What Does Rio Tinto’s “Eureka Moment” Mean for Lithium?

Mining giant Rio Tinto (ASX:RIO,LSE:RIO,NYSE:RIO) made news headlines on Tuesday (October 22) after announcing it has found a potentially large source of lithium in California. 

The miner said it could become America’s largest supplier of lithium, a key element in electric vehicle batteries, if it can successfully process the metal at a large scale.

“Our team had a eureka moment when they did some testing to look for valuable minerals beyond boron in our waste rock and found high grades of lithium,” said Bold Baatar, chief executive of energy and minerals at Rio Tinto.

“If the trials continue to be successful, this has the potential to become America’s largest domestic producer of battery grade lithium — all without the need for further mining.”

Securing sources of lithium in the US has been a main topic of discussion since early in 2019, with concerns increasing about depending on foreign countries for supply of raw materials. The only lithium-producing operation in the country is Albemarle’s (NYSE:ALB) Silver Peak asset.

Rio Tinto said it was looking for gold when it discovered lithium content in the waste rock from the tailings of its borate production at a mine in Boron, California. The miner has not disclosed actual concentrate percentages, but said they are higher than those at other lithium projects in the US.

The company has been mining borates from the asset since 1872, with production reaching 3 million tonnes of borate ore yearly. Borates are used to make soaps, cosmetics and other consumer goods.

Rio Tinto said it will invest US$10 million to build a pilot plant on site to extract the metal from the waste rock. The miner is also considering spending another US$50 million during the next phase for an industrial-scale plant with a capacity of up to 5,000 tonnes of lithium carbonate equivalent (LCE) per year.

The diversified mining major did not confirm when it plans to start construction of its pilot plant and it has not provided any longer-term production estimates.

According to Benchmark Mineral Intelligence, lithium demand is expected to reach 2.2 million tonnes by 2030, with LCE only reaching 1.67 million tonnes by that time — leaving a huge structural deficit.

Commenting on the news, analysts at the firm said the development will help Rio Tinto build intellectual property in the lithium chemicals space, giving the company a low-cost, low-risk way to have a more deep understanding of chemical processing first hand.

“So if (Rio Tinto) looks at acquiring lithium chemicals assets it has a deeper technical know-how,” they said in a note. “The move builds confidence internally on how the company wants to position itself in the electric vehicle revolution.”

Rio Tinto could also use the knowledge it may develop at its California project for its 50,000 tonne per year Jadar deposit in Serbia, where the company has spent and committed over US$200 million on development since its discovery in 2004. A final investment decision on Jadar is set for 2020, with first output expected around 2023.

Analysts at Fastmarkets also weighed in on Rio Tinto’s California news, saying that with supply of lithium salts expected to reach 350,000 tonnes in 2019, the company’s annual production of 5,000 tonnes is only a small volume by comparison — but it signals emerging interest in lithium as a key battery raw material due to its booming future.

“It is great to see a diversified mining major getting more involved and interested in lithium, especially in what will be a major area for demand,” said William Adams, head of battery raw materials research at Fastmarkets. “Given the amount of additional lithium that will be needed in the decades ahead, we will need to see more commitment and on a bigger scale.”

Similarly, battery metals expert Chris Berry, founder of House Mountain Partners, said this is not particularly significant for lithium supply going forward.

“Producing 5,000 to 15,000 tonnes per year is not terribly impactful in a market that is growing at a CAGR of 18 percent and expected to be 850,000 to 1 million tonnes in size by 2025,” he said. “If Rio Tinto wanted to be a significantly sized lithium player, they are better off doing this through M&A and buying one of the major producers.”

He added that considering the company’s revenue and operating income in 2018, for lithium to “move the needle” for Rio, the company will need to either build or buy significant production.

If Rio Tinto wants to be successful at processing lithium it will need to prove to end users that it can produce high-quality lithium chemicals at scale, said Berry.

“This could take longer than many think, which is why entering the business through acquisition makes more sense for them.”

With that in mind, should Rio Tinto look for partnerships to develop the asset? Berry said that from a technical perspective it would make sense to do so.

“The partnership model in lithium is a tried and tested way forward,” he said. “(But) Rio has an enormous balance sheet and numerous ways to financially engineer their way into the lithium sector should they decide to do so.”

Looking at what’s ahead for the market, Benchmark Mineral Intelligence analysts said the lithium industry needs a commodity major to shift its thinking from short-term increments to long-term big expansions — no commodity major has made a serious play in the space yet.

“Opportunity offers for a first mover advantage for the more financially powerful commodity houses, especially with lithium sentiment and share prices in the doldrums despite the double-digit growth this year,” the firm said.

Prices for lithium have been on a downtrend for the past several months, with investor sentiment turning negative and impacting share prices for junior and major players.

Benchmark Mineral Intelligence’s lithium price index had fallen 17 percent in 2019 as of the end of September, while Fastmarkets has also seen prices weaken throughout the year. Despite this, analysts agree demand is set to surge in the long term.

Click here to read more about what happened in the lithium space in Q3 and what’s ahead for the battery metal in the last quarter of the year.

Shares of Rio Tinto were trading up 0.41 percent on Wednesday (October 23) at AU$89.80 in Sydney. The company’s share price has increased 17.16 percent year-to-date.

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

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