Jon Hykawy: High on Lithium
Source: Brian Sylvester of
The Energy Report
With oil prices edging closer to $100 per barrel, the chatter
about electric cars is again on the rise. Jon Hykawy, head of
global research with Toronto-based Byron Capital Markets, thinks
the time is nigh for the mass adoption of electric cars, all of
which will need specialty metals like lithium. But where is that
lithium going to come from? In this exclusive interview with
The Energy Report,
Jon handicaps most of the players in the lithium space and
highlights a few that could be takeover targets.
The Energy Report:
Jon, tell us why lithium is generating a lot of excitement right
It's a case of the general public starting to understand what the
electric car might be able to do. As electric cars start to
penetrate global markets, that will save the consumer a
considerable amount of money, and help develop power
infrastructure in the United States, a country now spending $300
billion a year on foreign oil. The electric car will also have a
significantly positive effect on the environment-no matter how
the electricity is generated. Obviously, lithium batteries will
play a critical role because you need a fair bit of lithium per
vehicle that is going to be built. I think people are starting to
understand that there's going to be a tremendous pull on lithium.
That's really what's driving the excitement.
Lithium is not like gold or copper, two of the most commonly
mined metals. If someone is investing in lithium companies, what
are some lithium basics that investors should know?
Lithium mining is largely dependent on chemistry. The costs
really scale with the individual deposit and with the individual
chemistry of the brine, if it's a brine deposit.
The first rule of thumb is that lithium is an industrial
chemical. There is a defined demand for it. Nobody makes jewelry
out of lithium. There's not an insatiable demand for the stuff.
You want to find the companies that can produce lithium
inexpensively. Frankly, that tends to limit you to looking at
brine deposits. You can look at hard rock deposits to the extent
that you can look at a company like
Talison Lithium Ltd. (
, based in Australia. Talison's ore grade is very, very high.
It's really a bit of a mutant in the hard rock space. As a
result, there are very few other hard rock projects that we think
have any hope of doing anything in the market over the longer
term. We tend to tell people to look either at brine deposits or
possibly at the clay deposits because some of the clay projects
out there, especially
Western Lithium USA Corp.'s
King's Valley lithium project in Nevada, have a shot at coming in
at a relatively low cost. And cost is key; on the brine side, you
really want what you want in every deposit-high grade. You want a
high level of lithium in the brine. In Chile, off of the Atacama
Desert, you're going to see grades of 2,000 parts per million
(ppm) of lithium. That's at the top of the range. Anything over
800 ppm is a very, very strong deposit. But you also need low
levels of contaminants like magnesium and sulfates. If you find
all of those things, then you have a reasonable deposit. You just
need to couple that with great management and good financing and
you have yourself a mine.
Who are the major lithium players at this stage?
At this point, there are four major producers. They've been the
four major producers for a significant period of time. Three of
them produce from brine deposits in South America. Those are
Sociedad Quimica y Minera de Chile SA (NYSE:SQM;
, which is the Chilean national mining and chemical company;
FMC Lithium (
, which is part of FMC Corporation; and Chemetall, which is part
Rockwood Holdings, Inc (
. And, as I mentioned earlier, Talison Lithium. Talison really
dominates the market for lithium that's used to manufacture glass
and ceramics. But they also sell a fair bit of their lithium to
companies in China that produce battery-grade lithium.
And most of it comes from the Greenbushes Lithium Operation in
Western Australia, and, as you said, that's a hard rock
Yes, they produce a mineral called spodumene. The theoretical
limit on lithium concentration in spodumene is about 8% lithium.
They can produce something that is as close to 8% as it
What's the life expectancy of that operation?
Longer than you or I are going to care. They have a high-grade
core of about 4% lithium that probably can last through the next
20 to 40 years. It's a very rich, long-life mine. That's one of
the reasons there are no other major hard rock suppliers because
the primary market for that material is glass and ceramics. When
you have something that's as inexpensive to produce as the
spodumene from that high-quality deposit, it's very, very
difficult for anybody else to get into that game.
But what about the lithium Talison produces that is used in
They sell that same spodumene concentrate that contains lithium
and other companies in China turn it into battery-grade material,
but it's more expensive than producing it from brine.
You talked a little bit about lithium-ion batteries and, in
particular, those being used in cars. There was a press release
published in early December about Japan's Sanyo doubling its
plant production capacity for lithium-ion batteries. Sanyo has
contracts to supply Volkswagen and Suzuki. The company says that
the market for lithium over the next 10 years will average $6
billion a year. It's worth about $4 billion now. Do we have
enough lithium to meet that demand?
Well, first about the figures that you quoted. Lithium batteries
are not used in electric vehicles today. The batteries in the
Honda Insight or the Toyota Prius, today, are all
nickel-metal-hydride batteries. In terms of automotive use, the
use of lithium battery is completely greenfield; it's starting
essentially from zero. As far as whether we have enough lithium,
if you look at a vehicle like the Nissan LEAF, it uses about 4
kilograms (kg.) of lithium metal or about 21 kg. of
lithium-carbonate equivalent. We usually quote the amount of
lithium shipped in the world as lithium-carbonate equivalent
because it's a nice, benign chemical. Last year, the demand for
lithium was about 100,000 tons. You can see that one vehicle
using 20 kg. of lithium-carbonate equivalent is not going to
stretch lithium demand until millions of vehicles are produced
But at the same time, we're seeing a major increase in the price
of lithium per ton. It's around $6,500 per ton right now.
