonne cost of $15,000 to recycle, which will require lithium to hit $20,000 (that’s an increase of about $8,000 per tonne from today’s prices, or roughly 66 percent) per tonne before the process becomes commercially viable. The world’s biggest producer of the metal, currently, is Australia — it contributes about 40 percent to global annual production. Indeed, the world’s largest lithium mine, Greenbushes, can be found in the country’s southwest. The two next-largest producers are in Latin America: Chile and Argentina. Together they are responsible for about one-third of total global production. They form two elements of the the so-called lithium triangle, the name for a trans-national region that overlays northwestern Argentina, northern Chile, and southern Bolivia and is estimated to represent about 66 percent of the world’s total reserves. China is next on the list as the fourth-largest global producer.
The types of mines employed across the various locales can be broken down into two: hard rock and brine. Australian and Chinese lithium comes from hard-rock mines and South American lithium from brines. Hard-rock lithium is taken out of the ground as pretty much any other mineral might be, with the difference that freestanding lithium does not occur in nature: it needs to be refined from pegmatites of three primary types — spodumene, lithiophilite, and lepidolite. Brine lithium is extracted by evaporation from water containing high concentrations of the mineral — instead of a rock face, think huge open pits of greenish water baking away in the Atacama Desert. As you might imagine, there are significant differences in the per-tonne costs associated with these two extraction types. Brine lithium comes in between $2,500 and $3,000 per tonne, with hard rock lithium notching up costs between $5,000 and $6,000 per tonne. Manternach points out that this is a “a very steep cost curve. And what’s really interesting,” he adds, ”is that the vast majority of the growth in production to accommodate that 10 percent annual growth in demand is all going to come from hard rock. So you could argue that about 60 percent of the cost curve is only going to go higher, and that the marginal price and cost are going to intersect at a higher point in the future.”
Australia is currently the biggest beneficiary of what some are calling a “land rush” to acquire lithium-producing mines of the hard-rock variety. This is not shocking; the country enjoys an incumbent position as the world’s primary supplier. Greenbushes, mentioned above, is being built out to double its capacity — a project set up in the wake of a joint venture between one of the Western majors in the lithium space, Albemarle (via its subsidiary Rockwood) and China’s Tianqui. Greenbushes alone currently produces about 30 percent of the world’s lithium. Similar expansions and deals for future output are underway at other major lithium sites in Australia and elsewhere. The big driver here as noted is battery capacity demand, and the big driver for that is — where else? — China. “China has basically taken over lithium,” says Manternach. “China has a strategic approach to industrial policy and an ability to implement industrial policy and to think very long-term. So now they’re cornering the lithium market — because they see it coming. There is roughly 160 GwH of battery manufacturing capacity under construction or announced. You need approximately 700 tonnes per annum of lithium for each GwH of capacity. So that’s a demand increase of 112,000 tonnes versus today’s total market size of 200,000 tonnes.”
Investors looking for a way to play the lithium surge need look no farther, in our opinion, than Manternach’s own Lithium Americas. The company has a disciplined and experienced board and a strategic development plan with a unique jurisdictional focus: Argentina, the only country in the Lithium Triangle with an improving outlook on political risk under the business-friendly administration of Mauricio Macri. The company’s flagship project — Cauchari-Olaroz — is a brine project with opex putting its per-tonne costs squarely in the low end of the curve at just under $2,500. It has a projected mine life of 40 years with an annual output some 25,000 tonnes of LCE (the reserves are estimated at 1.5 million tonnes with a sky-high concentration of 698 milligrams per liter) and favorable offtake agreements with its two major shareholders, China’s Ganfeng Lithium and Thailand’s Bangchak Petroleum. Analysts see significant upside to this one. Even on very conservative assumptions — a 10 percent discount rate and long-term lithium prices at $8,000 per tonne, below where they are today to account for easing supply constrictions — the per-share NAV of Lithium Americas is according to Cormark $2.07. The company’s current share price of $1.74 stands at almost a 20 percent discount to that. Using that same model, with even a modestly higher long-term price of $9,000 the per-share NAV jumps to $2.42. Current share prices stand at a discount of almost 40 percent to that number. At that same 10 percent rate and lithium long-term at $11,000 per tonne, Lithium Americas’ per-share NAV hits $3.12 in Cormark’s model — marking out potential gains of 80 percent. And for the blue-sky gazers, at $11,000 per tonne (remember, that’s below current prices) and a friendlier discount rate of 7.5%, the per-share NAV rises to $3.60, making this a solid double.
Make no mistake: lithium is the commodity of the future. The metal and its miners have already gone up somewhat over the past 24 months, but 2019 will mark a watershed. Yet the boom years will not go on forever. Once lithium prices hit $20,000, recycling will become economical and demand for new lithium will plummet. So the time to act is sooner rather than later.