Chris Berry: Lithium to Elevate Equities and Investor
Source: George Mack of The Energy Report 04/05/2011
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
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?
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.
Does your investment theory assume that higher oil prices will
spur development of lithium-ion (Li-Ion) battery technology?
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
What's being done now to advance lithium-ion battery
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 "
," 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
As an investor, do you have a preferred type of lithium ore? Hard
rock, brine or clay? Which is best?
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.
Which lithium producers do you prefer?
The four major lithium producers are working with the highest
grade of known resources currently. On the hard rock side,
Talison Lithium Ltd. (
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
On the brine side, the same can be said with
Sociedad Quimica y Minera de Chile SA (NYSE: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.
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,
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 (
and a specialty company Chemetall (Pty) Ltd., which is a division
Rockwood Holdings, Inc. (
. 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
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
Does Talison own its entire supply chain?
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.
How much can Talison increase margins by owning a lithium
carbonate processing plant?
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
So, at this point, Talison is more of a growth story than a value
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.
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
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
Western Lithium USA Corp. (TSX:WLC;
, 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
The company is working on a prefeasibility study (
) 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
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;
, 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
One possible cause of the recent depressed stock prices could
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.
Do you expect Galaxy to proceed with its IPO this year?
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;
-one of the largest battery manufacturers in the world.
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
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
What about the concept of battery exchanges along the way where
you might drive 75-100 miles and exchange that battery for a
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.
Chris, I've enjoyed meeting you very much. This has been a
tremendous pleasure for me.
Me, too. Thank you.
With a lifelong interest in geopolitics and the financial
issues that emerge from these relationships, Chris Berry
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
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1) George Mack of
The Energy Report
conducted this interview. He personally and/or his family own
shares of the following companies mentioned in this interview:
2) The following companies mentioned in the interview are
The Energy Report:
Talison, Western Lithium, Lithium One and Rock Tech.
3) Chris Berry: I personally and/or my family own shares of the
following companies mentioned in this interview: Talison Lithium.
I personally and/or my family am paid by the following companies
mentioned in this interview: Rock Tech Lithium.
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