Australia’s Pilbara Minerals (ASX:PLS) has signed a lithium offtake deal with Chinese car manufacturer Great Wall Motors (HKEX:2333) to further develop its flagship Pilgangoora lithium-tantalum project.
Pilbara said on Thursday (September 28) that Great Wall, one of China’s largest vehicle manufacturers, will provide it with $50 million worth of debt financing and an AU$28-million upfront equity subscription for about a 3-percent stake in the company.
In return, the car maker will receive up to 150,000 tonnes per year of chemical-grade spodumene concentrate. At current market prices, that translates to about US$135 million a year.
“[The deal] highlights the strategic importance for the global automotive sector of securing access to large scale, consistent, high quality sources of battery raw materials in low-risk jurisdictions,” Pilbara Managing Director and CEO Ken Brinsden said in a statement.
Pilbara’s offtake agreement with Great Wall is the first investment deal by an automaker into an upstream supplier of lithium raw materials. Until now, offtake agreements have generally been with chemical manufacturers and traders rather than car manufacturers.
It should come as no surprise that a Chinese firm was the first to secure a supply deal, as the country is a leader in the electric car space. China produced and sold more than 28 million cars last year, according to the International Organization of Motor Vehicle Manufacturers, and has set goals for electric and plug-in hybrid cars to make up at least a fifth of its auto sales by 2025.
“While this deal reflects the remarkable progress being made in China, we are also witnessing increasing interest from battery and automobile manufacturers outside of China looking to secure their future lithium requirements, in response to an increasing global market shift towards electric vehicles and off-grid storage,” Brinsden added.
Sales of electric vehicles are expected to reach 14.2 million units in 2025 from under 1 million units this year, according to UBS (NYSE:UBS) analysts. As a result, demand for lithium, a key component in batteries used to power these vehicles, is forecast to soar.
“Manufacturers are scaling capacity four to five times by 2020 and potentially up to 10 times by 2025,” UBS analysts recently said. “Securing raw material supply is taking precedence over price in supplier negotiations.”
Meanwhile, lithium expert Chris Berry said on Twitter that security of supply is still underappreciated. “[It’s] going to be interesting to see how/if other automakers move to secure raw material access,” he commented after Pilbara’s announcement.
Because of the offtake agreement Pilbara will raise its processing capacity from 2 million tonnes a year to 5 million tonnes. At that level, it could reach 800,000 tonnes a year of spodumene concentrate.
On Thursday, shares of Pilbara closed up 1.3 percent in Sydney at AU$0.54. The company has been rising since the beginning of the year, and is up 9.4 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.