The Energy Report: You have been following the very crowded lithium space for some time. While predicted expanding energy storage demand (see Lithium Demand Will Spike: Daniela Desormeaux) has not yet had a big impact on prices, the number of companies in the space seems to be swelling by the month. Of the army of explorers getting into the lithium business, what are the top names in your book?
Chris Berry: I categorize earlier-stage companies into three "buckets": incubator, mature and legacy. Incubator companies are extremely early stage and offer the highest short-term upside, but we know the least about the deposit in question and management teams might not be as seasoned as we would like. Mature companies are those with some history under their belts and an understanding of the geology and metallurgy of a given deposit with more experienced management teams. These companies also typically have NI 43-101 resource estimates or feasibility studies in place, which give investors a sense of potential economics of a deposit. Mature companies are those in production and generating earnings and cash flow. A legacy company is one which is in production and is generating cash flow and earnings. Management is typically very senior and has extensive experience in the natural reource business. Examples in the lithium space would be Talison Lithium Ltd. (TLH:TSX) or Sociedad Química y Minera de Chile S.A. (SQM:NYSE; SQM-B:SSX; SQM-A:SSX).
One mature lithium company that has received a lot of attention lately is Western Lithium USA Corp. (WLC:TSX; WLCDF:OTCQX). Perhaps the biggest news here is the appointment of a new chairman of the board. John Macken will step in for Ed Flood. Ed founded Western Lithium and is handing over the reins to John, who has been on the board of Western Lithium since 2008. This should be a seamless transition, which can help strategically position the company as it moves toward a production decision. John has a multitude of experience with "majors" such as Ivanhoe Mines Ltd. (IVN:TSX; IVN:NYSE), where he served as president and CEO and focused on the development of Oyu Tolgoi in Mongolia and at Freeport McMoran Copper & Gold (FCX:NYSE) where he was involved in the development of the Grasberg Mine in Indonesia as a senior vice president of Strategic Planning.
I think John's history of advancing projects across different commodities and in various parts of the world will be a key strength of Western Lithium going forward. Junior mining companies in markets today will need to act with both a strategic and creative vision to survive. I will be watching Western Lithium closely to see John's vision unfold.
The strong economics of WLC's King's Valley clay lithium deposit speaks for itself and I won't belabor them here. This is also a U.S.-based asset in a mining-friendly state, another intangible not currently reflected in the company's share price.
Nemaska Lithium Inc. (NMX:TSX.V; NMKEF:OTCQX) is a mature lithium play I have on my watch list. The company has made some notable strides in recent months and has successfully positioned itself to be included amongst advanced development lithium plays. The company filed two U.S.-based patents for a process it has developed to produce both lithium hydroxide and lithium carbonate. This methodology has demonstrated a lower cost of production as electrolysis is used to reduce overall soda ash consumption. Input costs for mining companies are on the rise, so you must pay attention when a company is confident enough to stand up and demonstrate a method to potentially lower its cost of production. Successfully receiving these patents is a key catalyst for the company going forward.
Talison Lithium Ltd. has been and continues to be our favorite amongst the oligopoly of lithium producers. This is a legacy play that has been in the lithium business for 25 years but started publicly trading only recently. We continue to own shares in the company. It recently completed its phase 2 expansion at its Greenbushes open pit lithium mine in Western Australia. This was done both on time and on budget. This will double the company's production capacity and position it as a dominant force in an industry where it is already one of the world's largest lithium concentrate producers. In a recent Morning Note, we wrote that with the completion of this expansion project, it just got much tougher for junior mining lithium plays to break into this industry. TLH has been able to increase pricing of its products while at the same time lowering production costs. This is a key advantage. As capacity utilization of its new plant ramps up, we expect to see increased cash flow and profitability generated by the company in coming quarters. Any junior mining company looking to compete with this sort of powerful story must demonstrate some profound competitive advantages.
TLH is now researching the possibility of constructing its own lithium carbonate plant to capture additional value along the supply chain. A decision on whether or not to move forward with the plant should be forthcoming by the end of 2012. The tentative plan is for the company to produce 20,000 tons per year of lithium carbonate with plant construction commencing in 2015. There will, of course, be additional costs here should the company proceed with the project, but it is too early to speculate on those costs and how the company will choose to finance them.
Lithium One Inc. (LI:TSX.V) was my favorite amongst the advanced development stories in the lithium space. I say "was" my favorite, as its shareholders recently approved the takeover of the company by Australia-based Galaxy Resources Ltd. (GXY:ASX). The deal was recently finalized to give Lithium One shareholders 1.96 common shares of Galaxy, which equated to CA$1.55/share, a 35% premium to Lithium One's recent closing share price. The deal size was about CAD $112 million (M) and is expected to close on July 3, 2012. This deal typifies the merger and acquisition activity I expect to see pick up in coming months as I think it is complimentary to each company's shareholders. Lithium One management has built a solid story around a world-class asset and has in turn rewarded shareholders. I will be watching Lithium One management in their future endeavors as they have demonstrated the ability to reward their shareholders.
