By The Energy Report, on January 27th, 2012
 The lithium market is currently dominated by a handful of major producers, but investors naturally look to smaller junior exploration and production (E&P) companies for the real growth. Economist Daniela Desormeaux of Santiago, Chile-based signumBOX takes a global macroeconomic view of the lithium industry and concludes that supply will meet demand, but if the adoption of vehicular lithium ion batteries occurs sooner than the market expects, demand could overtake supply. In this exclusive interview with The Energy Report, Desormeaux discusses some of the juniors that could ultimately add some energy to portfolios.
The Energy Report: Daniela, over the past three months the small-cap lithium developers have on the whole been in positive territory. Are we at the beginning of a
long-overdue bull market in lithium equities?
Daniela Desormeaux: Most of the smaller-scale suppliers trading in the open market are young, junior mining companies. The stock price fluctuations observed during recent months reflect the market’s sensitivity to the companies’ announcements and news.
TER: What is currently driving lithium demand? What will drive it in the future?
DD: Lithium demand has a promising future. Rechargeable batteries are the largest application, accounting for about 30% of the lithium demand. This is also the segment with the highest growth rate for the next 10–15 years, by which point we believe batteries will represent more than 50% of demand. The main driver is the automotive industry. Electrification of transportation is now driving the use of lithium in energy storage devices for hybrid and electric cars. The amounts of lithium required in these batteries are significant, from between 5–60kg lithium carbonate equivalent (LCE) depending on the battery type and specification. When compared with the lithium required for mobile phone batteries, for example, the difference is huge. A mobile phone battery device requires less than 5g LCE. Other battery applications will also show very interesting growth rates in the coming years. These include smartphones, tablets, power tools and batteries for grid storage, among others. Other current lithium applications include glass and ceramics as well as lubricating greases. Considering all of its applications, we estimate lithium’s average demand will grow around 10%/year, which is greater than the growth of the economy.
TER: How are lithium prices holding up currently?
DD: In the last few months we have seen lithium prices going up in response to announcements made by FMC Lithium Corporation (FMC:NYSE) and Chemetall (a unit of Rockwood Holdings Inc. (ROC:NYSE)). Both companies announced price increases of around 20% on all of their lithium products last year. According to the companies, the main reason behind the rise in prices was higher raw material costs. So, we might be seeing an inflation phenomenon in this industry. In real terms, prices have remained stable, and probably will go down since new capacity is being added. Talison Lithium Ltd. (TLH:TSX) is expanding capacity in Western Australia, and Chemetall is also expanding in the U.S. Other new projects are in the pipeline coming from Galaxy Resources Ltd. (GXY:ASX) in Australia and from other projects in Argentina and Canada.
TER: So, for the moment there is currently some pricing power in the market?
DD: In general terms, prices are driven by the balance between production capacity and demand. If the market is tight, prices go up. Nevertheless, this industry has been, and still is, very concentrated and the largest, lowest-cost lithium chemicals producers drive prices. However, we have seen more competition in the market. Chinese lithium hydroxide producers have entered with an aggressive price strategy in order to gain market share from the other producers.
TER: But not all the large producers are raising prices, right?
DD: So far, Sociedad Química y Minera de Chile S.A. (SQM:NYSE; SQM-B:SSX; SQM-A) has kept prices stable. It hasn’t announced any price increase the way FMC or Chemetall have. The company probably wants to give a signal to the new competitors that they can “afford” higher costs. Most of the Chinese lithium hydroxide is produced from lithium concentrate, which is obtained mainly from spodumene. Producing lithium hydroxide from hard rock pegmatites has competitive advantages compared with producing from the lithium carbonate like Sociedad Química y Minera de Chile does, and so the Chinese can compete better in this field.
TER: Here in the U.S. we are seeing proliferation of TV ads for hybrid and electric cars (EVs). Manufactures are beginning to advertise these cars with some zing. Will this jump start hybrid and EV sales?
DD: It is difficult to know because these are still considered “luxury” cars because of their high price. We have tested a statistical model on how hybrid car sales in the U.S. responded to changes in the economic cycle and changes in gasoline prices. Conclusions are very interesting. We found some price elasticity with gasoline prices, as higher gasoline prices incentivize decisions to buy more efficient cars. But income elasticity is huge, which means these cars are very sensitive to the economic cycle. Of course these conclusions will change in the future when these cars become more affordable.
TER: Investors need to see double-digit sales and real increases in cash flow, and small companies have the tremendous advantage of not having the law of large numbers work against them. Can any of the companies you follow begin to double production and revenue and create exciting bottom lines?
DD: In the short term I don’t think so, but it’s likely in a future. Main sources of uncertainty are how fast/slow hybrid and electric cars will enter into the market in a massive way (at lower prices), and how fast/slow producers will respond to the demand. In the last years we have seen that in more than 90 projects under evaluation. We believe that 4–5 projects have chances to become part of the lithium supply very soon. That means that more competition will be added in the market.
TER: I’m recalling the way the mobile phone industry took off in less-developed countries in Asia and elsewhere because there was no pre-existing buildout of copper wire infrastructure. Mobile phones were an instant success in those areas. Why then are we not seeing large lithium ion storage batteries powering neighborhoods in the developing world where power grids have not been developed?
DD: Well, the thing is that batteries are expensive. The technology has only been in development since the early 90s. It took 30 years to make progress in developing batteries for mobile phones and electronic devices, and these are small batteries and less costly than larger batteries. This is where the industry has been focused, and now we are seeing a shift from batteries for cell phones and electronic devices to electric cars.
The requirement in terms of energy storage capacity is huge, and so the cost so far is also huge. That’s why we haven’t seen implementation of these batteries in neighborhoods and in small towns. There are also some projects that try to store energy for the grid, but in order to make these projects profitable, you have to store an important amount of energy. For a power grid, the main issue is cost.
TER: With a lot of new lithium supply coming onto the market over the next few years, will supply overpower demand, or will it be the other way around?
DD: Again, while demand is growing, so is supply. Talison Lithium Ltd. in Australia, for example, is performing a very aggressive expansion plan. We see expansions in Argentina and in the U.S., and the Chinese are also expanding capacity. The main question mark is how fast or slow electric cars will come into the market. But without subsidies and without incentives from the government, it’s very difficult to enter the market because the electric and hybrid vehicles are expensive right now. If demand for lithium grows sooner than expected, we might see a delay if supply is unable to meet demand, but I don’t think this is going to happen. In short, I think supply will meet demand.
TER: Which types of projects do you favor?
DD: There are projects based on pegmatites and projects based on brines. These are two completely different worlds. I think projects based on lower-cost brine have better chances to compete with current low-cost producers.
TER: What companies are interesting to you?
DD: Australian company Galaxy Resources Ltd. extracts lithium from pegmatite and has already started producing. Apparently, the company is competitive, and it has started to ship concentrated spodumene to its lithium carbonate plant in China.
Other pegmatite projects include Canada Lithium Corp. (CLQ:TSX; CLQMF:OTCQX) and Nemaska Lithium Inc. (NMX:TSX.V; NMKEF:OTCQX). All of these projects have a chance to become part of the lithium supply. In Argentina there’s Lithium Americas Corp. (LAC:TSX; LHMAF:OTCQX), Lithium One Inc. (LI:TSX.V) and Orocobre Ltd. (ORL:TSX; ORE:ASX). These and the previous ones I mentioned have the highest project ranking by our methodology and have more chances to become part of the lithium supply.
TER: What about Li3 Energy Inc. (LIEG:OTCBB)? Back in December, it executed a letter of intent to acquire a 100% mining interest in one of the biggest assets to be had near the Maricunga Salar in Northern Chile. That makes Li3 Energy a potential major player in Chile and one of the few developers inside of Maricunga. What does this mean to the company, particularly with regard to the ban?
DD: Li3 is developing a project in the Salar de Maricunga, the second-best salar after Atacama in Chile. The company has a project and has a strategic partner (POSCAN), but current Chilean regulation does not allow newcomers to exploit lithium. We have a ban that only allows lithium extraction from those mining concessions that were assessed before 1984, which is the case of most of the mining concessions at Atacama. I think that the ban will be removed this year, but we really can’t yet know the formula that the government will use.
TER: Lithium One is close to production, and it has established a good relationship and a joint venture with Korea Resources Corp. I believe the stock has been supported by this relationship. What are the prospects here?
DD: Lithium One is in a very advanced stage of development, and it is very well ranked in our signumBOX ranking. One of its upsides is that it is located in Salar del Hombre Muerto. It’s the only startup that actually is operating in Argentina. So it has really good prospects for the future.
TER: Back in November, Rodinia Lithium Inc. (RM:TSX.V; RDNAF:OTCQX) delivered results of a preliminary economic assessment (PEA) for the Salar de Diablillos lithium brine deposit. There are estimates of 15 kilotons (kt)/year production of lithium carbonate and 51 kt/year of potash. This implies a 34% internal rate of return (IRR), which is excellent. Is this a viable project?
DD: I think it can work, but Rodinia faces huge competition. The company estimates costs will be in the range of $1,500/t lithium carbonate. But I think that it is very different to have an estimated cost before starting production than when you’ve already started producing. I think that Rodinia can be a player in the lithium industry, but like other players in Argentina it will face huge competition. It will have to be competitive because new production is coming from China and Australia. And if Chile removes the ban, they will have to deal also with that.
TER: Talison Lithium is the leading global producer of lithium, and it’s a pure play. It’s a mature company. How much can it grow?
DD: Yes, Talison is the largest lithium concentrate producer, but it’s not the lowest-cost producer. It produces lithium concentrate in Australia and most of its product is shipped to China, where it’s converted into chemicals. I think Talison will face more competition, and that’s why it has expanded production capacity. It has performed a very aggressive expansion plan at its Greenbushes project in Australia. Nevertheless, its deposit has a short mining life; that’s why it is looking for other sources of lithium and performing an evaluation project in Chile.
