Lithium Demand Will Rise Significantly: Mansur Khan
Source: George S. Mack of
The Energy Report
Lithium is lightest of all metallic elements, with low density
and high electrochemical potential. These are essential
characteristics that make the element especially suitable for use
in various power-storage applications, including electric
vehicles (EVs). In this exclusive interview with
The Energy Report
, Equity Research Analyst Mansur Khan of Dundee Capital Markets
talks about his favorite junior lithium stocks that he expects to
be major beneficiaries of dramatic growth in lithium-ion battery
demand over the coming decade.
The Energy Report:
EVs don't burn gas, but power must come from some source of fuel,
such as nuclear, coal, hydro, gas, solar, geo or wind. So, what
is the value of an electric vehicle (
)? How does it help?
From a societal and governmental point of view, there are a
number of benefits. EVs can really help reduce carbon emissions.
Their energy efficiency is very high, sometimes over three times
that of conventional combustion engines. I think it can be argued
that, even assuming an EV uses a power-generating mix that
includes carbon-emitting sources such as coal- or gas-fired power
plants, its life-cycle net carbon-emission production is
significantly less-anywhere from half to one-third of that from
comparable combustion vehicles. Reducing our dependence on oil is
another concern, although it's more geopolitical. I think there
is a top-down push to essentially steer the automotive industry
into adopting electric vehicles.
Finally, from the end-consumer point of view, the operating
cost of an EV is expected to be significantly less than an
internal combustion vehicle. On average, they are about one-third
the cost on a per-mile basis.
In January, General Motors Inc. (GM:NYSE) announced that it would
be producing 60,000 (60K) Chevrolet Volts per year, beginning
this year. Does this signal a new wave of EV or hybrid
development? How positive is this for lithium consumption?
GM's commitment to the EV model is reflective of what you're
seeing across the board with major auto manufacturers rolling out
some form of an EV model in their lineup.
Aside from GM and Toyota Motor Corp. (TM:NYSE), Hyundai Motor
Co. Ltd. (HYMLF:OTCPK), Nissan Motor Co. Ltd.
(NSANY:OTCPK;7201:TYO), Volkswagen AG (VLKPY:OTCPK)-all the
majors have announced their own models. And when you look on the
battery side, you're seeing considerable research and development
(R&D) investment going into battery manufacturing and
technology development. Majors like Chinese battery and car
BYD Co. Ltd. (BYDDF:OTCBB)
, of which Warren Buffett owns approximately 10%, and
BASF Corp. (EUR53.17:XETRA)
are making inroads into the technology's development.
To answer your question, this is of course positive for
lithium demand and consumption. Industry consultancy SignumBOX
put out an estimate that electric and hybrid electric vehicles
made up about 5% of total lithium carbonate equivalent (LCE)
consumption in 2011, and that's expected to grow to about 25% by
2020. So there's quite a bit of room for growth there. The
industry still has a long way to go, but in general, it's
Mansur, what is the lithium-ion battery industry's biggest
challenge right now?
The industry's main challenge is really to scale up in size, from
the small consumer electronics to the larger batteries required
for EVs, and to be able to do this without compromising on cost,
safety and longevity. Technological development may not be
happening as quickly as people had expected a few years ago, but
it is certainly happening, and I think you will see these growing
pains addressed over the coming years as other derivative
applications are opened up.
As manufacturing capacity continues to expand, the cost of
these lithium-ion batteries will come down, and that is already
happening. A few weeks ago a Bloomberg report said the cost of
lithium-ion batteries fell 14% year over year, and has fallen
about 30% since 2009.
Your February 2012 report cited a third-party consultancy firm,
Roskill, which found that lithium consumption has outperformed
both industrial production and GDP trends since 2002. But I don't
see that reflected in equities. An index of small-cap lithium
stocks shows a 40% decline over the last 10 years. A mix of
larger- and small-cap companies is down 30% during the same
period. Can you talk about the disconnect here?
Without knowing the specifics of this particular index, I think I
can make some general comments. Our view on this is that there
are two aspects at play here, and both stem from the global
recessionary environment that we are in.
Against this backdrop and coupled with slower technology
development, we have seen a slower-than-expected uptake of
lithium-ion batteries and EVs. The consensus view still holds
that you're likely to see a mass adoption of EVs by about 2015
and thereafter. We argue that the equities are taking a bit of a
wait-and-see approach to this, and so that would probably be one
aspect of why they have not done so well. EVs currently make up
only a small part of the overall lithium market, as just
mentioned, but they are expected to really drive the majority of
the growth over the coming decade.
The second aspect is more directly linked to equity markets in
general. As you know, stock markets dislike uncertainty and
volatility, and unfortunately we have plenty of both right now.
In this kind of risk-averse environment, small-cap stocks can
face the additional challenge of financing their exploration and
development projects without causing a lot of dilution. So
there's a bit of an added risk that is reflected in small-cap
performance. We think these factors explain why the equity
markets have not really kept pace with the underlying growth and
demand for lithium that we are seeing.
