VIDEO - Chris Berry: Lithium Volatility, Cobalt Supply Deals and the Battery Metals Space

There was a lot of optimism at the recent Prospectors & Developers Association of Canada (PDAC) conference, where experts and thought leaders shared their knowledge about the resource sector.

The Investing News Network (INN) did not miss the chance to be there and caught up with Chris Berry, founder of House Mountain Partners, to discuss the future of lithium, cobalt and other battery metals.

Berry discussed the most recent news in the lithium space, including the widely expected SQM (NYSE:SQM)-Corfo deal signed in January. “The fact that an agreement is now in place for SQM out to 2027 or 2030 is on a net basis positive for lithium overall,” he said.

He also shared his thoughts on a recent report released by Morgan Stanley (NYSE:MS), which predicts a decline in lithium prices by 2021. “If prices fell to the levels that they were predicting, much of the cost curve, the hard rock portion of the cost curve, would not be economic,” he explained.

Berry also spoke about the cobalt market, including when he expects long-term supply deals to be signed and how the Democratic Republic of Congo’s (DRC) new mining code will impact the market.

Watch the video above to hear more about Berry’s thoughts on the battery metals space or read the transcript below. You can also check out our other PDAC 2018 interviews here.

INN: We are here at PDAC, how are you finding the conference? Are investors interested in the battery metals sector?

Chris Berry: Very much so and that’s been a consistent theme for the last couple of years. I feel like the whole mining sector in general is just sort of emerging from its funk from the last couple of years. But it’s clearly that energy metals or battery metals have really kind of lead the charge. No pun intended.

INN: Let’s talk about lithium. Let’s begin with the SQM-Corfo deal. Can you explain a little bit to investors that maybe are new to the sector why this deal was so important for the market?

CB: Well, it’s important because SQM is the largest lithium producer in the world and they’re limited essentially based on the amount they can produce based on the agreement they had with Corfo. For your listeners who don’t know, Corfo is essentially the state economic development agency in Chile. So the negotiation between SQM and Corfo had dragged on for a long time. We could probably sit here for half an hour and dissect it but we won’t. But nevertheless, they came to an agreement, and obviously, that’s caused a lot of volatility to run certainly in the market. But nevertheless, the fact that an agreement is now in place for SQM out to 2027 or 2030 is on a net basis positive for lithium overall. 

INN: Another news that’s been impacting the market is the recent report released by Morgan Stanley which is predicting a decline of prices by 2021. Do you agree with their forecast? And if you don’t, where do you see prices going in the next couple of years?

CB: I don’t agree with the forecast because if prices fell to the levels that they were predicting, much of the cost curve, the hard rock portion of the cost curve would not be economic. And so you have this really strong and defensible demand dynamic in lithium. But if prices were to fall though, I think $7,200 a ton or whatever they’re talking about, most of that hard rock that’s forecast to come on stream between now and 2021 wouldn’t come on stream. So I do see lithium prices falling probably to $11,000 to $12,000 a ton probably by that time frame. Maybe a little bit further beyond that. But in no way do I see prices falling to that level that they mentioned in the report.

INN: The report also mentions that the market might be oversupplied in the next few years. Should investors be worried about an oversupply in the lithium market?

CB: I think just like anything else in life, it’s all about probabilities. And I think what you want to think about in lithium in terms of oversupply is what would have to happen for an oversupply thesis to come true. So essentially, every project, both brine and hard rock, had to come on stream, on time and produce at capacity. All of the conversion capacity that it’s either existing today or coming on stream would have to be up and running. What is the likelihood of both of those happening on time and on budget? It’s very low. And then thirdly, I think for an oversupply argument to come true, you’d have to have electric vehicles in terms of demand just not materialize. And so when you think about those three things in terms of probabilities, they’re very low. I wouldn’t say the probability is zero but it’s almost minimal, minuscule.

INN: Just before that report was released, you actually published an article about lithium volatility. So is lithium volatility a curse or a gift?

CB: I think it’s a gift depending upon how long you’ve been investing in the space, if you just got in. And the reason why I think that there’s been a great deal of volatility in lithium comes from misunderstanding around the agreement with SQM and Corfo. That obviously shook the market, and then of course compounded by this Morgan Stanley report as well. Look, I think if you have a three to five to seven-year bullish view on lithium, what’s happening to the space right now is a gift.

INN: Let’s jump to another battery metal. Cobalt, of course. We know there have been a lot of talks about long-term contracts to secure supply from carmakers, and even Apple (NASDAQ:AAPL), to secure supply for their smartphones. So why are these long-term deals important for the market and why should investors care about them?