TER: Daniela, thank you very much for your time.
DD: Thanks to you.
Daniela Desormeaux is an economist and an expert in industrial chemicals and natural resources. She runs signumBOX, a Chilean-based company with extensive experience in the lithium industry. signumBOX has issued several reports regarding the use of lithium in batteries and vehicles and its prospects and trends.
By The Energy Report, on October 26th, 2011
 Lithium continues to be in high demand as battery application growth outpaces the economy. In this exclusive interview with The Energy Report, Jonathan Lee of Byron Capital calls on his engineering and manufacturing background to explain the factors shaping the evolution of this growing market. He also brings us up to date on several promising companies blazing trails in the lithium industry.
The Energy Report: Thank you for joining us this afternoon, Jonathan. You have a technical background in engineering and manufacturing in addition to your experience as an analyst. This gives you a unique perspective in evaluating investment opportunities. What do you look for specifically in a lithium company?
Jonathan Lee: Numerous factors. Our strategy is to find low-cost producers within a sector. Then from a capital cost side, it’s always more beneficial to have a lower capital cost to get a better return on equity and make the project more feasible. We like to have low capital expenditures and operating expenditures. Beyond that, it really comes down to valuing the company and trying to make sure that the equity is purchased at the right price. The two major factors that contribute to a better return on equity are good assets and low costs.
TER: Are you looking across the broad spectrum of levels of development, from prospectors to companies that are already producers? Or do you narrow it down to more advanced companies?
JL: We look at everything from exploration to producing companies. When we look at producing companies, a lot of times there is less technological risk or execution risk involved. At the earlier stage, there’s a lot more risk entailed in proving out the deposit, proving up a resource and gathering more metallurgical information, etc. Earlier-stage companies usually are valued less and have the potential of higher returns but also entail more risk.
TER: Lithium has been a hot topic in the past several years. For those readers who are not all that familiar with it, can you give us a little background on the metal, its uses and what people should be looking at when considering lithium investments?
JL: Lithium is a metal that’s used in a slew of different products. Batteries are a big percentage of it, roughly 25%-30% of production. Glass and ceramics are also a big usage because it lowers the heating temperature, which saves energy. It’s also used in lubricants and castings. A variety of products utilize the element, but these end users make up the majority.
TER: Is battery usage growing faster than other applications?
JL: Yes. Although penetration into automobiles is not great as of yet, there is significant growth in consumer applications for lithium-ion batteries, and you’re seeing that growth year over year. We think that’s going to continue to grow as things get switched over from, say, nickel-metal hydride rechargeable batteries to lithium-ion batteries in consumer electronics.
TER: With all the market turmoil that we’ve had here since you last spoke with us back in April, can you bring us up to date on what’s been happening in the battery materials industry in the past six months? Have there been any major changes?
JL: There are only four major lithium producers. Chemetall and FMC Lithium Corporation (FMC:NYSE) publicly stated in July that they were raising their prices, partly because of increased demand. That definitely helped out along with rising raw materials prices. Soda ash (sodium carbonate) has increased dramatically, thereby increasing the cost to produce lithium carbonate. Because demand is still strong, they’ve been able to raise prices and pass on those extra costs to customers. If you look at companies like Talison Lithium Ltd. (TLH:TSX), which we currently cover and have a Buy recommendation on—it is also selling at capacity. You’re likely to see FMC increase its capacity by 30% next year. So the overall strength of the market is definitely there in the short term. We believe producing companies, such as Talison, will be able to take advantage of that market demand.
TER: Has anything happened recently on the technical front to affect the lithium market in either a positive or negative way?
JL: As kind of a leading indicator of where the market is going, you can look at the amount of money that a company is going to spend on new lithium-ion plants. GS Yuasa Corp. (TYO:6674) is increasing the capacity of its plant. It’s spending roughly $300M on that plant. When it’s up and running in 2014, that will be a significant buyer of lithium for batteries. Panasonic, although it’s scrapping its plant in Japan, is also expanding in China. More and more battery producers are increasing capacity, and that’s a clear signal of where we think the market is going.
TER: A number of companies are mining lithium deposits, mainly in South America, but also in Canada. Do you foresee a supply glut in the market?
JL: Most of the mining companies could come into production within the next year. Demand should increase in step with supply. Talison is increasing its production as is FMC. The markets have a pretty good way of clearing out producers that aren’t able to compete. That is why locating potential low-cost producers is part of our investment strategy. Just like any other market or mining sector, not all exploration juniors make it to production. We try to find those companies that will be in the lower quartile of relative production costs.
TER: You mentioned that a couple of the major producers raised prices. Is lithium mainly a negotiated or supplier price-based market rather than one driven by investment demand?
JL: Yes, it’s mainly supplier-price based. It’s sold over the counter, and we doubt there is going to be any type of LME (London Metal Exchange). It’s not going to be an exchange-traded material because customers have specific criteria for batteries on the chemical side as well as the physical side. A lot of the juniors that we cover are working with trading or industrial companies or even an end user like the Argonne National Laboratory, which has an agreement with Western Lithium USA Corp. (WLC:TSX; WLCDF:OTCQX). Determining the physical and chemical characteristics of lithium products will be based on customers’ needs. Because each customer has different needs, we think that it will remain a negotiated market, and people will pay different prices for different chemical and physical characteristics.
TER: Back in April, you told us about the four major companies that dominate the market, which are Sociedad Química y Minera de Chile S.A. (SQM:NYSE; SQM-B:SSX; SQM-A) a Chilean company; FMC Lithium Corp.; Chemetall, a unit of Rockwood Holdings, Inc. (ROC:NYSE); and Talison. What are the prospects for smaller companies now entering the market?
JL: Recently, demand has been strong and the majors are expanding. But we believe there will be space for companies to enter the market because the four majors will, at some point, max out on capacity. We think there is space for some of the juniors. In the short or medium term, you may see companies that have strategic investors who may pay up for the security of having that supply in an offtake agreement. If one of those strategic investors makes a more substantial equity investment in the near future, we think that shows that the customers are more worried about the security of supply rather than price. And that could bode well for some of these juniors.
TER: You’ve done some research reports recently on Talison Lithium, Lithium One Inc. (LI:TSX.V) and also Western Lithium. Of course, Talison is one of the majors. What can you tell us about Lithium One and Western Lithium, which are not in that category?
JL: Lithium One is a junior brine exploration company in Argentina. It just released its preliminary economic assessment (PEA), which showed positive economics. It showed it could be a low-cost producer of lithium as well as potash. Its estimated production includes a substantial amount of potash, which, on the byproduct credit basis, significantly reduces the cost of lithium production. It’s similar to the model that SQM uses in Chile, where it has potassium and lithium co-products that make for positive economics. We think it’s definitely tangible given that its salar looks very much like FMC’s salar.
On Western Lithium’s front, it signed up with the Argonne National Laboratory to collaborate and work on creating better lithium products. Because lithium is a non-commodity with respect to its chemical and physical characteristics, having that knowledge of what its customers want is a significant turn of events.
TER: How close are these companies to production?
JL: Most of them are at least a few years away from production. I guess the closest one out of the brine projects would potentially be Orocobre Ltd. (ORL:TSX; ORE:ASX). It’s in negotiations with Toyota Tsusho Group (TYHOF:OTCPK) to finalize its offtake and strategic investment. Even after that is done, you still have to construct the mine, pump brine into the ponds and evaporate it for at least a year. So you are looking at a timeframe of at least two to three years to production. I think it would be one of the earliest companies to come to production. Most of them are fairly far off.
TER: What kind of capital costs are associated with putting these operations into production?
JL: It really depends on the size, but a lot of their economic assessments have come in roughly between $200-$360M, ranging in size from 15,000-25,000 tons. And those estimates seem fairly reasonable. Financing is going to be one of the risks for companies getting projects up and running. Mining is a capital-intensive business.
TER: Are there any other lithium development names that you think are worth considering at this point?
JL: The other two names that we cover are Lithium Americas Corp. (LAC:TSX; LHMAF:OTCQX) and Rodinia Lithium Inc. (RM:TSX.V; RDNAF:OTCQX). Lithium Americas has a strong management team with a property adjacent to Orocobre with very similar brine chemistry, and it already has strategic partners in Magna International Inc. and the Mitsubishi Corporation. Rodinia has a brine project in Argentina, which is highly prospective. It should have its PEA released within this quarter. That should bode well for it and prove up its economics as well.
TER: How would you summarize your reading on the lithium business at this point?
JL: I think the lithium business is strong. I’m seeing strong growth in the near term. With the consumption of lithium in consumer batteries, you’ll see substantial growth, especially with the implementation of transportation vehicles. Companies are committing hundreds of millions of dollars in capital to build these plants. We think that’s a leading indicator of where demand is heading.
TER: As far as you are aware, is anyone developing any competing technology?
JL: No. When you look at where lithium is on the periodic table, it’s on the top left, so it’s the cathode of choice because of its energy density.
TER: It looks like lithium is here to stay for the foreseeable future.
JL: We believe so as well.
TER: Very good. We appreciate the update and your current thoughts. Thanks for talking with us today.
JL: Thank you.
Jonathan Lee is a battery materials and technologies analyst with Byron Capital Markets in Toronto. As a member of Byron’s research department, Lee’s primary focus is on the battery materials sectors, which includes lithium, vanadium and cobalt.
By The Energy Report, on September 2nd, 2011
 Although lithium equities have not elevated moods much recently, House Mountain Partners founder Chris Berry makes his case that over the longer term the element will be in such strong demand for the electric vehicle (EV) revolution that investors will no longer be able to ignore explorers and emerging producers. The crucial growth driver is the nascent lithium-ion battery industry that will be vital to management and allocation of energy sources ranging from nuclear and coal to wind and solar. In this exclusive Energy Report interview, Chris has identified several publicly traded lithium juniors priced low enough to reward patient investors with big multiples on investment.