I think that's rather high. Lately, the price of industrial-grade
lithium has been around $5,000 a ton. And the battery-grade
material has been selling for something like $5,600 or $5,700.
The historical high prices do run up to $6,500 per ton,
But the price for lithium is not set like copper or nickel prices
on the London Metals Exchange. Lithium prices are determined by
buyers and sellers working out agreements with each other. How is
that dynamic influencing junior explorers with lithium
Unfortunately, it's a more complex question than that. But the
critical point at this stage is that none of the four key lithium
suppliers want to grant offtake agreements to automotive
manufacturers. As far as these suppliers are concerned, there's
plenty of lithium on the market and the automotive manufacturers
should be happy to go out and buy their lithium through
negotiated contracts, just like everyone else.
But you can't ask an automotive manufacturer to depend on the
fact that they're going to get 50 or 100 tons of lithium on a
given day. Maybe there's only $60,000 or $70,000 worth of lithium
coming, but if they miss that shipment they could literally cease
production to the tune of tens to hundreds of millions of
dollars' worth of vehicles. So carmakers will not depend on a
spot contract. They need offtake agreements; they need something
that's carved in stone.
To that end, what's been happening lately is that a lot of
these automotive manufacturers are doing direct offtake
agreements with the junior lithium miners. They're actually going
out and tying up supply by buying it directly from the
What are some examples of those?
Well, there's been a few high-profile ones. For example, one of
the better-known names in the junior lithium space is
Orocobre Limited (TSX:ORL; ASX:ORE)
. They signed an offtake agreement and development program with
Toyota Tsusho. So Orocobre's program seems to be advancing
reasonably well. We expect that sometime in the first quarter of
2011 we're going to hear about the finalization of that agreement
and an equity injection by Toyota into Orocobre's Salar de Olaroz
lithium project in Argentina.
Another company that has signed two separate agreements is
Lithium Americas Corp. (TSX:LAC)
. They have lithium supply agreements with both
Magna International Inc. (NYSE:MGA; TSX:MG)
Mitsubishi Corporation (OTCPK:MSBSHY)
. Lithium Americas' Salar de Cauchari lithium project is just up
the road from Orocobre's lithium project in Argentina.
Another Argentine group that signed something recently is
Lithium One Inc. (TSX.V:LI)
. They share the salar that FMC produces lithium from, Salar del
Hombre Muerto, in the Argentine desert. That salar produces about
15% of the world's lithium through FMC. Lithium One's agreement
is with the Koreans, via Korea Resources (KORES), to supply a
number of potential buyers with lithium. There are certainly some
frontrunners in this space.
What is it about these deposits in Chile, Argentina and Bolivia
that make them so prospective for lithium?
There are a couple of things that are important. One is that the
portion of the world that we're talking about-the desert in South
America-has been uplifted. Millions of years ago there were
small, relatively salty lakes there due to their proximity to the
ocean. Those lakes were eventually lifted into the mountains and
set on the leeward side so the evaporation rates have been very
high. As a result, nature has done a lot of the work.
The salty brine that was left behind is just below the surface
where it's protected from further evaporation. It has a high
enough concentration of lithium to make it worthwhile to process.
But it also has a low enough concentration of contaminants that
those materials don't negatively impact the cost of the lithium.
That has made the South American desert one of the least
expensive places in the world from which to source lithium.
There are other places in the world where this same sort of
thing has happened. It's happened in Tibet. It's happened in
portions of China. It's happened in a few other places but in
most of those places the lithium concentration is low and the
concentration of some contaminants, like magnesium, is relatively
high. That, unfortunately, has made those deposits uneconomic to
mine at this point.
You mentioned Lithium Americas. It owns the Salar de Cauchari
lithium-potassium property in Argentina, where pilot-scale
processing is underway. You have a speculative buy rating on
Lithium Americas with a target price of $2.50. It's trading
around $1.90 now. What sort of catalyst is going to bring it up
to that level?
What really matters at this point is that Lithium Americas
produces a definitive feasibility study that points out the flow
sheet that they're going to use to produce lithium. It's a bit of
an interesting deposit. They have a reasonably good concentration
of lithium but they also have a relatively high abundance of
sulfate, one of those contaminant ions. If you had nothing but
sulfate, you'd have a bit of a problem and it would be an
expense. But they also have a fair bit of potassium in their
brine. Potassium and sulfate together are potash. If you could
get the chemistry correct and put the right flow sheet together,
Lithium Americas could be a relatively inexpensive producer of
lithium, as well as a relatively inexpensive producer of
fertilizer. The two of them together would make a very
interesting revenue stream. You sometimes see those dual revenue
streams from some of the major producers, like SQM in Chile.
Has Lithium Americas done studies to determine if they can get
the chemistry right?