You've written that the lithium market is currently in a tight
supply-demand balance, and that this has prompted capacity
expansions by three of the four major lithium producers. You also
wrote that prices have stabilized in the $5,500-6,500 per ton
(/t) LCE. I realize there are different lithium compounds, but do
you foresee a futures market for lithium?
I think it's too early for that. You would need a market sizeable
enough to maintain a spot supply inventory. Right now, what we
are seeing is that most of the supply and demand is on a
contract-by-contract basis, and these are typically one-year
contracts. There isn't much of a spot market to speak of, and
until you have a secondary market open up, you are unlikely to
see a futures derivatives market develop.
Looking at the lithium equities market today, do you see it as a
deep-value market? Or do you see it as a growth market? Are we at
the foot of a growth curve?
Going to the question of growth, I think that's definitely there
in our view. The majors have been reflecting that, not just in
what they've reported, but also in their outlooks. If you peruse
through some of the recent commentary by the majors, they are all
reporting strong growth in volume and prices, and in general they
expect real growth in lithium demand to continue-anywhere from
6-11% by 2020. So that's a fairly healthy growth in demand. If
you look at
Talison Lithium Ltd. (TLH:TSX; Not Rated)
, for example, it is saying that the lithium market will almost
double by 2020, and that's even excluding the EV component that
you hear so much about. So that's definitely positive, and
there's growth absolutely happening there.
What lithium equities are you recommending to investors?
When you're looking at the juniors, we believe that only
companies with quality assets that are in advanced stages or have
strategic backing will have a reasonable chance of making it to
I would highlight
Nemaska Lithium Inc. (NMX:TSX.V; NMKEF:OTCQX)
. We have it rated Buy, Speculative Risk with a $1 target price.
Unlike the brine developers in Argentina and Chile, this is a
hard-rock developer based in Québec. Its Whabouchi property
project has a Measured and Indicated resource estimate of 25
) tonnes (metric ton or mt) grading at 1.54% lithium oxide. It
also has an Inferred resource of 4.4Mmt grading at 1.51% lithium
The company is envisioning a two-phase strategy. Phase one
will see production of 200K tonnes per year (tpa) of lithium
concentrate. This is concentrate, not carbonate, at about a 6%
Li2O grade. The operating cost is about $138/t of concentrate.
And the preliminary economic assessment (PEA) from last year had
an initial capex of $86M for the project.
Phase two essentially envisions a chemical conversion plant
that would produce higher-value downstream chemicals, and in
particular they're looking at lithium hydroxide. The PEA on this
option was just commissioned. It has also done some pilot-level
testing that shows some innovative departures from the
conventional process used to produce lithium hydroxide, and the
company is going to be filing for a patent on this pretty soon.
This could be an interesting development.
Both the definitive feasibility study (
) of the concentrate production and the PEA are expected to be
out in Q3/12. The company has a strategic partner behind it,
Chengdu Tianqi Industry Group Co., the largest lithium battery
material supplier in China, which owns 20% of Nemaska. Tianqi
recently entered into an agreement with Targray Technology for
international distribution of lithium compounds in North America
and Europe. We see Nemaska fitting in quite well with this
Another thing we like about Nemaska is that it's located in a
mining-friendly jurisdiction of Québec, which is trying to build
a world-class EV industry by supporting R&D and bringing
mining companies and strategic partners together. And of course
you could argue that the open-pit conventional mining process has
less mining and processing risk. Also, there are a couple of
upcoming milestones, the DFS and the PEA. So we like that
Going over to the brine-developer world, I would highlight
Rodinia Lithium Inc. (RM:TSX.V; RDNAF:OTCQX)
. We have it rated Buy, Speculative Risk, with a target price of
$0.80. This is a lithium brine developer with its flagship
100%-owned Diablillos project in the province of Salta in
Argentina, which hosts resources of about 5 Mmt of LCE and is
adjacent to one of the largest lithium producers in the world,
FMC Lithium Corp.'s (FMC:NYSE; Not Rated)
Hombre Muerto project, which has been producing for decades.
Diablillos is also adjacent to
Lithium One Inc.'s (LI:TSX.V)
Sal de Vida project. As you know, Lithium One is currently in the
process of being acquired by
Galaxy Resources Ltd. (GXY:ASX; Not Rated)
, which has a wholly owned lithium carbonate plant in China. So
that's definitely an interesting development in the area.
Diablillos has high lithium and potassium grades and low
impurities that could enable economic extraction, and the PEA put
out last year suggests robust economics. With cash costs coming
in at a bit over $1,500/t of LCE, along with a strong potash
byproduct credit potential, the company is envisioning production
of 15K tpa of LCE. Aside from the flagship project, Rodinia also
has a brine project in Nevada adjacent to Chemetall Foote's
Rockwood Holdings Inc. (ROC:NYSE)
] existing project there.
But despite all this, the company trades at a large discount
to its brine-base developer peers. We estimate an enterprise
value of about $3/t, compared to the average of about $10/t. We
would say that part of this has to do with Rodinia's relatively
early-stage project and tight cash position. That's a risk, given
the nature of current markets. Management is being prudent with
cash, but it is steadily moving the project forward. Also, it
does have the Chinese company Ningbo Shanshan Co. at its
You said your target on Rodinia was $0.80. You have just taken
that down from $0.90, is that right?