The Energy Report: I’m looking at an unweighted basket of lithium stocks and it’s down about 17% since July 22. During the past six months, these stocks have underperformed the S&P 500 by about 30%. Chris, what does this tell you? Is it heralding a slowdown in manufacturing and the economy in general? Or, are lithium equities a screaming buy here?
Chris Berry: I think it tells us both. If you look at recent gross domestic product (GDP) data in the United States or, most recently in Germany, many Western economies are in stall speed with second quarter GDP numbers barely coming in above zero. So, the world economy is at a little bit of a crossroads—the West is slowing down and relying on the East as the sole engine of economic growth. There is a risk of a double-dip recession here in the United States, but I think it remains to be seen if that will happen. Regarding whether lithium equities are a “screaming buy,” I think there are some lithium stocks that are undervalued at their current levels, but it’s not safe to assume that all lithium stocks are a buy right now.
There are two reasons you’ve seen lithium equities get pushed down in the last couple of months. The first has to do directly with uncertainty in Western economies. Second is the fact that there are likely too many junior exploration companies in the lithium space based on current and near-term supply and demand. So based on these two factors, everyone is just getting pounded. It’s a flight to quality, and it’s a reaction of fear in terms of where to put your money, which is why you’ve seen gold hit historic highs. Lithium, itself, is an industrial metal, whether or not it’s used for polishing glass, as a grease, or its most popular current-day use—in batteries. The long-term potential of lithium rests with growth and innovation in the automotive industry. Electric vehicles are a key growth driver for lithium demand in the future. So electrification in the automotive industry, energy storage and consumer electronics demand are all themes to focus on when developing an opinion on long-term lithium demand. There is a great deal of debate in scientific circles regarding what the optimal battery chemistry is or will be. Lithium will play a central role here, but there are other choices, as well, clouding the end game.
TER: Will some look back at this as a missed opportunity in lithium equities?
CB: I think so as long as you are selective. One of the main themes that we look at in our research at House Mountain is how GDP growth is directly related to access to cheap and reliable energy. How that energy is generated is a question with a number of different answers. If you think about the potential that lithium has in terms of energy storage and generation, it will no doubt play a role in the world’s future energy mix. Hydrocarbons will always be with us thanks to their availability and energy density, but lithium will, in my opinion, play a central role in transportation. This isn’t something that is going to all shake itself out next week or next year. We are looking at a process that is slowly evolving.
TER: At the end of June, Rockwood Holdings, Inc. (NYSE:ROC), a $4 billion market-cap company announced a 20% lithium price increase and the stock really responded quite well until things began to turn down. What is driving that kind of pricing power?
CB: You are absolutely right about Rockwood. I believe a week or two after the Rockwood announcement FMC Lithium, a division of FMC Lithium Corporation (NYSE:FMC) raised prices as well. The prices of select lithium end products were increased by 20–25%. What I read into this was the fact that there is a substantial amount of raw materials inflation globally and these companies are passing higher costs on to their customers. It remains to be seen whether these higher prices stick.
TER: Right now, given the current economic environment, what is the bull case for lithium?
CB: I’m not sure the bull case is particularly compelling, again, because you’re looking at a predominantly industrial mineral facing a slowing global economy; granted some economies are expanding faster than others. I think the lithium industry draws an interesting parallel with the rare earth industry. You are at the beginning stages of a huge shake out in the rare earth space where many of the junior explorers there won’t achieve production as the small size of the market cannot support the 200-plus companies involved in rare earth exploration. With lithium, you’ve got four primary global producers and a couple near-term producers in a market that today has too many participants given the current global lithium demand picture.
But I do think over the coming years as this emerging growth phenomenon in countries like China, Brazil and India continues and other economies recover, the case for lithium is strong. Lithium can play a huge role, whether or not it’s in electricity generation, electricity storage, or the transportation sector. I don’t want to underestimate how critical a viable transportation sector is to any economy. If you think about supply chains and what they mean to a given economy in terms of the movement of raw materials, the transportation sector is absolutely critical to maintaining or sustaining any increased quality of life.
TER: I know you travel to Latin America at times. Exports from Chile and Argentina are up over last year, and the lithium industry looks very positive down there. What’s going on in South America? Is this a resource issue, a policy issue or both?
CB: I think it’s a mixture of both. When you talk about Chile and Argentina, they are two of the top lithium producers and exporters in the world. Most, if not all, of the producers are brines and they are solidly economic. You have healthy demand for lithium and lithium carbonate coming from Asia so that’s, in my opinion at least, why you are seeing these export numbers increase from Chile and Argentina. Both of these countries have mining as a central driver of their economic growth. Various provinces in both countries have been mining metals—lithium, gold, copper, you name it—for hundreds of years. They also understand how important mining is to local economies. I know, for example, in some provinces in Argentina, the mining industry accounts for up to 70% of the local economy. So it’s an overwhelming engine of growth. That’s not lost on local and national politicians in these countries. These countries are stable geopolitical jurisdictions with a set rule of law and very clear royalty schemes. That is what attracts foreign direct investment and creates jobs.
TER: I don’t know if you go to Australia, but it’s friendly to mining as well, isn’t it?
CB: I was actually in Australia visiting Talison Lithium Ltd.’s (TSX:TLH) Greenbushes project in April. Australia is an extremely mining friendly country. What is interesting there, however, is that the last few heads of state have tried to push ahead with a carbon tax. It’s no surprise that the proposed higher taxes have been viewed unfavorably by large producers with operations there—Rio Tinto (NYSE:RIO; ASX:RIO) and BHP Billiton Ltd. (NYSE:BHP; OTCPK:BHPLF) for example. It remains to be seen what will come of this legislation, but it is really one of the only potential stumbling blocks I see in an otherwise solid mining jurisdiction.
TER: Speaking of Talison, its chart is an inverse or mirror image pattern to Sociedad Química y Minera de Chile S.A. (NYSE:SQM; SSX:SQM-B, SQM-A). I was comparing them because they are the two largest producers of lithium. Over the past six months, Sociedad Química is up 10%, and Talison is down 41%. Talison is the world’s largest producer, and it’s set to double production by 2013 with expansion of its Greenbushes project you just spoke about. Why has it underperformed so badly?
CB: I have followed Talison for a long time and visiting the site provided a lot of new perspective. This is a company that has been producing high-grade lithium for 25 years. It has a very strong technical team that knows exactly what it is doing. It is mining an asset that is actually the highest grade hard rock lithium in the world. I don’t know if that is necessarily lost on the market, but in the mining industry one of the themes in terms of evaluating a project is that grade is king. If that’s the case, then Talison is a runaway winner. You have an asset with a substantial mine life with an incredibly high grade in a safe geopolitical jurisdiction that supplies China with upwards of 75% of that country’s lithium needs. Think about the growth taking place in China in cleantech research and the battery manufacturing business. The overwhelming majority of the lithium used here comes from Talison.
Talison is the only pure-play lithium producer in the world. So comparing it to a company like FMC or Sociedad Química or Rockwood is not exactly fair because those are chemical companies that produce fertilizers and other chemicals aside from lithium.
TER: At the risk of comparing apples and oranges once again, Sociedad Química is a brine producer of lithium. Talison is a hard rock producer. Which method do you prefer?
CB: On a cost per-ton basis and on a head-to-head evaluation, the brines are cheaper. But it can take 18 months to extract and evaporate the brine and produce lithium carbonate, whereas with hard rock you can do it much faster. How Talison competes with brine producers is interesting. In many cases, it can out-compete brine producers because it is producing such high-grade product. Even though mining may be more expensive for Talison compared to a brine producer, its higher grade allows it to capture a higher margin for the end product that it sells.
TER: Chris, what other companies are you talking to investors about?
CB: One, in particular, that we are focusing on right now is Lithium One Inc. (TSX.V:LI). This is a company that has two assets—a brine asset in Argentina, which is its centerpiece project, and a hard rock pegmatite property in the James Bay region of Quebec. The company is planning on producing lithium carbonate and potash from the Argentinean property named Sal de Vida. In the lithium space, I like to see this because if you can produce a byproduct profitably, that is going to lower your overall cost of production. Additionally, you have very strong management in Paul Matysek and Patrick Highsmith.
TER: Do you give Lithium One an advantage because it produces from both hard rock and brine?
CB: The company isn’t yet producing from either, but plans on production from the brines first. I suppose there is an advantage in having a diversity of supply, but the real advantage will be that it will be predominantly producing lithium from the brine along with potash and lowering overall cost of production. So that is the advantage. This asset borders a property from which FMC is now producing and has substantial grades of both lithium and potash.
Near-term catalysts for this company are a preliminary economic assessment in Q311 and a prefeasibility study in the middle of 2012. We are looking for positive catalysts over the next 6–12 months here.
One of the other things we really like about Lithium One is the fact that it has done strategic joint ventures for each of its assets. For the Sal de Vida property, it has partnered with a Korean consortium of three different companies—LG International Corp., Korea Resource Corporation (KORES) and GS Caltex Corp. The consortium will fund the project to feasibility in exchange for up to a 30% ownership of the property. The key benefit for the consortium is to lock up a secure supply of raw material. For Lithium One, the company is carried to feasibility. It is important to consider how a company is going to ultimately start generating cash. Is it going to continue to dilute through share issuance to get there? In my opinion, Lithium One has really executed a masterstroke in negotiating a partnership with this Korean consortium.
On its James Bay asset in Quebec, Lithium One has done the same thing with Galaxy Resources Ltd. (ASX:GXY), which is a company that just started producing lithium in Australia on its own. Galaxy can earn up to 70% of the James Bay property by completing a definitive feasibility study by the end of 2012. So Galaxy can ensure security of supply and Lithium One is carried to definitive feasibility on the project.