Continuing my focus on the lithium triangle in South America, Lithium Americas Corp. (LAC:TSX; LHMAF:OTCQX) is another mature lithium play I am following. The company recently released a robust definitive feasibility study (DFS), which increased the size of the measured and indicated NI 43-101 resource and cemented the Cauchari-Olaroz brine resource in Argentina as the third largest in the world. The DFS showed an NPV at an 8% pre-tax discount rate of US$738M for the first of two production phases of this project. The production plan here supports both production of lithium carbonate and potash, which should help keep cash operating costs low. I also like this as it offers the company a second product to sell should lithium carbonate demand falter. The study currently has these costs listed at US$1,332 per ton of lithium carbonate (including a byproduct credit from potash production). With lithium carbonate selling for approximately US$6,000 per ton and LAC anticipating selling 10,000 tons of lithium carbonate per year starting in 2015 (though ramping up to 15,000 tons in 2016, and then 20,000 tons in 2017 going forward), you can begin to get a rough sense of the potential economics of this project.
The company will be filing the DFS and then will begin focusing on catalysts, including the receipt of environmental permits and negotiating financing arrangements with its two strategic partners, Mitsubishi Corp. (MSBSHY:OTCPK) and Magna International Inc. (MGA:NYSE; MG:TSX). While it is true that capital expenditures for this project did rise in the DFS, the company traces it back to increases in the cost of soda ash and lime, which are two of the main reagents used in lithium carbonate production. I would expect company management to look at ways to optimize their production processes and insulate against risks associated with input costs. Also, Argentina has recently proven to be a somewhat problematic place to do business, but thus far company management has been able to navigate.
A final name in the lithium space to watch is Orocobre Ltd. (ORL:TSX; ORE:ASX). I have long regarded Orocobre as the "big brother" of the junior lithium industry as it has been involved in lithium for some time and has demonstrated to other juniors how to build a successful company through developing strategic relationships and not losing focus on developing a world-class asset. This company also has a mature lithium/potash play in Argentina and was just awarded the final permit necessary from the Expert Committee of Jujuy to move forward with the development of its flagship Olaroz low-cost lithium brine/potash project. This is a huge win for the company and puts it at the head of the pack to become one of the next major lithium producers in 2013. With the potash credit, the company anticipates a cost per ton of $1,230. As I said above, with a ton of LCE priced at approximately US$6,000, and Orocobre tentatively producing 16,400 tons LCE per year, the economics of this project are sound indeed.
As part of the permit approval, Orocobre will join forces with Jujuy Energia y Mineria Sociedad del Estado (JEMSE), which will take an 8.5% stake in the company. Jujuy Energia y Mineria Sociedad del Estado acts as the investment arm of the Jujuy provincial government. While there are those who may not like the company having to partner with a provincial government through granting an equity stake, I think it gives the Jujuy provincial government "skin in the game" and a vested interest in seeing this project through to positive cash flow. Additionally, Orocobre has strategic relationships with Toyota Tsusho, Mizuho Bank and JOGMEC, all of whom can help with the financing necessary to put this project into production. I would not anticipate more share dilution based on these relationships and the ability to attract project debt financing.
TER: Thank you for sharing those names.
With a lifelong interest in geopolitics and the financial issues that emerge from these relationships, Chris Berry founded House Mountain Partners in 2010. House Mountain firmly believes that the emerging quality-of-life cycle emanating from Asia is a "game-changer" that will affect everyone throughout the world for decades. With that in mind, the firm focuses on the intersection of three topics: 1) The evolving geopolitical relationship between emerging and developed economies; 2) The commodity space; and 3) Junior mining and resource stocks are positioned to benefit from this phenomenon. Chris spent 14 years working across various roles in sales and brokerage on Wall Street before founding House Mountain Partners. He holds an MBA in finance with an international focus from Fordham University and a BA in international studies from the Virginia Military Institute. He invites readers to receive a complimentary subscription to Morning Notes, which provides analyses of emerging geopolitical, technological and economic trends. Go to www.discoveryinvesting.com.
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1) The following companies mentioned in the interview are sponsors of The Energy Report: Talison Lithium, Lithium One, Lithium Americas, Nemaska Lithium and Western Lithium USA. Interviews are edited for clarity.
2) Chris Berry: I personally and/or my family own shares of the following companies mentioned in this interview: Talison Lithium. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview.