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Chile is counting on lithium operating contracts to significantly increase lithium production over the coming years as it aims to compete with leading producers like Australia and Argentina. The winner of the first contract will be announced on Monday, September 24.
The POSCO consortium — which includes lithium exploration and development company Li3 Energy (OTCBB:LIEG) — and Chilean miners SQM (NYSE:SQM) and Sociedad Legal Minera NX UNO de Peine are vying for the first special lithium operating contract (CEOL) since the Chilean government announced in February an initiative aimed at “re-launching the Chilean lithium industry.”
In spite of heavy opposition from groups demanding that lithium be nationalized, the Chilean government, sidestepping a decades-old constitutional ban on strategic natural resource concessions to private hands, decided to allow companies to tender bids for CEOLs. A CEOL allows the grantee the right to extract up to 100,000 tonnes of lithium over a 20-year period in exchange for paying royalties equivalent to 7 percent of the total yield. Such a contract could generate as much as $350 million for Chile.
In March of this year, Lithium Investing News reported on Chile’s decision to open up its lithium resources at the vast Salar de Atacama to private development. The bidding process officially began in June, when Chilean President Sebastian Pinera invited local and foreign companies to tender offers. This initial concession is reportedly the first of several more to come. The government is counting on CEOLs to significantly increase lithium production in the coming years as it aims to compete with leading producers like Australia and Argentina.
To qualify, the companies must bid at least $5.3 million. The winner will also be required “to build a chemical plant within five years. If they don’t start producing, the government will remove the quota and they will have to resubmit the tender,” Daniela Desormeaux, general manager of Chile-based market intelligence firm signumBOX, told Lithium Investing News in July.
Li3 Energy and its partner POSCO (NYSE:PKX), the largest steelmaker in South Korea and the fourth worldwide, operate a project in the Salar de Maricunga that was listed amongst the world’s top 11 lithium projects in a 2011 report by signumBOX. POSCO aligned itself with Li3 Energy as part of its goal to use its newly-developed lithium extraction technology in plants overseas. The POSCO consortium also includes Mitsui & Co. (TSE:8031) and Daewoo International (KRX:047050).
Given that the market is so tightly concentrated in the hands of four (soon to be three) major producers, buyers of lithium products, such as those companies in the POSCO consortium, are “very keen on expanding their network of lithium projects,” Jonathan Lee, battery materials and technologies analyst at Byron Capital, told Lithium Investing News.
SQM, the world’s largest lithium producer, already has a strong position in Chile’s lithium industry. The company’s COO is the brother of Mining Minister Hernan de Solminihac, who has excused himself from the development of the lithium contracts to avoid a conflict of interest.
Rockwood Holdings (NYSE:ROC), the other top lithium producer in Chile, is not in the running for the concession. Most likely the company is focusing on its all-cash takeover of Talison Lithium (TSX:TLH). “Their strategy is to diversify their assests outside of Chile,” explained Lee. Talison’s hard-rock Greenbushes lithium operations in Western Australia helped it garner 32 percent of the global lithium market. Geographic diversification, said Lee, will allow Rockwood to mitigate political as well as weather-related risks and will allow for quicker turnaround on lithium products.
The concession will go to the highest bid, and Chilean officials are expected to open the bids this Monday, September 24.
Securities Disclosure: I, Melissa Pistilli, hold no direct investment interest in any company or commodity mentioned in this article.