Another interesting company is Western Lithium USA Corp. (TSX:WLC; OTCQX:WLCDF). It’s a little bit of a hybrid as it’s not a traditional brine or hard rock play. This is a very large clay asset in Nevada called Kings Valley. Western Lithium recently updated its NI 43-101 resource estimate, which I think was received positively as the tonnage and grade of the deposit increased, which helps the already good economics of the project. When you talk about lithium, one of the keys is security of supply. When the electric vehicle revolution really takes hold, the idea of having a ready domestic supply of the key asset lithium carbonate is of paramount importance. I’m currently reading a book titled “Bottled Lightning: Superbatteries, Electric Cars, and the New Lithium Economy” by Seth Fletcher. In the book, the “story” of Western Lithium is told and WLC CEO Jay Chemelauskas is featured prominently. The book is an interesting read on the history of lithium’s role in electrification and more importantly, it’s future.
TER: What about earlier stage plays?
CB: We have talked about Rock Tech Lithium Inc. (TSX.V:RCK; OTCPK:RCKTF; Fkft:RJIA) before. This is a very early-stage play. It’s not quite as far along as Lithium One or certainly not as far as Talison. Rock Tech is a hard rock explorer and it has several assets in Ontario and Quebec. The primary property is the Georgia Lake lithium deposit about 200 km. north of Thunder Bay, Ontario. It has a historic resource, and it will be updating and releasing information on that before the end of the year. So we will get an idea of the tonnage and grade of its Georgia Lake asset. It also has an asset in Quebec that borders Lithium One’s hard rock deposit. You can take a look at the tonnage and grade specifics for Lithium One at James Bay and infer what Rock Tech might have if the geology underlying the deposits is consistent and continuous.
TER: Will that upcoming resource estimate be an NI 43-101? What has been the historic estimate?
CB: It will be a qualified NI 43-101 resource estimate. The historic estimate at its Georgia Lake prospect is 9.8 million tons of lithium oxide at a grade of 1.18%. Rock Tech is conducting bulk sampling, and has produced very high-quality lithium carbonate from one of the bulk samples. So the metallurgy there is very close to being understood, and that is a huge key with a lot of these lithium plays.
TER: Do you expect Rock Tech’s NI 43-101 to be a market-moving event?
CB: I think it will be significant because what you are looking at now is historic or backwards information. So you have an idea of what this company has and what the size and grade are, but you don’t really know. So an NI 43-101 is certainly a significant step in Rock Tech’s future. I don’t know if I would necessarily say it is market-moving. One of the keys with juniors, whether you are dealing with lithium or gold, is patience. A lot of times patience can wear thin, but I think with a company like Rock Tech, patience may ultimately be rewarded despite the fact that the lithium space has too many participants
TER: Thank you very much, Chris. It has been a pleasure.
CB: I think a lot of what you guys do at Streetwise. Thank you.
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. Chris is also a member of the Canadian American Business Council. 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.
By The Energy Report, on May 27th, 2011
 Siddharth “Sid” Rajeev isn’t a miner. But in his search for value, Sid, head of research for Fundamental Research Corp. in Vancouver, digs deep into the world of small- and micro-cap stocks to find undiscovered gems. In this exclusive interview with The Energy Report, Sid drills down on some relatively unknown resource stocks he has uncovered.
The Energy Report: Sid, you’re an electrical engineer by training. How did you end up the head of research at your boutique investment bank?
Sid Rajeev: I initially worked for an engineering firm for a few years. I developed a strong interest in finance and investment analysis in those years, so I decided to pursue an MBA degree. Soon after I got my degree, I joined Fundamental Research and it’s my sixth year here. At Fundamental, we have a team of analysts, including financial analysts and geologists. We cover about 150 companies, three-quarters of which are in the natural resource sector. The rest are from agriculture, technology, aerospace and other industries.
TER: Instead of putting target prices on stocks, your firm uses a fair-value metric. Does that imply perfect pricing, a theoretical point at which there’s no upside or downside?
SR: Fair value, basically, is the intrinsic value of a stock on a particular day, which is calculated based on the stock’s fundamentals. And you’re right, essentially, it’s the point at which there’s no upside or downside.
TER: When shares reach fair value, do you recommend them as momentum plays?
SR: No, our valuation methodology is always based on fundamentals—we will not give a buy recommendation on a stock if its share price is higher than its intrinsic value. We tend to evaluate or review our valuations on a particular company every three to four months—sooner if some significant news develops.
TER: With a fundamental theory, you recommend taking money off the table when a company achieves fair value and seeking fair value in another company’s shares.
SR: Exactly.
TER: What are you trying to achieve for your clientele through your general investment theory?
SR: Our main goal at Fundamental is to bring out those underexposed small- to mid-cap companies that no one really follows—those are the companies most likely to be undervalued. Our geologists look at the technical aspects. They work in conjunction with our financial analysts to come up with the intrinsic value and a recommendation.
TER: Are you generally bullish on commodities right now and, if so, which ones?
SR: Our favorite now is uranium. We’ve been bullish on uranium for the past couple of years. Yes, the incident in Japan caused uranium to take a huge hit, along with the companies that follow or track uranium, but we believe the fundamentals of uranium are still intact. It’s still one of the cheapest and cleanest sources of power out there. Particularly when fossil fuels are at extremely high prices, we need sources like uranium going forward. Having said that, I don’t think we are going to see any spike but rather a slow and gradual recovery in uranium prices and, therefore, we believe uranium is very attractive for investors with a longer time horizon (at least 12 months).
TER: Where should investors be deploying capital?
SR: Our three top picks are Western Potash Corp. (TSX.V:WPX), Compliance Energy Corp. (TSX.V:CEC), a coal company, and Strathmore Minerals Corp. (TSX:STM; OTCQX:STHJF), a uranium company.
Western Potash is an advanced-stage exploration company with potash in Saskatchewan. We think it’s a good acquisition target.
We picked up Strathmore Minerals when it was at $0.57. It traded as high as $1.60 but, after the disaster in Japan, the stock dropped significantly and now is sitting at about $0.62. We believe uranium companies with quality assets, like Strathmore, should do well going forward.
Compliance Energy recently announced a positive feasibility study, and it should go into production in the next 24–36 months. It has a quality management team, strong cash and investments—especially its significant position in Copper Mountain Mining Corp. (TSX:CUM).
TER: Great. Any others?
SR: Rock Tech Lithium Inc. (TSX.V:RCK; OTCPK:RCKTF; Fkft:RJIA) is a very interesting company under our coverage. Its main focus is on the Georgia Lake lithium project in the Thunder Bay Mining District in Ontario. That project has a historic resource of 9.8 million tons (Mt.) at 1.18% lithium oxide. We like this company particularly because it is expected to complete several milestones in the next 6–12 months. Number one, Rock Tech is expecting to convert its historic resource to an NI 43-101-compliant resource in the next month or so. Second, the company is awaiting metallurgical test results on a 1-ton bulk sample, which will determine the recovery rates for different separation methods and also evaluate the potential to produce battery-quality lithium carbonate. Third, in addition to Georgia Lake, the company also plans to advance its recently acquired projects in Quebec, which are located close to some well-known lithium projects.
The Kapiwak project (James Bay area in Northern Quebec) is located close to a new discovery and the Lacorne project (Val d’Or) is close to a near-term producer (18–24 months). We expect this stock to move closer to our fair value estimate of $0.55 per share if these developments turn out to be positive. The current share price is $0.25.
TER: The main driver here is the growing popularity of electric cars?
SR: Exactly. We think lithium is attractive for use in electronic devices and vehicle batteries because lithium is the lightest metal in the periodic table. Lithium has the highest specific heat of any solid element. Lithium batteries also hold a charge for a long time and could be utilized to store energy from alternate sources, such as wind and solar, as the electricity production from these sources is variable.
TER: What else can we look forward to from Fundamental Research?
SR: Another company that is worth tracking is Mesa Exploration (TSX.V:MSA). It’s exploring for lithium, potash and uranium in Utah and Arizona. All the projects are in proven mining districts with accessibility and infrastructure. The company recently released an NI 43-101 technical report for its flagship Green Energy Lithium Project in Utah, where drilling is expected to begin this spring once the permits are received. Mesa also has a joint venture (JV) partnership with Passport Potash Inc. (TSX.V:PPI, OTCQX:PPRTF) on its Holbrook Basin Potash Project.
We recently picked Plains Creek Phosphate Corp. (TSX.V:PCP) and will be initiating coverage on the company shortly. It has an advanced-stage phosphate project in Guinea-Bissau in West Africa. A bankable feasibility study is expected in Q411. The company has already received a production license, and production is expected to commence in 2013. Our recommendation and rating on the company should follow in the next few weeks.
TER: Do you believe a phosphate company can grow due to the success in potash, and that it might be time for phosphate to catch up?
SR: Exactly, phosphate has the same drivers as potash. The main idea behind phosphate and potash is increasing demand for food, increasing population and diet improvement in developing economies. Also, meat consumption in developing countries is expected to significantly increase in the future, which would drive up demand for grains to be used as livestock feed. All this requires fertilizers, and that’s where potash and phosphate come in.
TER: Got it. I’ve enjoyed meeting you very much Sid. Thank you for your time today.
At Fundamental Research Corp., Sid Rajeev heads the research department, which covers over 150 small- and micro-cap companies and 15 exempt market/private issues from a broad array of industries including energy, mining, real estate and technology. He also manages the FRC list of Top Picks, which are the stocks under coverage that he has the highest conviction level about. These picks have historically helped the firm finish strong in various third party analyst performance rankings.
Sid holds a bachelor of technology degree in electronics engineering from Cochin University of Science & Technology and an MBA in finance from the University of British Columbia. He is a CFA Charterholder and has completed studies in exploration and prospecting at the British Columbia Institute of Technology.
