The future's hot for lithium - and getting hotter

The Gold Report: Jon, you're a very strong proponent of lithium and from what you've told us previously you believe it's hot. How hot is it?
Jon Hykawy: Hot and getting hotter. What we've seen recently is a number of deals coming to market looking for financing and those deals are getting done. We're currently in the midst of one Toronto IPO.
It's an Australian-listed company called Orocobre Ltd. (ASX:ORE). The company just put out press releases suggesting that they're going out and raising $22 million, to be exact. There's a rumor that we're going to see their direct neighbor on the salar in Argentina come to market soon with their IPO. We've seen a number of offtake and partnering agreements being signed including the Toyota Tsusho (OTCBB:TYHOF.PK) agreement with Orocobre. The interest in the sector has never been greater.
TGR: How are these deals getting financed so easily compared to other rare earth deals?
JH: I think part of it is we're seeing so much media attention paid to electric vehicles. I was actually just at the Geneva Motor Show. That particular event was actually being referred to by people in Geneva as the "electric car show." I went in at the behest of my company president to take pictures some of the new hybrids and electric vehicles that are available. I realized about 10 minutes in that I was going to have to ration the number of flashes I was expending from my cell phone camera because I was going to run out of battery. Every major dealer of motor vehicles in the world was represented there and each of them had new hybrids and/or new pure electric vehicles.
TGR: Is the lithium ion battery going to be sustainable over the next two years with potential new technologies coming into the market?
JH: Absolutely. The new technologies that are potentially coming to market are largely new iterations of lithium ion batteries with new chemistries in the cathodes and new materials being used for anodes. You can improve lithium batteries considerably from here. Keep in mind this is a technology that's only really been under development since the mid '80s and commercially since about the late '90s. This is a technology that has a long way to go.
TGR: You mentioned in one of your research reports that you're recommending that investors consider a basket of lithium companies. A lot of these are development companies from what I understand. Are they long-term plays?
JH: They are. Well some of them are longer-term than others. There's really no way to play lithium directly out of the existing producers with the possible exception of Talison Lithium (currently a private company) coming to market; should they come back for the IPO and should that succeed. Talison, in the minds of most investors, I believe, is not going to play a major part in the battery industry. What you're looking for is lithium development companies that can play that role producing inexpensive battery grade lithium. That largely consists of brine and clay producers. That's the basket that we're referring to. It's companies similar to the ones we have under coverage like Western Lithium Corp (TSX.V:WLC), Rodinia Minerals Inc (TSX.V:RM) and Salares Lithium Inc. (TSX.V:LIT).
TGR: Explain the difference between brine and clay producers, if you don't mind.
JH: With regard to brine producers; lithium is commonly produced today by pumping salty water out of dry salt lakes in South America. This has historically continued to be the least expensive way to produce lithium. The lithium is in the brine in the form of lithium chloride salt. What you do to simplify it dramatically is you basically evaporate the water leaving behind the lithium in the brine and then treating it to produce a chemically tractable form. The clay producers are a different story.
Western Lithium is one of those companies with an extremely large deposit of a lithium-bearing clay in Nevada, actually near the northern border with Oregon. They have the ability to produce, according to their scoping study, relatively inexpensive lithium. It should be very clean lithium which also brings the cost down for producing that ultra pure battery grade. We're very positive on that possibility and we have a couple of other brine companies that we believe have relatively low cost and can find their way into the market as well.
TGR: You stated earlier that brine-based lithium supplies are active and cannot be produced too quickly, referencing evaporation. If the supply is there, won't it come down to companies that can bring it to market quickly in the long run as far as share value is concerned?
JH: It has to get to market relatively quickly and relatively inexpensively. With any commodity industry, your biggest issue is maintaining control of your costs. You must make sure that when the inevitable price decreases do hit the market, you are not one of the companies that fail as a result. Our basic approach at Byron has been to build a model for what we believe the pure variable cost for production out of a specific deposit is and then look to find the lowest cost potential producers.
TGR: Is the potential nationalization of lithium in Bolivia and Chile where Salares is going to potentially affect the price of lithium?
JH: Actually it's not even potential anymore. Bolivia has announced that they're going to be creating a national lithium company whose mandate I believe is to go out and develop Salar de Uyuni as a source. The media hype over the last year has been that Bolivia is the pending Saudi Arabia of lithium.
That Salar de Uyuni is the greatest deposit in the world. I'm afraid that is going to be much more problematic than most people think. Our original lithium report indicated that one of the major cost drivers is the amount of magnesium dissolved in the brine along with lithium. The higher the level of the magnesium, the more expensive it is to produce the lithium and Uyuni is an absolutely marvelous source of magnesium. You're going to have a significant problem developing that economically.