In theory it's workable. They've worked on it on a pilot-scale
basis. What it really comes down to now is finding what the cost
is going to be and that's where the feasibility study comes
When should that be published?
We're hoping we're going to see something from Lithium Americas
relatively early in the New Year. That will give us some
Well, we'll look forward to that. You also mentioned Lithium One.
What's unique about its Sal de Vida Brine Project in
Well, one of the geologists who works on the deposit in Argentina
had a very good statement about it. We were discussing the
deposit's chemistry when he just smiled and said: "God was very
good to Lithium One." They have a relatively high abundance of
lithium. They have very low magnesium levels. And the sulfate
levels are well matched to the two of those. They really have no
other contaminants to worry about. It looks a lot like the brine
that FMC deals with on the other half of the salar. It's a very
good brine. In terms of chemistry, there's very little you could
ask for other than even higher levels of lithium. But as far as
it goes, Sal de Vida is one of the more straightforward projects
that you're going to come across.
You mentioned Western Lithium, too. The company has a clay
deposit, the King's Valley lithium project in northern Nevada.
Have you been to that project?
I have, yes.
What were some of your thoughts after seeing it firsthand?
Firstly, King's Valley probably contains a never-ending stream of
lithium. There are two things that distinguish it. The first is
it's in the United States, so the political risk is minimal. The
second thing is that there are five lenticular deposits of
hectorite clay that effectively contain an inexhaustible supply
of lithium. And through the publication of Western Lithium's
preliminary feasibility study, the company has shown it can
produce battery-grade lithium, or what certainly looks like
battery-grade lithium, at a very reasonable cost. The cost
outlined in its study would make Western Lithium one of the least
expensive producers of battery-grade lithium in the world. That
is interesting to us.
The process that Western Lithium is using to recover the
lithium looks a lot like the mundane processing of an industrial
material like vanadium. While it looks a little like that, it's
never been done on a commercial scale. That's still a risk that
investors need to keep in mind. This is a novel method for
producing lithium. While you can get game-changing results out of
novel approaches, you can also get some serious negative
surprises once in a while.
What about some other companies with projects that are similar to
Western Lithium but perhaps a little further away from
There is one. We know this company reasonably well and have
visited all their sites.
Rodinia Lithium Inc.'s (TSX.V:RM; OTCQX:RDNAF)
Salar de Diablillos lithium brine project in Argentina looks like
a good one to us. Again, it's one of those deposits that's been
blessed by reasonably good chemistry. They've got relatively high
levels of lithium. Good magnesium levels. Good sulfate levels. It
should be a relatively tractable project. It's not a huge
project, but in the larger scheme of things you don't need to be
huge. You just need to target the right markets and find some
buyers who want to buy the stuff.
With most of these deposits being found in the same part of the
world, are we going to see some takeovers?
We've already seen a few. For instance, we've seen Talison take
over Salares Lithium and its properties in Chile. The idea of a
hard rock player owning brines is an attractive one to me. I like
the synergies that come with the two approaches in terms of being
able to guarantee delivery to automotive customers, for example.
With brine, for example, lithium production is dependent on the
weather, so guaranteed delivery can become an issue. Production
of lithium from hard rock or clay is nearly certain and
independent of the weather. Put the two together, and you can
have guaranteed delivery with potentially very low costs.
We're likely to see more takeovers. Lithium Americas' Salar de
Cauchari and Orocobre's Salar de Olaroz in Argentina are really
side by side. There's a tremendous amount of potential synergy
between what Orocobre is doing and what Lithium Americas is
doing. You may well see some activity there. If not an outright
merger of the two companies, you could certainly see some
cooperation on the processing of lithium. That would make an
awful lot of sense. Frankly, none of the properties in Argentina
are really all that far away from one another, so some sort of
regional processing facilities would make sense there, too.
Do you have some parting thoughts on lithium?
As I said earlier, people need to bear in mind that lithium
really is an industrial chemical. There is a defined demand for
it. The companies that are going to succeed in the lithium space
are going to be the ones that put together the right marketing
agreements and produce it at a reasonably low price. If you
manage to pull those things together, lithium mining is highly
lucrative. Nature has done most of the work and the margins in
the space can be 50% or more. You don't often see that in the
production of an industrial material like lithium.
Thanks, Jon; interesting as always.
Jon Hykawy is currently with the research team at Byron
Capital Markets, with a specialized focus in the lithium and
clean technology/alternative energy industries. Jon holds both
a PhD in physics and an MBA from Queen's University and has
been working in capital markets as a clean
technologies/alternative energy analyst for the last four
years. He began his career in the investment industry in 2000,
originally working as a technology analyst. His current area of
focus is the lithium sector, ranging from availability and
production to lithium battery technology. He has extensive
experience in the solar, wind, and battery industries,
conducting significant research in the areas of rechargeable
batteries, ranging from rechargeable alkaline to lithium-ion to
flow batteries. Jon is also fluent in Spanish and
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1) Brian Sylvester 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 USA, Lithium Americas, Lithium One and
I personally and/or my family own shares of the following
companies mentioned in this interview: None. I personally and/or
my family am paid by the following companies mentioned in this
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