The Lithium Play No One is Talking About

By Branson Hamilton

Branson Hamilton is chief investment officer and managing director of Calyx Capital Advisors, a full-service wealth management firm that provides comprehensive financial advice and investment management.
Branson’s 30-plus-year career spans from operations, to product invention, to marketing, to business strategy, to company leadership at some of the largest companies in the world, as well as at middle-market and entrepreneurial businesses. He has always been recognized for his knack of discovering opportunities that have produced growth and profits.

Overview

• A key risk factor for the success of Tesla Motors’ (NASDAQ:TSLA) gigafactory is access to sufficient supplies of the key raw material: lithium.

• Lithium supplies have been tight this year as supply growth barely kept pace with demand.

• Recent announcements of Tesla’s discussions and agreements with mining exploration companies have raised questions regarding the viability of Tesla’s supply strategy.

• Tesla appears to have a lithium supply dilemma.

• Interestingly, one possible supplier within 500 miles of the factory with significant capacity to produce lithium has not been mentioned … yet.

Supplies are tight

During the heyday of mining investment a few years ago, industry analysts projected that lithium production would far outpace demand for the product. That was then, this is now.
Mining investment has cratered in the past several years, limiting supply growth to only those projects that have shown very real potential. Meanwhile, battery production is ramping up, raising demand above past expectations.
Here’s a sample of analyst comments from an article reviewing the lithium market in 2015:

• “A year of tight supply, growing demand and rising prices.”

• “Only a few years ago you could never have foreseen the issues that the major producers are experiencing in the Atacama and the inability of these companies to feed growing demand.”

Consolidation of suppliers — as well as long-term supply agreements and strategic investments by battery producers, automobile companies and other large users, primarily from China, Korea and Japan — is restructuring the market. In some cases, these changes are clearly making future supply from specific producers unavailable to Tesla.
Some recent examples of industry changes:

• In 2015, Albemarle (NYSE:ALB) acquired Rockwood Lithium, securing sources in Argentina, Nevada and Australia to become the largest supplier of lithium.
• In July, Jiangxi Ganfeng Lithium (SZSE:002460), China’s second-largest battery maker, agreed to buy 100 percent of the spodumene (lithium-containing rock) produced at Reed Industrial Minerals’ Mt Marion lithium project in Western Australia. The company also received options to buy up to 17.5 percent of Reed.
• Toyota (NYSE:TM) is a partner in Orocobre’s (TSX:ORL,ASX:ORE) project at the Salar de Salines Grandes in Argentina, which has recently begun production of lithium.

Tesla agreements with exploration companies

Recent articles have reported Tesla’s pursuit of exploration partners and supply agreements with sponsors of yet-to-be proven supply sources. While that displays a view toward the future, history has shown that the success rate of new mine proposals at the stage of these ventures is similar to Silicon Valley ventures — most don’t succeed.
Recent announcements:

• Reuters reported that Tesla has met with government authorities in Chile to discuss a lithium venture with state copper miner Codelco. Codelco currently has no lithium assets, no specific exploration plans disclosed and has stated that no agreement has been reached. Editor’s note: Codelco holds several lithium concessions in the Salar de Maricunga. As an April article from Mineria Chilena notes (in Spanish), efforts to develop the concessions have so far fallen flat as the state miner has kept its focus on copper. However, Mineria Chilena also stated that Codelco was approached by Li3 Energy (OTCMKTS:LIEG) regarding a potential partnership earlier this year.

• Bacanora Minerals (TSXV:BCN,LSE:BCN) and joint venture partner Rare Earth Minerals (LSE:REM) announced in August a conditional lithium hydroxide supply agreement to supply Tesla from their lithium-bearing clay deposit in Sonora, Mexico. Viability of this project has yet to be determined.

• Pure Energy Minerals (TSXV:PE,OTC:HMGLF ) announced in September that it has signed a conditional lithium supply agreement with Tesla to potentially supply lithium hydroxide from its Clayton Valley project in Southern Nevada, a project whose viability has yet to be determined.

Tesla gigafactory risk: Access to lithium supply

Clearly, access to the basic building block of lithium-ion batteries is critical to Tesla’s vision of success for the gigafactory. These exploration and prefeasibility plays bet on a possible future that depends on many things going right. Chris Berry of the Disruptive Discoveries Journal has called these deals an “out of the money call option.”
What these projects lack is a strategy to create supply security. Even if one of these exploration ventures were to become a viable supplier, the process of getting from a concept to a producing mining facility will take many years.
So, why would Tesla pursue these long-term, low-probability bets for possible future supply of the core material for its flagship factory when what it needs is access to near-term supply? The thought is echoed by industry advisor Joe Lowry in an article from November 4 — he states, “[t]he REAL risk they are taking by not aligning with major suppliers is that they could find themselves without adequate lithium at a critical time in their growth (late 2017 or 2018).”
Perhaps the answer is that Tesla can’t negotiate reasonable terms with the major suppliers.
Why?
To begin, Tesla doesn’t buy lithium; it isn’t even in the market today. Tesla buys batteries from Panasonic (OTCMKTS:PCRFY) for the automobiles it produces. And while the gigafactory has been hyped for a couple of years now, it won’t be in production until 2017 … or later. Only at that point will Tesla begin to be a customer for lithium.
And then, even though the factory is “giga,” the amount of lithium required will not make it a 500-pound gorilla in the lithium market. Lowry comments in a November 8 article, “[e]ven if Tesla produces 300,000 vehicles by 2020, the total amount of lithium required for their batteries will still be under 8% of the growing world market. Tesla is significant but not of a size where they can dictate terms to the limited world of lithium suppliers.”
Given the state of the lithium market and the proliferation of electric vehicles, why would any large supplier limit its options by signing an agreement with a company that is not yet in business in a supply marketplace where the future customer set is so unknown? Porsche (ETR:PAH3) has said that it will invest a billion euros to bring its first all-electric car to the market. Who’s next?

Tesla’s dilemma

Tesla will need access to lithium to fulfill its vision for the gigafactory. Its current actions of aligning with exploration ventures will not provide it with secure supply soon. It does not have the clout in the lithium market to negotiate strong deals with major suppliers.
So what is Tesla to do?
It needs to find tangible sources of supply that fit with its location and needs. One suggestion is to look at smaller suppliers or new supply sites that are potentially within two to three years of production.

A solution less than 500 miles away?

Interestingly, there is a source of lithium right in Tesla’s backyard that could be brought online closer to the same timeframe as the gigafactory. It also has more lithium than it will require given the current ramp up of car sales.
Apparently little attention has been paid to a project that is much further along in development than the speculative bets described above, is less than 500 miles from Tesla’s Nevada facility and whose process captures significant amounts of lithium in high concentrations.
If you leave Tesla’s facility headed east on US Highway 6 and drive into Utah, you will pass right by the Sevier dry lake, a brine lake that contains a range of minerals, including lithium. Crystal Peak Minerals (TVXV:CPM,OTCQX:CPMMF) is in the development stage with its project. It is targeting production of potassium sulfate, a specialty fertilizer with strong and growing demand, using solar evaporation of the lake brine. The company also intends to produce other minerals, including lithium.