We don't have any shortage of lithium. What we have is a shortage of inexpensive lithium and that's going to come back to bite the Bolivian company. I just don't see how they're going to be able to develop Uyuni at present price points. As far as Chile is concerned, there's been one senator that's proposed nationalizing the industry. The government has just changed recently to a more central right government as opposed to the left-leaning party that was in power previously. I think you're going to see a much more pro-business and pro-mining stance taken by the government there. I don't think nationalization is in the cards.
TGR: When you're looking at a company like Salares in Chile and comparing them with Western Lithium in Nevada, would you as an investor take position in both?
JH: There are different risks associated with each. No one has yet produced commercial quantities of lithium from clay in Nevada or anywhere else for that matter. You have to balance the technology risk. We believe it's relatively minimal because the processing of clay for lithium looks very much like the processing of hematite or magnetite ores for vanadium. That's a process that's been conducted commercially for decades now.
Balancing the two, I think you're probably better off finding a basket of collectively low cost potential producers. Fifteen percent of world production comes from FMC (NYSE:FMC) at a place in Argentina called Salar del Hombre Muerto. That is expensive lithium and it's not an inexpensive place to produce from. It's significantly more expensive than Atacama. It leaves a fair bit of room for others to come in and try to take up some of that 15% market share.
TGR: That helps drive the market, does it not?
JH: It absolutely does. It's not only growth in the market overall which we see being significant over the next few years; it's the potential to displace some of the expensive supply that's in the market place today.
TGR: How many companies are in the lithium basket?
JH: We have three names under coverage and they are Canadian-listed companies. We haven't touched companies like Orocobre which has signed an off-take agreement with Toyota Tsusho. This will provide Toyota Tsusho with the ability to buy up to 25% of their first project. That's a significant endorsement making Orocobre a pretty strong company in the space.
TGR: Cobalt is a more prominent component of the lithium-ion battery. Is there a basket of cobalt companies we should be looking at?
JH: I'm going to have to say definitively no and there's a good reason for it. You're right. In current lithium ion batteries cobalt is a significant component. I know a number of institutional clients that have been approached and told that you have to own cobalt and lots of it because there will be huge demands on this as electric cars roll out.
But we're also all familiar with what we've seen on YouTube and television regarding battery failure. The fact is that very occasionally these batteries do explode, and at the very least burst into flames. That's actually a function specifically of the cobalt that's in these less than modern lithium-ion batteries.
TGR: What is vanadium exactly?
JH: Vanadium is a metal that has some very interesting electrical as well as physical properties. One of the odd things it does is it dissolves in iron and steel creating an alloy. At relatively low levels it can produce extremely strong construction steels. It's used to significantly strengthen and bring up the quality of steels at a very reasonable price point. But at 4% or 5% alloy in steel, vanadium actually makes it strong enough to become high speed tool steels. So these would be the cutting bits in milling machines and that kind of thing.
There's not really another material that can do that. People are probably familiar with molybdenum as a steel alloying agent. You run out of the capacity to dissolve molybdenum in the steel long before you reach the strength point that you can achieve with even small levels of vanadium. Niobium is another material you can substitute but it's only about one-third as effective. Therefore, it usually trades about one-third the price of vanadium in the market. More than eighty percent of it goes into steel use like this but we believe there are significant other uses building.
TGR: Do you see the demand for this metal increasing since its only use is in steel at this point?
JH: No doubt about it. You're getting significantly higher demands out of China on the basis of Chinese growth alone simply because the Chinese are mandating better and better grades of construction. So your choices in construction are: use twice as much conventional steel at a much higher cost or use vanadium dope steels. Use significantly less steel build buildings that are just as strong but have more workable room inside of them that you can actually lease to people. It comes down to a much easier choice. Stronger grades of vanadium dope steels are used and that's the best choice for any sort of construction today.
TGR: This has been very informative. Thank you for your time.
Toronto-based Jon Hykawy, who earned his PhD in physics (University of Manitoba, 1991) and an MBA (Queen's University, 1997), spent four years in capital markets as a clean technologies/alternative energy analyst before being named lithium analyst at Byron Capital Markets in August. Jon began his career in the investment industry in 2000, originally working as a technology analyst concentrating on the lithium space. Jon has become a valuable resource on everything about the light, silver-white metal-from supply and demand to exploration and production. He has extensive experience in the solar, wind and battery industries, conducting significant research in the areas of rechargeable batteries, from alkaline to lithium-ion to flow batteries.
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