By The Energy Report, on April 20th, 2011
Demand for lithium, a super-light, yet super-charged metal used in batteries, has been slowly rebounding from a dip in 2009. Main players in the space are planning to expand and new market entrants are on the horizon. But which are poised to benefit if there is a glut in supply? In this exclusive interview with The Energy Report, Byron Capital Markets Battery Materials and Technology Analyst Jonathan Lee reveals his forecast for prices, supply and demand.
The Energy Report: Jonathan, please tell us about lithium and its core uses.
Jonathan Lee: Lithium metal is used mainly in the glass and ceramics industry and in lithium-ion batteries, which, collectively, comprise about one-half of all lithium used. The other remaining uses are anything from greases, casting and aluminum production to pharmaceuticals. It’s a very versatile metal.
TER: What is the investment thesis for lithium?
JL: Lithium is an important component of the batteries that power electric vehicles (EVs). We believe in the electrification of vehicles over time. It’s a transition; Nissan’s LEAF has come to commercial production, the Tesla Roadster has come out and the Chevy Volt also has come into commercial production. We focus on the metals that play a role in the electrification of our transportation mechanisms and associated infrastructure. Obviously, lithium came up as one of the key metals that will be used in this revolution.
TER: The green revolution?
JL: The green revolution is a nice way of saying it. Demand for lithium will continue to grow at a much higher rate than gross domestic product (GDP) over the next 10 years.
TER: What has lithium’s supply/demand curve looked like during the past few years?
JL: Lithium experienced a dip in 2009, but production has been around 120,000 metric tons (120 Kt.) lithium-carbonate equivalent since 2008. That’s equal to about 23 Kt. lithium metal. In 2009, lithium demand, along with many other materials, dropped pretty severely to under 100 Kt. Estimates for last year, 2010, range from less than 100 Kt. to about 120 Kt. It’s hard to get very exact numbers because it’s a fairly opaque market.
Four major players dominate the market: Sociedad Química y Minera de Chile S.A. (NYSE:SQM; SSX:SQM-B, SQM-A), FMC Lithium Corp. (NYSE:FMC), Chemetall, which is a unit of Rockwood Holdings Inc. (NYSE:ROC), and Talison Lithium Ltd. (TSX:TLH). We estimate there was about 108 Kt. tons in 2010. FMC, a large lithium miner in Argentina, estimates it at 100 Kt.
TER: Do you think the lithium market will become more transparent and perhaps trade on the LME, for example?
JL: Lithium is not that big of an industry, but you saw cobalt and molybdenum start to trade on the LME in early 2010. If there is some success in trading those materials, maybe there are some benefits in trading lithium. The problem is that lithium is traded in different forms. That would make it more difficult to trade on any exchange because it is sold as spodumene, which is lithium oxide concentrate, lithium chloride, lithium hydroxide or lithium carbonate. It is really customer specific; so, it probably won’t be trading on an exchange any time soon.
TER: What has the price of lithium been like in the recent past?
JL: Each form of lithium brings a different price. In the second half of 2008, a big run-up in the price of lithium carbonate equivalent (LCE) resulted in highs of $6,000/ton. In 2009, SQM’s figures show lithium was selling at around $5,300/ton and its latest financials indicate that it was selling at around $4,700/ton last year.
TER: Where do you expect the price to be by year-end?
JL: We think it’s going to finish at around $5,000/ton lithium carbonate. With so few players in the market and not many low-cost juniors expecting to come into production this year, I don’t foresee a price move upward or downward in the next year.
TER: Do you believe there’s long-term upside in the price of lithium?
JL: I’m not sure if there’s a real upward price trend for lithium in the long term; thus, any high-cost supplier that comes to the market is really going to have a hard time competing. I don’t believe there will be a dramatic increase in the lithium price in the near, medium or long term.
TER: So, it’s all about the margins on these projects? A company must bring lithium to market at a low cost to have a good margin?
JL: I believe that the low-cost suppliers will be able to thrive in this marketplace. Obviously, the product has to meet customers’ end specifications. The problem is that often juniors don’t know whether or not they meet customers’ specs. Only some have offtake options for steady customers but, in forming options, companies have access to customer specifications with which they can develop around. It’s hard to gain a market share without being a low-cost producer or having an offtake agreement.
Also, three of the four main lithium companies are planning expansions. Chemetall wants to—whether or not it will get permission is another question because it’s in Chile and lithium is a strategic metal. FMC is looking to expand its operations 30% this year.
Talison is planning to double its production capacity. The company recently raised money, has all the capital costs to invest and is willing and ready to compete. However, it does produce slightly different material—spodumene—mainly to customers in China for the ceramics and glass market. Talison is considering going from a mine to spodumene, and then from spodumene to lithium carbonate.
TER: Isn’t that a hard rock deposit that’s in Australia?
JL: Yes. The company is looking at whether or not it will be economically feasible to go from spodumene to lithium carbonate at this time. It hasn’t made that decision but, like FMC, it is definitely expanding its operations to increase capacity. For us, hedging risk implies being a potential low-cost producer trying to compete with these expanding companies for the growing lithium demand.
TER: The market is dominated by four companies but there are some up-and-comers in this space, most of which have brine deposits. What are some of Byron’s favorite names among the up-and-comers?
JL: A few low-cost producers have the potential to thrive and return money to investors in this marketplace. Lithium Americas Corp. (TSX:LAC) has the Cauchari-Olaroz project that is scheduled to go into production in 2014. We like the company because it has very good chemistry. It has a very high lithium concentration and a very low magnesium level. Its preliminary economic assessment (PEA) should be released fairly soon. We’re looking forward to seeing that and the results of all the hard work the company has done over the last few months. We currently have a Speculative Buy rating on LAC and a $2.80 target price.
The Sal de Vida project is another one that we really like. It is being developed by Lithium One Inc. (TSX.V:LI). We have a Speculative Buy rating on LI with a $2.45 target price. The company has some of the best brine chemistry; and with good lithium and potassium concentrations combined with the right magnesium and sulfate concentrations, it may be one of the lowest-cost producers. The Sal de Vida project has very similar brine chemistry to that of FMC, which is one of the four main producers.
TER: The companies’ projects are basically right next to each other?
JL: FMC is on the west side and Sal de Vida is on the east side of Farallon Catal, a volcanic intrusion that comes up and separates the two. Lithium One released its inferred resource report in early March and the brine chemistry results were better than expected—very high potash levels, very high lithium concentrations and very low magnesium levels, which are good indicators of a low-cost production. Lithium One also has a pilot plant producing lithium carbonate. It is not only progressing with drilling and determining the size of the resource, but also making sure it can produce lithium carbonate.
TER: Has the company recovered potash, too?
JL: It really comes down to working with chemistry. There will be a potash byproduct credit, but it really depends on the economics of it and how much potash the company wants to create relative to lithium. There’s always give and take because production utilizes an evaporation method. Lithium One has to determine whether it wants to produce more lithium or potash.
We also cover Orocobre Ltd. (TSX:ORL; ASX:ORE) with a Speculative Buy rating and a $3.05 price target. The company is probably the most advanced to date and should come out with a definitive feasibility study. It has a joint venture (JV) agreement with metals trading house Toyota Tsusho Group (OTCPK:TYHOF), an affiliate of Toyota Motor Corp. Subsequent to the definitive feasibility study, the plan is to have Toyota Tsusho make a 25% equity infusion to start construction on the mine.
TER: And as Lithium One is to FMC, Orocobre is to Lithium Americas. They’re pretty close to each other, too, right?
JL: Yes, Lithium Americas and Orocobre are in the Olaroz-Cauchari Basin. A river delta separates the two salars.
TER: Given their proximity, what’s your opinion about the possibility of those companies joining forces?
JL: There would be a lot of synergies if the two merged. Obviously, infrastructure and capital costs could be shared; but it comes down to valuation. I think there would be enough synergies to warrant investigating a merger.
TER: Which company is more likely to become the consolidator?
JL: It’s hard to say. They both have pretty good cash positions right now, but Orocobre has a larger market capitalization.
TER: Talison Lithium also has been trying to get into brine deposits due to the high margin on high-grade brine deposits. Have you heard anything about that?
JL: Talison Lithium went public on September 23 through a reverse takeover (RTO) in which a private company acquires a public company. Talison merged with Salares Lithium and, in doing so, acquired early stage brine projects in Chile. It was a nice complement. I think it’s a long-term story for the company, given that it has such a good customer base in China from its high-grade lithium-bearing spodumene project, the Greenbushes Lithium operation.
Rodinia Lithium Inc. (TSX.V:RM; OTCQX:RDNAF) also has a brine deposit at its Salar de Diablillos project in Argentina. We have a Speculative Buy rating on it with a $2.25 target price. It’s another example of fairly good chemistry and good, effective porosity levels. And the project is another that, potentially, could be a low-cost producer. It has a decent level of lithium grade, reasonable magnesium:lithium ratio and very attractive sulfate levels—that’s another key. It has a lot of positive qualities.
Rodinia has a strategic investor in Shanshan Resources Co., Ltd., a wholly owned subsidiary of the largest battery manufacturer in China—Ningbo Shanshan. Some of Shanshan’s partners have extensive experience doing brine chemistry in the Tibetan salars. Shanshan is a value-add for that company.
TER: Where is lithium demand going relative to new technologies like EVs and batteries for smart phones, laptops and tablets?
JL: We’re definitely very bullish on the demand for lithium. Being that lithium is in the top left of the periodic table, it’s an energy-dense, but light, material for battery applications. Demand began to pick up in the latter half of 2010 and I believe it will increase significantly from 2014–2016 on, due to the implementation of EVs. To give you some perspective on lithium use, there’s roughly 20 kg. (44 lb.) of lithium in every Nissan LEAF battery; and the Tesla Roadster contains twice as much lithium.
