Global Lithium LLC’s Joe Lowry returns for a discussion on how Sociedad Quimica y Minera de Chile (ADR)(NYSE:SQM), Albemarle Corp (NYSE:ALB) Lithium Americas Corp (TSE:LAC) and MGX Minerals (CNSX:XMG) stack up against the global lithium supply picture, and why its a great time to be a lithium investor.
Listen to the podcast with Joe Lowry
James West: Joe, welcome back to the show.
Joe Lowry: Well James, thank you for having me again.
James West: Joe, I think you would categorize yourself as a conservative voice when it comes to trying to model future demand profiles for lithium and its derivative products. What drives your conservative perspective?
Joe Lowry: Well, let me clarify my use of the word conservative. I have referred to myself as conservative, but in my opinion, that’s only just opposed against the big banks kind of very large numbers and, in some cases, I think without a lot of real rigour in the analysis behind it. so I would honestly consider my estimates, at least for the next five year term, to be realistic, and at this point in time I would still say that the algorithm that I use for estimating battery demand, which is what I call the rule of 50, and I’ve written about it in some of the stuff I’ve posted on LinkedIn, it still works. But at some point, there’s a hockey stick out there in e-transport, in ESS demand, energy storage systems, that probably going to make me revise my rule.
But my rule has always been, and it has been that way since I started selling lithium raw materials to the industry in the 90s, that whatever the battery guys tell me they’re going to use, I cut that number in half.
James West: Right. And that’s worked, obviously, very well for the past.
Joe Lowry: It has. And at some point in the future it won’t work. Everybody acknowledges that EVs and ESS – Electrical Storage Systems – are going to boom at some point, and we can talk about that later, but I still think within the next five years what I show as demand is fairly realistic. But I’m looking at those numbers again right now, and I may upwardly adjust my forecast a bit, but it won’t be that significant.
James West: Okay. So let’s talk about the last year. It hasn’t been quite a year since we last spoke, but what has changed in the last year in the lithium space that you might categorize as surprises?
Joe Lowry: I’d say two things surprised me: the first would be with respect to Argentina, and maybe I was just anticipating a rapid move prematurely, but when the government changed, I thought it to be investment in the world-class projects, which I would characterize as Sal de Vida and Cauchari, I thought capital would flow to them more quickly than it has.
Lithium Americas Corp’s Cauchari-Oloroz fully funded
That having been said, with the recent announcement that LAC is fully funded for their half of Cauchari, with the investment by Ganfeng and Bangchak, everything’s in place for them, because obviously SQM has the financial wherewithal to do what they need to do for their half of that project.
The other side, Sal de Vida, I think that now that Galaxy has Mount Catlin operating, it will have a lot of cash flow from that, plus they did a recent capital raise. So I think it’s surprising it took this long, but it does look like 2017 is going to be the year that real development on the world class projects in Argentina starts, which is good news.
The other thing that surprised me was really the deal that Albemarle signed with the Chilean government, and the fact that the royalty is just so high. Everybody knew Chile was going to take a bigger piece of the pie, but they seem to have taken a disproportionately large piece of the pie. If you look at how the royalty works, if the way the market’s going, if the market price of carbonate gets up into the $14, $15 a kilo level, then Albemarle is paying more than 20 percent. That’s a big royalty, and I was a little surprised that they allowed themselves to be beat up like that.
James West: Sure, yeah. That, it’s tough to turn a profit when you’re giving away 20 percent off the top, I would think.
Joe Lowry: Obviously they have, along with SQM, they have the lowest cost resource, but I mean, you put it in that perspective, if they’re selling at $14 or $15 a tonne, they’ve been the slowest to raise price, so maybe that’s a 2018 price for them rather than a ’17 price, but you know, their cash cost basically increases by in the 50 percent range or more, just with that change. It’s significant.
Petro Lithium and MGX Minerals Inc.
James West: Okay. What about the whole petro-lithium thing, where companies like MGX Minerals are trying to harvest lithium from old hydrocarbon disposal wells and/or late-life producing oil and gas wells that have a high ratio of water to hydrocarbons? They’re doing that trying to deploy an accelerated acceleration technology that is as yet unknown, but do you see the potential for this to become a significant source of lithium?