CB: Well, they’re important for end users because whether or not you’re an OEM or you’re Apple, you want to have visibility on your supply chain out to 2025, 2027, 2030. And what I think is interesting in the case of Apple or Samsung (KRX:005930) or the electronics manufacturers is they, along with the OEMs, believe that vehicle electrification is real and it’s going to happen. We can argue about penetration rates out of the next five to ten years. But the electronics manufacturers are worried about getting prodded out. And so that’s why they, along with their downstream–or upstream I should say–partners, are trying to lock in these longer term deals on the cobalt side. So it’s very important for security of supply.

INN: Do you have a particular date when you expect these contracts to be signed or closed?

CB: Well, I would think that some of them would have been closed already. I mean, there’s lots of talk of negotiation going on in the markets and I think the issue is what is the long-term price that a buyer is willing to pay? And also, what is the length of the duration of a contract? I mean, most contracts that I’ve seen whether or not it’s lithium or cobalt aren’t ten years in duration. That’s a lifetime with these niche metals. And so it’s all about the amount, it’s all about the price, and it’s all about, again, I guess your sort of view of the future around electric vehicles.

INN: And another news in this particular metal was about the DRC, where most of the cobalt is mined. The country might be hiking its taxes and royalties for cobalt and other metals soon. How do you expect that to impact the market?

CB: Well, I don’t believe that that law has been signed yet by the government in the DRC so it’s still being negotiated. Look, it’s going to raise the cost of doing business in the country but I actually think that over the next two years, the amount of cobalt coming from the DRC is going to increase as opposed to decrease. My sense is that near-term projects and safer, more reliable geopolitical jurisdictions aren’t going to be ready for the next few years. They have to get finance, you have to get approved by end users. So it’s going to take a long time to see excessive amounts of cobalt coming from Australia or Canada. And they probably will in the future, but right now, the DRC is still for better or worse the place to be. 

INN: We have a lot of investors watching us today that might be new to the battery metals space. What is your best piece of advice for them?

CB: I mean, we’re in the middle of this incredible structural shift around mobility and around energy storage. And I think that that is a 10 to 15-year move, what we’re sort of seeing, when you think about renewable energy prices falling, electric vehicles becoming more ubiquitous. And within that, you’ve got these metal cycles. I still think that cobalt, lithium prices will go up, prices will fall. Those are still cyclical metals despite the fact that you’re seeing this really incredible structural change in terms of backdrop. When you’re looking at these companies whether or not it’s a producer or near-term producer and exploration play, you want to find projects that are scalable. So large and long life. And even probably more important than that, you want to find management teams that have the technical capability to bring a lithium or bring a cobalt project into play. Cost of production does matter. You want to be in the low end of the cost curve. But at the end of the day, if you cannot produce a battery grade or highly pure material from a given deposit, it doesn’t matter what the cost is.

INN: What factors should investors watch out for the rest of the year, as we’re approaching the second quarter? What factors are going to impact the battery metals sector?

CB: On the lithium side, I think the big news right now is that FMC (NYSE:FMC), one of the larger producers of lithium, is going to be IPO-ing their business. And so I think that’s important because it’ll give the market an idea of what a pure play, a lithium pure play producer is valued at. They’re talking about raising $500 million but whatever the market capital, wherever the valuation is for that project would be very important. I think that potentially reset both up and reset down valuations in the lithium space right now. So that’s probably one of the top things I would be looking at. The other thing I’d be looking at is the success of the challenges that might come from a lot of the hard rock production in Australia. There’s been a lot of money pumped into that part of the world, and now it’s time for them to start showing that they can actually build these projects and produce a scale. 

INN: And finally, my last question for you is about a different battery metal, vanadium. What are your thoughts on that metal and how is that story different from cobalt or lithium?

CB: Well, vanadium is really a steel story. And so when I think about vanadium or look at vanadium, I try and get a sense for what’s going on in the steel market globally. Look, it’s no secret. I think that the success or failure of vanadium as an additive to steel and also in the battery business is going to be driven by China. So right now, with respect to vanadium, I’m just trying to do as much research as I can around battery technology, and because there are pros and cons to a vanadium redox battery relative to lithium ion. But my sense is that vanadiums had an incredible run just in terms of the pentoxide price over the last few months. I do probably expect that to continue for the next little while. But again, it’s all dependent on China and sort of what they do with respect to steel production and also adoption of vanadium redox batteries. 

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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews 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.