TER: One of the issues with some specialty metals like lithium is that cheaper substitutes are often found when prices for specialty metals get too high. Is this a threat in the lithium space, or are its unique properties of lightness and high-energy density virtually irreplaceable?
JL: I don’t think there is any danger of lithium being replaced by another metal. If it was to be replaced, it would be swapped out for a different technology. Lithium is the choice material for rechargeable batteries. President Obama has come out and said that, by 2015, all federal vehicles purchased will be alternative-fuel vehicles. That’s a steppingstone to where lithium demand can go. I know China’s following suit also, in terms of electrification of it vehicles. We firmly believe that because of road electrification, lithium will be used more and more.
TER: Thanks, Jonathan, this has been very informative.
Jonathan Lee is a battery materials and technologies analyst with Byron Capital Markets in Toronto. As a member of Byron’s research department, Lee applies his beliefs, skills and investment acumen to evaluate and select equity securities, and then recommend investment ideas to the firm’s proprietary traders and institutional clients. His primary focus is on the battery materials sector, which includes lithium, vanadium and cobalt. Prior to joining Byron in 2010, Lee had more than seven years of professional industry experience in the manufacturing and engineering sectors. He previously worked in an engineering capacity preparing feasibility studies for economic assessments and engineering designs for construction projects. Lee has an MBA from the Leonard N. Stern School of Business at New York University, BSc in chemical engineering from Tufts University and is a CFA Level III candidate.
By The Energy Report, on April 6th, 2011
 House Mountain Partners Founder Chris Berry points to the rising quality of life in Asia as competition for strategic resources that could push the cost of energy to the breaking point. There won’t be a single solution, but more efficient electricity storage to power vehicles will be critical. High-capacity batteries are dependent on several metals, including lithium, which is still underappreciated by the commodity and equity markets. In this exclusive interview with The Energy Report, Chris shares some of his favorite lithium companies and why he sees dramatic upside potential in each one.
The Energy Report: You propose that development of lithium-ion batteries for electric vehicles (EVs) will drive increasing demand for lithium. But even assuming these new batteries, ultimately, have storage capacity of three, four or five times that of conventional nickel-metal hydride batteries (NiMH), they still have to be charged with power that comes from a source like coal, hydro, solar, wind, nuclear or whatever. My question is how do EVs alleviate the drain on resources? What’s the benefit?
Chris Berry: You know that’s a great question because it’s one that a lot of people struggle with, me included. People say that with electric vehicles you’re just trading dependence on oil for a dependence on coal or other dirty fuels to power your car. I don’t see one form of energy winning over all others.
I think coal and nuclear will probably lead the way in powering electric vehicles and providing electricity in the coming decades. But there’s definitely going to be a role for renewables, such as solar, to play in places like Phoenix, Arizona and hydropower in the northwestern United States, for example. One thing to remember is that, as the rise of the middle class in Asia continues, there certainly will be increased auto demand coming out of these countries, which means increased fossil fuel demand. This gets us back to your question, the net benefit of using EVs is resource sustainability and finding the right balance of baseload power sources. You can charge a battery from many different power sources; and, as battery technology continues to advance, so too will the power sources. But there likely won’t be a singular winner.
TER: Does your investment theory assume that higher oil prices will spur development of lithium-ion (Li-Ion) battery technology?
CB: I think that’s one of the keys but I’m not sure what the tipping point is; for instance, I don’t know if it’s $150 or $200/barrel. Higher oil prices are already filtering down to higher gasoline prices at the pump. As gas prices continue to rise, people start getting a little antsy and that filters up to politicians who can spur research and development (R&D) through increased funding on the Federal level. I just hope it’s not a matter of too little too late, as development of Li-Ion battery technology is a global competition involving multiple countries throughout the world.
TER: What’s being done now to advance lithium-ion battery technology?
CB: There’s a global competition unfolding right now to own the next-generation battery technology. Four countries are the real players here. South Korea and Japan are producing Li-Ion batteries currently, while the United States and China are playing catch-up. The competition is focused on finding a battery chemistry around which you can build an entire industry. If you own the intellectual property, you can own the supply chain, which creates manufacturing jobs—something we’ve lost in this country over the past decades.
Currently, China is investing more in battery technology than any country—to the tune of hundreds of millions of dollars—even more if you consider its entire cleantech spending budget. In 2010, China invested $34 billion in cleantech research of which battery technology is a part. In the mid-1980s, the country created what it called the “863 Program,” which still exists today under the Five-Year Plans it uses as a guide for economic policy. The 12th Five-Year Plan, by the way, which was just released is thought to be the “greenest” in China’s history. That could say something about Chinese leadership’s priorities. The 863 Program has a mandate to develop high-tech and cleantech industries; so, if you want to know what China is spending R&D dollars on and where it is focusing, looking at this data is a good start.
In the U.S., President Obama helped spur development of lithium-ion battery technology with the American Reinvestment and Recovery Act of 2009. To establish a battery-manufacturing base, $2.4 billion in grants was earmarked. The Argonne National Laboratory is also at the forefront of the research to find that next-generation breakthrough. Billions of dollars in grants have also gone to the private sector in the U.S. I’ve called this a ‘Manhattan Project’ or ‘Cold War’ because, really, we are trying to outspend and out-innovate foreign competitors to own this intellectual property. That’s the name of the game going forward.
TER: As an investor, do you have a preferred type of lithium ore? Hard rock, brine or clay? Which is best?
CB: I’m not sure if one is better than the others; I think each deposit has its own pluses and minuses. Typically, brines are the cheapest from a cost-per-ton standpoint but it can take up to 18 months to produce the lithium. On the other hand, hard rock producers can adjust to a spike in lithium demand more quickly because they can increase the rate at which they mine the ore. But they have a higher—arguably the highest—production cost among any of these ore sources. Clay is right in the middle.
TER: Which lithium producers do you prefer?
CB: The four major lithium producers are working with the highest grade of known resources currently. On the hard rock side, Talison Lithium Ltd. (TSX:TLH) has its Greenbushes operation near Perth, Australia. It has 3.5%–4.5% lithium oxide, which is extremely high for hard rock deposits and is, in fact, the highest-grade lithium produced in the world today. That gives the company a distinct production economics advantage. Talison is an interesting story because it’s the only pure-play lithium producer listed on an exchange globally. It came public through a reverse takeover of a small junior called Salares Lithium in Chile. As I mentioned, Talison is producing the highest-grade lithium in the world and because of that, it is supplying 75% of China’s lithium needs—nobody else comes close.
On the brine side, the same can be said with Sociedad Quimica y Minera de Chile SA (NYSE:SQM; SN:SQM) in Chile. It produces lithium from the Salar de Atacama, an extremely high-grade brine lake. I know it can be controversial, but I prefer hard rock production due to the ability to scale to both size and demand more quickly.
TER: Talison’s market cap is just under $500 million. That really sounds low considering it’s the only public pure-play lithium company. From what I understand, it supplies one-third of the world’s current lithium market. So what am I missing here, Chris?
CB: It’s still a new story, relatively unknown. It has been public only for five or six months now, and I think the market may not understand the pure-play aspect of this company, which is extremely powerful. The other three major lithium producers globally are SQM, FMC Lithium Corporation (NYSE:FMC) and a specialty company Chemetall (Pty) Ltd., which is a division of Rockwood Holdings, Inc. (NYSE:ROC). All three of these companies trade on the New York Stock Exchange between roughly $50 and $80 per share but are known for the specialty chemical aspects of their businesses. SQM is a great example. It is a huge potash producer with lithium produced as a byproduct. Lithium accounts for just 8% of SQM’s total yearly revenue and yet the company’s one of the largest lithium producers in the world, even though the company views it as a byproduct.
So, the point with Talison is that it’s the only one that owns this pure-play production space, has the highest-grade lithium in the world and is still in its public company infancy. As Talison continues to increase capacity and supply high-grade lithium to China (predominately), more and more people are going to find out about this. There’s also additional exploration upside at the Salares 7 brines in Chile that it acquired in the reverse takeover of Salares Lithium. I think the stock is really undervalued given the stranglehold Talison has on the lithium space.
TER: Does Talison own its entire supply chain?
CB: Not currently. The company supplies two types of concentrates—one is a technical grade and the other a chemical grade. The technical grade is used in glass and ceramics, which account for 30% of global lithium demand. The chemical grade is what TLH sends to China for conversion into lithium carbonate for batteries. Talison has begun a scoping study to evaluate the possibility of building its own lithium carbonate plant.
TER: How much can Talison increase margins by owning a lithium carbonate processing plant?
CB: It’s hard to say without knowing the capital costs. If the company can build and operate the plant with expenses of less than $2,800/ton to produce lithium carbonate (which sells on the open market for around $5,000/ton now), it could see some really healthy margins.
TER: So, at this point, Talison is more of a growth story than a value story?
CB: I think it’s a growth story, but there is unrealized value here. The fact that Talison’s customers are dependent on it for the quality of lithium the company produces, and also that Talison is not only selling 100% of what it produces but working to double production capacity, should only cement its place as a globally dominant lithium producer.
TER: I note that TLH has pulled back by almost one-third over the past three months. Was there any particular tipping point, or was this a technical issue? (Others also pulled back during that time.)
CB: With respect to Talison, I think it’s likely a technical issue. The lithium space, in general, has had a few hiccups lately. Some interesting companies are still out there, however. One example is Western Lithium USA Corp. (TSX:WLC; OTCQX:WLCDF), a lithium clay explorer based in Nevada. It has a very large resource called Kings Valley in Nevada where it has produced battery-grade lithium in pilot tests as recently as late last year. That provides a high degree of confidence regarding any metallurgy issues.
The company is working on a prefeasibility study (PFS) this year and continuing to drill and increase the size of the resource. The good thing about lithium is that, unlike rare earths, the United States is not 100% dependent on lithium imports. There’s plenty of lithium out there in stable geopolitical locales and Western Lithium’s Nevada deposit is an example.