Joe Lowry: Well, this isn’t really new; if you go back to the smackover brines in Arkansas in the southeastern United States area, Albemarle was talking about that before Albemarle had a lithium business. So that’s been looked at. It may not be an exact duplicate of what’s going on in western Canada, but in an extended high price environment, I think there’s hope for investors that one of these processes works. I’m not going to say it’ll never happen; I think they’ve got a pilot plant, MGX is kind of at the last stage of proving out their pilot, and you know, I think it could happen. I don’t think it’s going to be 15 percent of the supply anytime soon, but it could happen, and honestly I just got an email this morning for a company, another one of those companies who claims to be two months behind MGX and have better technology.
So I mean, there’s a lot of interest, and we’ll see.
James West: Yeah. Well, certainly MGX’s rapid value appreciation has catalyzed a whole generation of would-be petro-lithium harvesters, and it’s good to see.
So we also have yet to see significant and sustained production of commercial volume of lithium from clay-based sources. What’s the hold up in that department, do you think?
Joe Lowry: Well, I think it’s fair to say you haven’t seen any commercial production from clay. You know, new technology takes time, and most overnight successes take 20 years. So I’m not – you know, in the past I’ve been very negative about clay, and that was really because, I think it was the province of really promoters who set great expectations with very little technical ability behind them. I think that’s changing. I think you have a couple of forces at work that also are going to help clay become commercial; if it’s going to happen, I think the higher lithium prices, which I believe will be sustained for long enough to see clay have its day.
I think also there’s better technical talent working on the problem now. I spent some time recently with David Deak, and you know, he left Tesla to become the CTO of LAC and is currently focused on their huge clay asset in Nevada. I also think the fact that LAC recently made a deal with Ganfeng, now you’ve got a good technical team with what LAC’s done to put that together, and you’ve got Ganfeng, who is now almost a 20 percent owner of LAC; they’re the world leader in lithium processing, I would say, because they have become a very large lithium company. And up until just recently with Mount Marion starting up, they didn’t have any significant assets of their own; they’ve survived by taking spodumene, taking lepidolite, taking brine from SQM, taking basically the offshoots of other processes like the butyl-lithium brines of their own, and FMC, and turning them into good product.
So I see their skill set as probably, if it’s brought to bear on clay, along with what the team that LAC’s put together is interested now, a much greater chance that clay happens.
Lithium consumption by Volkswagen, Tesla and China
James West: Right. Okay. Interesting. So we see at this point all the major automotive brands now transitioning to an electric product future with, for example, Volkswagen planning its own gigafactory and up to 15 of these facilities, and we’ll use Dr. David Deak’s definition of a gigafactory being something that can produce up to 100 gigawatt hours per year of battery capacity. Does that change the outlook for lithium demand in your view going forward?
Joe Lowry: Well I mean, I don’t think VW specifically changes anything, but I think you hit on the trend, and the trend is to get the cost of the battery down as low as possible, and in order to do that, scale is important.
I spend a lot of time in Asia. In 2014, I was in a gigafactory that was in the first phase of development in China, and this is long before Tesla started up. So this has been a theme that, Tesla has gotten most of the publicity, but it’s global. Yeah, I mean, obviously, I don’t know if 15 will happen, but even if 5 happen, it’s huge for lithium demand. So I agree, but as you stated the question with VW, I don’t think – I think it’s so broad-based that I wouldn’t point out one specific company as being more specific than the others.
James West: Okay. What about the lithium price? We recently heard of Chinese prices of high-purity lithium for batteries fetching as much as $20,000 per tonne; is this for real? Is this a reflection of supply constraints now, or is it more of a longer-term trend?
Joe Lowry: Well, let’s define terms. You know, I use the term battery quality, because there really isn’t – first of all, you don’t need what truly is high purity lithium carbonate or lithium hydroxide, to make a battery. You do need a certain set of criteria to be met, but it’s really the juniors that have probably done the biggest disservice by talking about oh, we’re going to do 99.9 carbonate – it doesn’t matter. There is a certain spec, let’s just call it 99.5, but actually, the most important thing is the stability of the impurities, not whether it’s 99.5 or 99.4 or 99.6.
So with that preamble out of the way, now let’s just say that lithium carbonate and lithium hydroxide are priced differently; hydroxide sells at a higher price. So the 20,000 a tonne is a real price. Even carbonate got that high in China during spike. I don’t think that, I don’t think 20,000 is the new normal; I think what you have now is a situation where the supply of lithium is tight, it’s going to continue to be tight for the next few years, and pricing of spogimene from the two mines starting up in Australia that represent most of the new material going into the market in the next few years, is priced at three times what spogimene was selling for a few years ago.