That's correct. We put out a commodity update at the end of every
quarter where we go back to the drawing board and look at foreign
) rates and commodity assumptions. So part of the discount was
about the FX, and the other part is that we are applying a
slightly higher discount to the brine developers in Argentina due
to the investment climate resulting from expropriation of
Argentina's largest energy company, YPF from Spain's Reposol.
You mentioned Rodinia's neighbor producers. You must be implying
Yes, and overall, what we like about this story is that the
company has a salar that it is not sharing with anyone else, and
it will potentially have two large lithium producers right in its
backyard, FMC and potentially Galaxy, both of which have talked
about expansion. The company has a strong management team, and
both CEO Will Randall and head of exploration Ray Spanjers have
extensive experience in managing projects. And Ray actually was
previously with FMC's lithium division.
The second brine company that I would highlight is
Lithium Americas Corp. (LAC:TSX; LHMAF:OTCQX)
. We are rating it a Buy, High Risk with a target price of $2.60.
Now this is a more advanced brine developer, located in the
province of Jujuy. Its Cauchari project hosts a high-grade
resource of 8Mmt LCE. It's had extensive pump tests, pond- and
pilot-level tests, as well as hydrological work done, and the
company is currently on the verge of putting out a DFS on the
project. It's also interesting to note that the DFS will trigger
a decision by its strategic partners, Mitsubishi Corp (8058:TYO)
and Magna International Inc. (MG:TSX, Not Rated), who have the
option to secure 37.5% of lithium production in exchange for
financing up to 37.5% of capital costs. So that's definitely a
good arrangement to have in this kind of market.
Lithium America's PEA from last year had estimated low cash
costs of about $1,434 per ton, based on 20K tpa of phase one
production. And of course one common theme with these brine
projects is that, given their low impurities, there's strong
byproduct credit potential. There's good infrastructure in place.
And as I said they're currently working through the final project
approval from the province of Jujuy, which should be another
catalyst for the stock. By the way, the province of Jujuy had
essentially designated lithium as a strategic metal last year,
and both Lithium Americas and
Orocobre Ltd. (ORL:TSX; ORE:ASX)
are currently working out approvals here.
Orocobre will be the last one I'll mention today. We have it
rated Buy, High Risk with a target price of $2.80. This is the
most advanced brine development project in our universe of
coverage. Immediately north of Lithium Americas' Cauchari project
is Orocobre's flagship Olaroz project, which also hosts a
high-grade lithium resource of 6.4 Mmt of LCE. The company
already has a DFS out on the project, and the cash costs are
estimated at $1,512/t of LCE, and once again, given the low
impurities, there is potential for byproduct credit.
A production rate of about 16K tpa is expected by the second
half of 2013, and at the end of last year Orocobre finalized
terms with its strategic partner,
Toyota Tsusho Group (TYHOF:OTCPK)
. This will essentially enable Toyota to take an equity stake of
up to 25% based on the project's net present value (
) estimated from the DFS. This also includes debt financing by a
Japanese consortium for 60% of the project capex, which is a bit
over $200M. So the final sign-off on these financing agreements
would occur once the Jujuy provincial approval comes through.
I've enjoyed meeting you very much, Mansur.
Thank you very much, George, I really enjoyed the interview as
joined Dundee Capital Markets in 2007 as an associate covering
the industrial, aerospace and special situation sectors. In
late 2010, he switched into Dundee's mining group, where he
covers a range of exploration and production companies in the
uranium and lithium sectors. Since 2012, he has been providing
lead coverage on the lithium sector. Prior to Dundee, Mansur
worked for a number of years at a private design engineering
company on various information systems and operations projects.
He holds an MBA from the Rotman School of Management,
University of Toronto and a Bachelor of Commerce in systems
development from Ryerson University.
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1) George S. Mack of
The Energy Report
conducted this interview. He personally and/or his family own
shares of the following companies mentioned in this interview:
None. Streetwise Reports does not accept stock in exchange for
services. Interviews are edited for clarity.
2) The following companies mentioned in the interview are
The Energy Report:
Lithium Americas Corp., Lithium One Inc., Nemaska Lithium Inc.,
Rodinia Lithium Inc. and Talison Lithium Ltd.
3) Mansur Khan: I personally and/or my family own shares of the
following companies I mentioned in this interview: None. I
personally and/or my family am paid by the following companies I
mentioned in this interview: None.
4) Dundee Securities Ltd. and its affiliates, in the aggregate,
beneficially own 1% or more of a class of equity securities
issued by companies under coverage: None.
5) Dundee Securities Ltd. has provided investment banking
services to companies under coverage in the past 12 months:
Nemaska Exploration Inc.
6) All disclosures and disclaimers are available on the Internet
. Please refer to formal published research reports for all
disclosures and disclaimers pertaining to companies under
coverage and Dundee Securities Ltd. The policy of Dundee
Securities Ltd. with respect to research reports is available on
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