The questions are: What’s the cost of production? What’s the grade? Western Lithium has said it will be able to produce at just under $2,000/ton, which is slightly more expensive than the brines but a heck of a lot cheaper than the hard rock guys. This company is planning to be in production by 2014. It’s doing all the right things to position itself to achieve this; so, Western Lithium has a great chance.
Another interesting early stage play is Rock Tech Lithium, Inc. (TSX.V:RCK; OTCPK:RCKTF; Fkft:RJIA), which is focused on hard rock lithium and rare metal deposits in Canada. The company has a historical resource that it’s working to bring into NI 43-101 compliance by this summer. The location of the deposits and a wealth of historic drill data are two reasons this stock interests me. The whole lithium space has been under pressure recently as have many lithium juniors, but I think it’s been a market overreaction more than anything specific.
One possible cause of the recent depressed stock prices could be that Galaxy Resources Ltd. (ASX:GXY) was planning on doing a $250M IPO in Hong Kong to increase its footprint in the lithium space but delayed it due to market conditions. I think that may have hurt the price of many of the lithium juniors more than any other reason.
TER: Do you expect Galaxy to proceed with its IPO this year?
CB: My understanding is that the company shelved it because market conditions weren’t optimal. If things change, it may, but that’s really a question that company management would be better suited to answer. I know Galaxy recently achieved production out of its Ravensthorpe deposit in Western Australia, which is a positive sign; so, perhaps the IPO can wait, as the company is now generating cash from the sale of its product. Galaxy also has done a joint venture (JV) with Lithium One Inc. (TSX.V:LI), which is another interesting company in that it has attracted the attention of not only a lithium producer (Galaxy), but also Korea Resource Corporation (KORES), GS Caltex Corp. and LG Chem Ltd. (KSE:051910; KSE:051915; OTC:LGCEY)—one of the largest battery manufacturers in the world.
TER: Considering the mindset of North American investors, is there something they’re not seeing here? Because we’re going to drive big vehicles, so perhaps we don’t see the potential in these EVs?
CB: That raises a good point. I think there are certain psychological drawbacks to electric vehicles in this country today, and one of those is “range anxiety.” It’s the underlying question, ‘If I get a Nissan Leaf and the battery dies after 75 miles, what do I do?’ ‘What do I do if I have to drive 300 miles?’ That’s why I think plug-in hybrids—those that have a small gas tank and an electric battery—are going to be more popular in the U.S., at least initially. I’m not sure if the size of the vehicle is as important an issue as finding the right battery chemistry that discharges more slowly and recharges more quickly than do current EV batteries.
TER: What about the concept of battery exchanges along the way where you might drive 75–100 miles and exchange that battery for a charged one?
CB: Absolutely. An Israeli company called Better Place is attempting to address this issue. What you mentioned in your question is essentially Founder Shai Agassi’s business model. You drive and when the battery gets close to running out, you go to a depot and exchange it for a new one. Additionally, the company is working to set up a charging infrastructure and make its battery-switching technology and charging stations standard across different vehicle models.
You also raised an interesting point about infrastructure and battery-charging infrastructure in this country. I think this whole EV phenomenon is going to take place much faster in Asia, where the company’s building its infrastructure from the ground up. In the U.S., there’s a chicken and the egg problem. I’m generalizing here, but nobody wants to buy an electric car until they know there are ample charging stations and better battery chemistry in place. But governments and private industries aren’t likely to spend, time, money and other resources building charging stations until they’re confident there’s enough EV demand out there. Ultimately, this is a multidecade phenomenon. Infrastructure buildouts are happening in places like Israel and Asia but, going forward, the real winners in this industry will own the entire electric vehicle supply chain—from raw material sourcing to battery manufacture to charging infrastructure. The race is on.
TER: Chris, I’ve enjoyed meeting you very much. This has been a tremendous pleasure for me.
CB: Me, too. Thank you.
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 13 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. Chris is also a member of the Canadian American Business Council. 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.
By The Energy Report, on February 11th, 2011
Philip Williams, Pinetree Capital’s VP of business development, says the spot price for uranium will likely explode above $100/lb. in 2011, much as it did in 2007 when it topped at $137. The good news, Philip says, is that even when uranium comes off its high, it will likely only fall to around $80. It’s around $73 now. If Philip’s right, we’re on the cusp of another round of uranium market madness. And you will want to read this Energy Report exclusive for some of Pinetree’s favorite uranium and lithium plays.
The Energy Report: In January, Macquarie Research said it expects the uranium spot price to reach $75/lb. in the first half of 2011 with the main driver being China’s growing energy demands. Where does Pinetree Capital Ltd. (TSX:PNP) see uranium trading at in 2011 relative to Macquarie’s forecast?
Philip Williams: We continue to be very bullish on the price of uranium. It’s had a very good run of late and we see that continuing for many of the same reasons that Macquarie does. I think for the early part of the year $75 is a good number, but it could surpass that substantially by year-end. By then, we think that the price will be at the $100 level and maybe even higher. We’ve got China doing quite a lot of stockpiling, especially on the spot market. We see the producers as being overcommitted right now. We also think that financial-speculator activity will come back to the market. All those events will culminate in a much higher price.
TER: The last time we saw a similar price spike in uranium was in 2007, when prices for yellowcake rose above $130 per pound. After that, prices dropped off dramatically. If these financial speculators are just looking for short-term money and getting out again, could we see a similar price drop?
PW: I think there are two things to think about. In 2006–2007, the uranium price was driven up mostly by financial speculators and I think they’re coming back into the market. When the run-up in the price was on, in some cases, a very small amount of uranium actually changed hands. With China’s recent uranium stockpiling, we’ve seen quite a lot of material go through the market at these prices. I think we’ll probably get a spike similar to the last one and it could be even higher, and then it will pull back. But I think we’re going to have a much higher base price this time than we did last time. After 2007, the price came back to about $40. I think it’s going to be substantially higher; it could be a price that falls back into the $80–$100 range.
TER: You mentioned China is stockpiling uranium, and China National Nuclear Corp. just received governmental approval to work on four new reactors. The European Commission just published a 10-year strategy plan that encourages development of nuclear energy as a means of clean energy. Japan’s Kyushu Electric Power Co., Inc. (TKY:9508.T) has submitted plans to build a third reactor at the country’s Sendai Plant, and India just brought a new reactor online. Where is North America in this global nuclear buildout?
PW: In a word North America is lagging. When it comes to nuclear, the U.S. is the largest generator of nuclear power with 30% of worldwide nuclear generation; but a reactor hasn’t been built in the U.S. in decades. While there are quite a few on the drawing board, only a handful is expected to come online by 2018. The real growth here is in the developing countries that you mentioned, China, India, etc.
TER: What’s largely responsible for the U.S.’ lagging nuclear growth?
PW: I think government policy is improving toward new nuclear energy but cost is still a big issue. Some of the numbers Macquarie recently published listed the cost of a new reactor built in China at about $2 billion versus $7 billion in the U.S.—that’s a huge factor. And natural gas-powered plants compete against new nuclear reactors. I think there’s still a lot of public opinion against new reactors being built. There are 104 reactors in the U.S. right now, so adding four is a very small growth rate compared to what’s happening in China and India. The U.S. was very successful on its first nuclear energy buildout but has since lost a lot of that technical knowhow, especially when it comes to building new reactors. Now, the U.S. is climbing back up that curve.
TER: Late last summer and into the fall, we watched big uranium producers like Cameco Corp. (TSX:CCO; NYSE:CCJ) and BHP Billiton Ltd. (NYSE:BHP; OTCPK:BHPLF) dip into the uranium market to meet their supply contracts because it was cheaper to buy uranium on the open market than bring on more production. What minimum price level is necessary for new uranium producers to be profitable?
PW: I expect the spot price will get to around $85 soon, and I think everything that’s in—or very close to—production will be profitable at that level. Lots of groups out there have done cost-curve analysis for future production that suggests we need a much higher number. It’s hard to give just one specific number but I think it’s at least $80/lb. It could even be higher depending on cost inflation. The next generation of uranium projects are lower-grade, more technically challenging and farther from infrastructure and major markets than most of the current mines. So, these new projects require a significantly higher uranium price to make them profitable. You need a higher incentive just to get them into production.
TER: But just a few months ago, we had $40 uranium. What’s going to sustain the uranium price at $80?
PW: You need to distinguish between the spot price and the term price. The spot price tends to be a lot more volatile. That price was $40 but the term price was above that at the time. Now, the term price is below the spot price. But it’s that long-term price that applies to new projects because a lot of these projects will forward sell their production into that price.
Fundamental supply and demand issues are ultimately going to sustain the price. Going back to that Macquarie report you quoted, we’re seeing a lot of strategic buyers like utilities from Asia and other places buying projects outright. At some point, it’s going to be very difficult to get production at any price because it will be all tied up. The end users will be integrated in such a way that they’re already contracted for any material produced. When you get into that type of environment, the price can be as high as it needs to be.
TER: But JP Morgan was far less bullish on the short-term price for uranium. It predicted uranium prices in the neighborhood of $60–$65 in 2011. Why is one big bank so much more bullish than the other?
PW: I think the difference, which Macquarie discusses in its report, is that they missed the China stockpiling. Again, you’re talking about what’s happening today between buyers and sellers that need material today—not what people are looking for in the future. When China comes in and buys close to 3,000 tons of uranium oxide in December alone, that really impacts the spot market. Because the spot market represents just a fraction of the total uranium required in any given year, it is subject to much more swings in price than the term price.
TER: How large is that fraction?
PW: I think it’s 20%–30%. Last year and the year before were particularly active years on the spot market. That’s what gives us the confidence that this move on the spot market is real and can be sustained because of the volumes that are trading on the spot market. The spot price is much more transparent; the term price is far less so. It’s a referenced price that’s provided by the pricing groups, but it’s not as transparent as the spot price in terms of where it might actually be on any given day. It could be higher; but until an actual contract transacts that meets those specific criteria, it doesn’t actually change.
