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Wednesday, November 22, 2017 Derek Macpherson

Lithium: Mining Industry Gears Up for the Battery Boom


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The global production of Li-ion batteries is expected to significantly increase over the next few years as the costs of production continue to decrease and auto manufacturers implement plans for electric vehicles (EV’s). With the demand of Li-ion batteries comes the demand for lithium, a silvery-white metal that under standard conditions is the lightest metal and solid element on Earth. This enables lithium to have a high charge-to-weight ratio, which makes it an important component for batteries. Li-ion batteries require both lithium carbonate and lithium hydroxide, which have both experienced a +120% price increase between the beginning of 2015 and 2017. The boom in battery demand and lithium prices were met by an estimated 12% increase in mine supply for 2016 from existing operations, with the remaining supply gap to be met by new production from emerging producers (USGS).

 
Demand continues to be fueled by the battery revolution. Forecasts for lithium demand indicate an average annual growth rate of more than 10% over the next decade. On a lithium carbonate equivalent (LCE) basis, total demand for the metal is expected to reach over 400,000 tonnes LCE by 2025E from only 188,000 tonnes LCE in 2016. It is expected that as early as 2020E, Li-ion batteries will account for 67% of the lithium end market (Figure 1). EV producers are continuing to publicly disclose plans to convert multiple models to electric within the next decade, which includes companies like BMW, Volkswagen, Ford, Chevrolet and Volvo. EV’s on the road reached 2 million worldwide in 2017 and by assessing country targets and manufacturer announcements, it is estimated that there could be as much as 13 million EV’s on the road by 2020E, which represents annual electric car stock growth of 60% per year. As the adoption of EV models gain momentum among all automobile manufacturers and their plans move to the production phase, it is estimated that there could be 40-70 million electric vehicles on the road by 2025E (IEA). It is also estimated that by 2025E, 70% of the total rechargeable battery market will consist of Li-ion batteries. To illustrate this in terms of LCE, with an average of 63kg of LCE estimated to be in a 70kwh Tesla Model S Li-ion battery, by 2025E, 40-70 million EV’s on the road could collectively contain 1.8-3.1 million tonnes LCE compared to only 88,200 tonnes LCE this year.


Lithium market scrambles to fill supply gap. Most of the world’s lithium production comes from brine and hard rock projects in Australia, Argentina, Chile and China, which is currently dominated by four major producers including Albermarle Corporation (NYSE:ALB), FMC Corporation (NYSE:FMC), Sociedad Química y Minera de Chile S.A. (NYSE:SQM) and Jiangxi Ganfeng Lithium Co Ltd. (SHE:002466). The supply deficit is estimated to currently be approximately 35,000 tonnes LCE, increasing to nearly 45,000 tonnes LCE next year (Figure 2). As new production comes online from projects like Nemaska’s Whabouchi and Orocobre’s Olaroz, the deficit is expected to decrease in 2019E and enter a supply surplus by 2020E until 2023E. As EV penetration accelerates, the demand for lithium is expected to continue to grow and outpace new mine developments and expansions, which may cause the market to enter a significant supply deficit by 2024E. Lithium supply security has now become a top priority for many technology companies including Tesla and Foxconn.


Near-term production ramp-up, may impact the lithium market in the medium term.Under the assumption that development projects being advanced by juniors are able to get the necessary financing and existing producers continue to ramp-up production, the lithium market may move into a position of oversupply in the medium-term. This could cause the lithium price, to flatten or decline, impacting marginal projects (higher cost) that are currently being advanced. However, this period of oversupply, is likely to be short lived as over the longer-term we expect demand to accelerate as Li-ion battery mega-factories approach production and automobile manufacturers implement EV plans. We highlight that the market consensus is far more bullish over the long-term (>10 years) as aggressive government policies approach those in line with the cleantech revolution.

Risks to long-term lithium bull market. While demand growth is not a major concern in the sector, investors must be weary of two important points on the supply side of the industry; lithium is generally more abundant than other battery metals and current global reserves of lithium can last over 400 years at the 2016 level of production (Figure 3). We note, that similar to other commodities, a sustained period of high prices is likely to result in new higher cost projects and new technologies being developed to meet the supply gap, which would impact the current long-term view for the lithium market.


The mining industry gears up to ride the electric car boom.One of the largest mining companies in the world, the Rio Tinto Group, is currently considering a bid to acquire 32% of the largest lithium producer in the world, Sociedad Química y Minera de Chile S.A. (NYSE:SQM), to increase its exposure to the lithium bull market (Bloomberg). Lithium exploration expenditures are also ramping up with an estimated increase of 113% year over year to US$156M in 2017, which is being directed primarily at the politically stable mining jurisdictions of Canada, Australia and the United States (S&P Global Market Intelligence). Unless a significant amount of lithium discoveries are made and new developments projects reach production within the next five years, it is expected that by 2024E a significant market deficit may be unavoidable.

Low cost producers expected to thrive in either boom or bust cycles. In a sector recently crowded by companies with expensive and marginal projects, it is expected that only a fraction of development projects will be able to secure project financing. That being said, there are certain characteristics of companies and projects to look out for when investing in lithium. Similar to the mining industry as a whole, the ideal characteristics include low capital expenditures and high margin projects in politically friendly jurisdictions. In an industry dominated by politically volatile regions, tech firms like Tesla would prefer to sustainably and ethically source 100% of its battery raw materials from North America. This separates the lithium industry from other mining sectors and redirects the lens to low-medium cost operations in more politically stable jurisdictions.


Derek Macpherson | VP Mining Analysis
Victoria Ellis Hayes | Associate
Alex Pitcher | Associate
 
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Company Specific Disclosure Details
Albermarle Corporation - NYSE:ALB - None
FMC Corporation - NYSE:FMC - None
Sociedad Química y Minera de Chile S.A. - NYSE:SQM - None
Jiangxi Ganfeng Lithium - SHE:002466 - None
Advantage Lithium Corp - TSXV:AAL - None
Critical Elements Corp - TSXV:CRE - None
Lithium Americas Corp - TSX:LAC - None
LSC Lithium Corp - TSXV:LSC - None
Nemaska Lithium Inc - TSX:NMX - None
Neo Lithium Corp - TSXV:NLC - None
Orocobre Ltd - TSX:ORL - None
Pure Energy Minerals Ltd - TSXV:PE - 4

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