It should not come as a surprise that speculators have jumped head first into this market. The sector has been calling out for a metal or mineral to get excited about after years of poor returns and false hope.
But, while demand for the metal is growing – from car manufacturers to battery producers – not all of the billed supply will be needed.
Those moving into the lithium investment game need a few of the fundamentals spelt out.
First, one lithium product is not the same as another.
During the recent iron ore run, miners and promoters gave the impression steel mills were willing to take any product coming with more than 58% iron, but end-users were very picky over just what ore went into their furnaces, issuing those that didn’t meet the standards costly penalties, or asking for a refund.
The downstream lithium space is no different.
The idea of Tesla, Volkswagen, or Johnson Matthey ringing up a trader in Singapore and asking them for 30,000 tonnes of lithium hydroxide to be shipped to their port of destination in a week’s time is ludicrous.
Every gram, let alone tonne, of lithium will be tested by consumers before any purchase is agreed. They will not use just any old material to produce their goods.
This is where existing producers – the likes of Albermarle, SQM, Orocobre – have an advantage over earlier stage rivals. Still, offtake agreements like the ones Nemaska Lithium and Bacanora Minerals signed are in a better position than most.
Second, regardless of Tesla’s Gigafactory, the real buyers are from the East.
This leads onto the second point: according to a recent report by industrial metals research consultancy Roskill, Asia will continue to dominate lithium demand in the future.
“The upstream and downstream battery supply chain will remain a largely Asian phenomenon, despite the Gigafactory and similar large-scale battery plants planned or underway elsewhere, meaning Asia will remain the growth engine for lithium demand going forward,” it said.
Ties to Asian trading houses or end-users are important in sorting the speculators from the serious companies in the exploration space. Pilbara Minerals’ recent Chinese binding offtake gets the ASX-listed company serious investment points on this front.
Third, carbonate and hydroxide are not the be all and end all.
“Product flexibility will be important, especially as battery technology evolves, with sulphide and metal potentially becoming more important lithium products longer-term,” Roskill said.
“The upstream and downstream battery supply chain will remain a largely Asian phenomenon, despite the Gigafactory and similar large-scale battery plants planned or underway elsewhere, meaning Asia will remain the growth engine for lithium demand going forward""
This point has not been missed by TSX-V-listed junior American Lithium.
CEO Michael Kobler told Mining Journal: “Even though I am a lithium miner, I am also a boron and potassium miner. I don’t necessarily want to be a magnesium miner – as it is hard to get out of lithium – but if that is the case [and it is needed], I will become a magnesium miner also. It all depends on what the end product is going to be.”
For a company as early stage as American Lithium this is easy to accommodate, but all lithium-focused companies need to allow some product flexibility if their projects are to stay relevant for the duration.
Fourth, the price the product achieves is fundamental to investment.
A recent report from Stormcrow Capital estimated the price for 99.5% lithium carbonate would climb from US$7,780 per tonne in 2016 to $12,790/t in 2025, while lithium hydroxide – 96%+ with low sodium content – is due for a 64% rise to $14,330/t by 2025.
This is some price growth, but not the monumental ascent some have mooted.
As a result, investors should focus on all-in sustaining costs and consider a project’s capital intensity before taking part in raisings and not just blindly assume prices will rise indefinitely making all supply economic.
Fifth, technology plays a bigger part in a lithium-focused investment decision than other more established sectors.
There are a number of new extraction and processing methods being explored by various players, which may well help this but past advances in the field have come with delayed ramp ups, unforeseen complications and cost blowouts.
Orocobre made some miscalculations at its Olaroz brine project in Argentina, causing a longer and more costly ramp up to its lithium carbonate production process, even if the ASX-listed miner is in better shape now.
Hard rock projects in Canada and Australia will require new innovations to extract lithium, whereas brine assets in Nevada, or in the salars of Latin America where operations have been working to plan for many years should have more conventional flowsheets.
"Product flexibility will be important, especially as battery technology evolves, with sulphide and metal potentially becoming more important lithium products longer-term""
Processing is also likely to dictate just how low or high grade a project should be.
And, of course, the last consideration for investors – or should that be the first – is the stage of production.
Speculators will move into the exploration space where every drill hole or metallurgical test can see a huge share price move with buying and selling opportunities. It will be those companies talking in tonnes of lithium equivalent production, rather than hectares of land that garner most long-term investment, though.
There are always exceptions to the rules, but while some companies missing some of these attributes will succeed in the lithium game, failures will all be lacking at least one element.
*For more global lithium sector news and insights, go to www.mining-journal.com