So that is going to flow to converter capacity in China, and what you’re going to have is, the price umbrella is going to be at a much higher level than it was in the past. So I see carbonate price at 12 to 14 and hydroxide from 18 to 22 outside of China this year, and yeah. There’s lower prices and there’s higher prices. Albemarle leads the low price camp, and hydroxide going to Tesla is the lowest price because everybody seems to want to do business with the Tesla supply chain. But if you factor out the aberrations, the new normal in carbonate in my mind is 12 to 14, hydroxide is sitting about $6 higher than that, and it needs to be to incent future investment in hydroxide as the world goes to higher nickel cathodes and those blends of NMC that require hydroxide as a feedstock.
James West: All right. I’ve noticed you generally disapprove of some individuals’ categorization of the suppliers of lithium from spogimene versus those who supply it from brine as ‘embroiled in a war’. Is the lower cost brine sources out of Latin America not a threat to the viability of hard rock sources in Australia, Africa and elsewhere?
Joe Lowry: Okay, well, let’s take a step back. First of all, if you look at the last five years, most of the capacity that’s come onstream to meet the growing demand has been hard rock. I mean, you’ve had woefully small brine; Orocobre’s been a mess, they did about 11,000 tonnes last year, not the 17,500 that they were promising everybody early in the year to be at that level by the second half.
La Negra II, from Albemarle, is late – it’s late by a few years, now. So the only real, the most significant surprise in brine output was SQM’s very high production level last year. Chile was up 30 percent last year; it was virtually all SQM. But you take those all together, and they don’t really put a dent in the growth in demand. The real saviour to the supply-demand balance has been hard rock.
That’ll change as Cauchari develops and Sal de Vida develops, but that’s going to take a few years. So what I’ve been saying is that there’s room for both sides, and you have a whole class and it’s mostly in Australia, of these new lithium experts who are refugees from other commodities, who don’t know much about lithium but are trying to run pump-and-dump on every stray hard rock project in Australia, and making a lot of claims about why hard rock is better.
I don’t think the brine guys are fighting a war, because they don’t need to. I think it’s mostly form the hard rock side having a little bit of a chip on their shoulder when they don’t need to, because there’s room for both.
75 million electric cars
James West: All right. Last year we saw the world consumption of new automobiles at 75 million units, of which less than one percent were electric. At what point in the future do you see the number moving above 50 percent of new car sales being electric?
Joe Lowry: Well, I am not that smart. You know, when you take a number like 50 percent…if you took your 75 million and said you had a 50 percent penetration, and ran that back to the amount of cathode you needed and the amount of lithium you needed to make that cathode, you’d have a real problem. It’s going to take some time to have enough lithium to do that number.
I think that in a 2025 world, if you look at a 10 percent to 12 percent penetration, look at the numbers that David Deak’s put out in his recent presentation. His numbers are a little more favourable, probably, than mine are – well, in terms of, I believe the lithium per kilowatt hours is a little higher than he does, but he participated in the very high end at Tesla and there’s some more inefficient operators out there. But you know, if you’re going to say it’s 60,000 to 70,000 tonnes per million vehicles, and you had even a 10 percent penetration, it’s going to be a real challenge to have the lithium online by 2025 to do that.
James West: Well, so it’s a good time to be a lithium investor, bottom line.
Joe Lowry: It is, it’s a very good time, and I didn’t mean to give a non-answer to your 50 percent question, I just don’t know when that’ll happen. But I think that’s way out in the future. I think that’s 20 years away, and I know there was just an article in The Economist about how it’s going to happen faster than everybody thinks, and you know, that may be true. But in order to get to 50 percent, again, you’re going to have to have billions of dollars of investment in lithium. Billions. And look at how much has been invested in the past few years. It’s been woefully inadequate.
James West: Right. Well, that might just be the opportunity! All right, Joe, let’s leave it there for now. A very enlightening conversation as usual. Thank you so much for your time today.
Joe Lowry: You are very welcome.
The post Global Lithium’s Joe Lowry on Ganfeng, SQM, Albermarle, Lithium Americas, MGX Minerals appeared first on Midas Letter.