High concentration of lithium

The brine of the Sevier Playa (dry lake) contains lithium, according to Crystal Peak’s prefeasibility study. While the report focuses on potassium sulfate production, it indicates that there will be significant amounts of lithium in the highly concentrated solution that remains after extracting the potassium sulfate.
The process used to extract potassium sulfate uses solar evaporation to concentrate the minerals in the brine. When the brine is sufficiently concentrated, potassium sulfate precipitates out of the brine as a crystal. The remaining liquor is pumped to a separate pond. In testing, engineers found 1.92 grams per liter of lithium, a very high concentration, in this liquor. Thus, unlike typical lithium brine projects that require substantial engineering to get brine concentrated enough to begin chemical extraction, this liquor is already concentrated and in a pond ready for further processing.
The report further notes that the lithium can be extracted from the solution by one of several chemical processes. Sociedad Quimica y Minera de Chile (NYSE:SQM) also produces potassium sulfate and lithium from a brine playa in the mountains of Chile. Processes for extracting the lithium are well known, and include ion-exchange resin, solvent extraction and membrane processing, as noted in the prefeasibility study.
Moving forward, Crystal Peak will continue to evaluate its options for lithium extraction from the Sevier Playa to determine whether it can be incorporated into its flow sheet. A feasibility study for the project is expected to be complete in 2016.

Project already in development stage

The Sevier Playa is 125,000 square miles in size and contains an array of minerals in its dense brine. By comparison, the brine lake that is the basis for Pure Energy’s project noted above is only 8,000 acres in size.
The Crystal Peak prefeasibility study shows strong economics for producing potassium sulfate. This is the intended primary product of the company; it has sufficient equity funding to develop the project, and it expects to be in production in 2019. Thus, the project is fully in the development stage, unlike the exploratory ventures for which Tesla has made agreements.
Crystal Peak is completing its engineering work in preparation for final permitting and initiation of the construction phase of the project. Included in this work will be its plan for processing lithium. As a by-product of the primary product delivered from the Sevier Lake, adding lithium production will be less costly from both a capital and operating perspective than building out a facility from scratch (as is being proposed by those only focused on lithium).

Significant tonnage of lithium

The engineers conducting the study calculated that the amount of lithium in annual production equates to over 6,799 tonnes per year of lithium carbonate equivalent. The amount of lithium present in this concentrated liquor is substantial.
The sellable output quantity of lithium depends on the efficiency of the chemical process used. For example, process testing at other brine sites by Tenova Bateman Technologies indicates the possibility of up to 99-percent capture of lithium from less concentrated brine. The author chooses to use a more conservative 60-percent capture rate for sizing of the output. At a 60-percent capture rate the resulting marketable output would be 4,080 tonnes of lithium carbonate annually.

Why it matters

To put 4,080 tonnes in perspective, the total global production of lithium in 2014 was approximately 37,000 tonnes. Analyst estimates for 2015 are for 9 percent more production, for an estimated total of 40,000 tonnes. Thus, 4,080 tonnes is approximately 10 percent of current global production of lithium. It is also well above the tonnage of lithium used in batteries for Tesla automobiles at a production level of 50,000 vehicles this year.

Tesla’s opportunity

Lakes, clays and rocks containing lithium are being explored and tested for feasibility on every continent. Perhaps there are other projects that Tesla could consider that are firmly in the development stage and do not currently have a strategic customer as an investment partner.
Maybe Tesla doesn’t know that this possibility exists. It’s true for many of us that we don’t know what our neighbors do for a living. However, this opportunity looks like a “no brainer.” It is in development. It has all equity financing needed (the rest may be financed through debt). It is very close to the Tesla factory, and with the capacity to make a real difference.
I’d suggest that Tesla work with its backyard neighbor in Utah before one of its competitors captures this significant resource.
 
 
Securities Disclosure: The author, Branson Hamilton, will not initiate investments in any of the companies mentioned within 72 hours of the article’s publication. He is not paid by any company mentioned in this article, nor does he have any financial relationship with them. 
The information in this article came from public sources. The author contacted Crystal Peak Minerals and was informed that agreements and restrictions by regulators prohibit the company from commenting or providing information beyond what is in publicly available documents. This material is for informational purposes only and should not be used as the sole source for investment decisions. The views and conclusions are those of the author and not necessarily of the firm in which he is a principal.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in this article. The opinions expressed in this article do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.