TER: What’s the term price right now?
PW: About $73.
TER: As of Sept. 30, 2010, Pinetree Capital had 55 different investments in uranium. That accounted for 18% of your holdings. I dare say that that’s even greater now based on stock-price appreciation since then. Either way, that’s a sizeable bet on uranium. Could you tell us about your investment thesis and why you own so many positions in so many different plays?
PW: That September number also includes coal. We have one very significant coal position that represented a large portion of that amount and that’s Cline Mining Corp. (TSX:CMK). Cline has done great since the end of September and we think there’s a lot of potential there. As you pointed out, there have been some tremendous performances by the uranium stocks since September. We’ve always been big fans of this space.
We saw the long-term picture early on, or our Chairman and CEO Sheldon Inwentash did. This is a very simple macro argument—the world needs more electricity, especially clean power, and nuclear is in the best position to provide that. With that in mind, we wanted to have a big exposure to the uranium space, especially after the price pullback from $138 to $40. There were junior explorers and developers whose stock prices went so low that their value was basically being discounted to almost nothing. At that point, we decided to take a very proactive position in the space and rebuild the portfolio. We sold quite a few of our uranium names at the peak in 2007. We made a strategic decision to return early to the space and identified a number of juniors that were well positioned. I think our thesis has proven correct to this point.
TER: What are some of your more promising uranium holdings?
PW: We have a number of names. We focus mostly on the junior and the development-stage companies. We like names that have great assets but have been mispriced in the market and good management teams that can see those assets forward. Some of companies we are most bullish on would be names like Mega Uranium Ltd. (TSX:MGA), a long-held holding. It’s an Australia-focused uranium developer, and Australia has the most uranium of any country in the world. There are some mines in production now. A change in politics and philosophy in the country called for even more uranium mines. Mega’s Lake Maitland Project could be the very first, or possibly second, new mine to be developed. It’s in the feasibility study stage and soon the company will have some detailed information about the economics of that project.
TER: And it has a Japanese partner at Lake Maitland Project, correct?
PW: Yes, Mega has a very strong partner in the Japanese group JAURD (the Japan Australia Uranium Resources Development Co. Ltd.). And shortly it will be in a position to capitalize on the increasing price and shortage of advanced-stage uranium projects and companies. We’re excited about that one.
One of our names that’s had a tremendous amount of success in the last few months and really has just started to get a following is a company called Rockgate Capital Corp. (TSX:RGT). It has a growing resource in Mali, West Africa. We’ve seen a number of African names build and be taken over, including Mantra Resources Ltd. (TSX:MRU), which was taken over by Russia’s AtomRedMetzoloto (ARMZ) Uranium Holding Co., a Russian uranium miner that is wholly owned by Atomenergoprom OAO—a subsidiary of Rosatom and an extension of Uranium One Inc. (TSX:UUU) for a very attractive premium to the price that Rockgate’s trading at now. We’re starting to see monies that were invested in Mantra start to shift over to Rockgate as the company grows its resource. Rockgate’s recent financing puts the company in a very strong position to expand its resource and move its project ahead through economic studies.
One of the geographic regions we focus on that a lot of people have not is in South America. One of our key positions there is a company called U3O8 Corp. (TSX.V:UWE). U308 has projects in Guyana, Colombia and Argentina. This year, U308 is slated to expand its NI 43-101 resources at all of those projects by almost tenfold. We think there’s a lot of upside as other investors start to see South America the way we saw it two years ago—as the next frontier for uranium development.
One company in the U.S. is Energy Fuels, Inc. (TSX:EFR). We’ve been around that story for quite some time. What we saw last year was a very strong management team moving toward a new license to permit and build a mill in the U.S.—something that hasn’t been done for a long, long time. It paid off when the company successfully got that approval earlier this year. We think Energy Fuels is well ahead of the pack in terms of conventional uranium mining in the U.S. In the U.S., there’s a scarcity of uranium supply. We see Energy Fuels as a consolidator in the space. It’s just in a tremendous position to capitalize on what we think is a very strategic place to be in the U.S.
TER: And there’s some vanadium in the mix there on the Colorado Plateau.
PW: Yes, these Colorado Plateau projects, and even those in Utah contain certain ratios of vanadium to uranium. So, you get a nice kick from the vanadium byproduct, even though they’re still fundamentally uranium projects. Energy Fuels is well positioned to deliver new production and the first new mill permitted in the U.S.
Another one that we’re quite keen on right now is a company called Mawson Resources Ltd. (TSX:MAW; OTCPK:MWSNF; Fkft:MRY). This is in an interesting story because it’s much like Energy Fuels, but it’s actually uranium and gold. I would say almost freakishly high-grade gold and uranium. The company acquired a portfolio of projects in Finland from AREVA (PAR:CEI) last year. In prospecting at one of the projects, the company found probably the highest-grade gold and uranium anyone has ever seen on surface—over 20,000 grams per ton (g/t) gold in some places and more than 40% uranium in some places. It’s very early stage exploration at that project, but the company’s been able to delineate a 6 km. strike length to the trend at over 200 meters in width. These high-grade showings are pervasive across the trend and it’s never been drilled. It’s a new discovery with very limited work; but when you see those kinds of results on surface, it’s very, very encouraging.
TER: Does that mean Mawson is putting some of its other projects next door in Sweden aside for the moment?
PW: To a certain extent, yes. There’ll be some money spent on those projects but the bulk of the funds will be directed toward the Rompas Project, the high-grade uranium/gold project in Finland. Why? It’s the results. Mawson is waiting to get the final permits for a drill program that could commence as early as February. There’s just a lot of blue sky in that story and a lot to be learned about what could be there.
TER: Let’s move away from uranium, toward another clean energy commodity that’s getting a lot of play—lithium. Increasingly, lithium is being used in batteries to power electric vehicles (EVs). Those were nickel-metal hydride batteries just a few years ago, but now they’re mostly lithium-ion batteries. Lithium is also finding its way into some other new technologies. Judging by the number of investments that you have in lithium plays, Pinetree is betting heavily in its investment potential. Why did you get into lithium?
PW: A couple of years ago, we saw the potential in this space in terms of electric cars. Our analysis showed that even though some other battery types would fit into the mix, lithium would ultimately be the dominant player. There are a very small number of players that dominate on the production side; in fact, there’s a lot of room for juniors to come in and acquire projects—brine, hard rock or clay projects. You can acquire projects for relatively low costs and add a significant amount of value through exploration and development. We saw that as a great opportunity to make some very strong returns.
TER: Does Pinetree show a preference for brine versus hard rock lithium plays?
PW: We have in the past but we don’t like to make general statements about one type of project versus another. We really look at the individual investment opportunity. In some cases, the hard rock assets might be so mispriced that you could make a much better return even if you took a stance ideologically that the brines were going to be the better projects overall. For example, we’ve been quite positive on Canada Lithium Corp. (TSX:CLQ; OTCQX:CLQMF) even though we’ve spent most of our time focusing on the brines and names like Lithium Americas Corp. (TSX:LAC), Orocobre Limited (TSX:ORL; ASX:ORE) and others in South America. But really we try to find those mispriced or misunderstood assets where management has the wherewithal to move ahead, add value and realize the right price in the market.
TER: Yes, but some of those brine lithium deposits have potassium in the mix. If your processing circuit is developed properly, you could get potash as well as lithium.
PW: Absolutely. There’s tremendous opportunity in those kinds of plays.
TER: What are some that Pinetree is rather bullish on?
PW: Lithium Americas is at the top of our list. We’ve been involved in that story from the very early days, and it’s just blossomed into a tremendous story. It’s one of the largest brine deposits on the planet. The company’s made tremendous strides on the technical side, as well as understanding the economics. We’re going to see two major studies published this year with a prefeasibility study first, and then a feasibility study by year-end. The story has come together in a very short amount of time, but we see tremendous upside.
TER: And Lithium Americas’ Salar de Cauchari lithium project is not far from one owned by another company you mentioned, Orocobre.
PW: In fact, Cauchari and Orocobre’s Olaroz project are abutting each other.
TER: Given the proximity to each other, did Pinetree make its investment in Lithium Americas with an eye toward potential consolidation?
PW: In general, we always look for assets that we think will ultimately be consolidated or could be the consolidators. We certainly see that as something that should happen in that particular region. We’re not sure whether Lithium Americas will be the consolidator or not, but the company has tremendous partners and could easily go it alone. As I said, it’s one of the largest brine resources on the planet; so, it’s not a requirement but it’s certainly an exit that’s possible for LAC.
TER: Are you vested in Orocobre, too?
PW: We’re not a disclosed holder of Orocobre.
TER: Could you leave us with thoughts on how these clean technologies are influencing the mining sector and some of the opportunities they are creating?
PW: One area that we didn’t touch on is rare earth elements, which are used in a lot of cleantech applications. We also have quite a few investments in that area. We believe there will be strong opportunities in the cleantech space over the next few years for many reasons. China is dominating rare earths production, and finding supply outside of China is an absolute must for companies that want to be in those cleantech spaces. We’re tremendously bullish on rare earths, at least for the next year or two. Clean energy is certainly one reason we’re in the uranium space. When you stack up nuclear versus coal-generated power, uranium is a hands-down winner. We see more and more people getting behind nuclear energy, and it’s a great place to be vested.
TER: Thank you for talking with us today, Philip.
Philip Williams joined Pinetree Capital in January 2009 and was appointed to the position of resources analyst. Philip brings almost 10 years of financial market experience to the company. Prior to joining Pinetree, he spent five years working for several institutional brokerage firms in the equity research department. Most recently, he was a uranium analyst focused on companies with advanced development projects in Australia, the United States and Namibia.
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