Happy New Year everyone! Time is to check out what is in store for us in the coming hunting season. Lithium is in a secular bull market according to Chris Berry and now Galaxy will start M&A season by selling a stake in its "red hot" development in Argentina. We will have a lot of hype and nonsense in Lithium like in every bull market being born on this planet. Institutions will take their positions and start the "unbiased" education of their retail clients with the real push for this Next Big Thing in the mainstream. Retail investors will be primed for slaughter by the filthy promoters riding the wave of 100 and 1 new names in Lithium. Next phase will separate smart investors who will be making money from those who will be separated from their money. Your best guidance will be your own homework and guys like Joe Lowry and Chris Berry can give you a very good head-start.
It is relatively easy this time. The Switch is happening, Energy rEVolution is the Next Big Thing and Lithium is the magic metal at the very heart of it. We have the World Just Before The Internet. You have just to avoid eToys and At Home and find Apple, Google and Facebook in this place...
At International Lithium, we will continue to build our Vertically Integrated Lithium Business with the giant from China Ganfeng Lithium. We will be learning from the best and think very hard how to build value for shareholders. The start is very simple: we are the largest shareholders in this business. Our Holding Company TNR Gold is on par with Ganfeng with its stake in ILC and I personally have around 10% in the Company. The rest of the magic can come with the very hard work. Happy New Year everybody! It is going to be another year of The Switch and a parabolic rise of Electric Cars climbing their S-curve.
Please note that in Chris Berry article Ganfeng Lithium and Tianqi Market Caps are in RMB, while the rest is in dollars.
The Switch.
"I will throw a few numbers just to give you a teaser here. The rest is on this blog for those who are ready to learn. The cost of Lithium in your iPhone is $1 dollar, in Tesla's Lithium battery cost of Lithium is 2-3% in the price of the finished product. We are in a generational shift 2 to 7,000: 2 is the number of the batteries in your father's remote control, more than 7,000 is the number of lithium batteries in Tesla Model S. It takes 63 kg of LCE (Lithium Carbonate Equivalent) to build Tesla Model S 70 kWh battery. Every 1% increase in sales of Electric Cars as part of total auto sales brings new demand for 70,000 t of LCE. Total production last year was 160,000 -180,000 t of LCE. During all our humankind history 1,000,000 EVs were sold before 2015. This year alone we can get 1,000,000 electric cars sold. Worldwide we are still close only to 1% of Electric cars in total auto sales. BYD - EV automaker from China where Warren Buffett is holding a 10% stake, will sell this year 100,000 EVs, it took GM 7 years to sell the same amount 100,000 of GM Volts. China is talking now about California style Zero Emissions Mandate: 8% of all news cars to be electric by 2018 and 12% by 2020. Let's digest it for a minute. With sales of EVs now only above 1% mark, we are talking about the factor of 8X in ... two years time and 12X increase in the number of electric cars produced in China by 2020! Now Goldman Sachs numbers can be really conservative: they are talking about 3 times increase in Lithium Demand by 2025. I am talking about the total disruption of $12 Trillion industries: 4$ Trillion Transportation and $8 Trillion Energy and Utilities. I am talking about all cars being electric very soon.
Now you will better appreciate the following fact that International Lithium Strategic Partner Ganfeng Lithium has more than doubled its total sales in 2015 in just 9 months of this year! We are talking here about Energy rEVolution and Lithium is the magic metal at the very heart of it. Only a few experts, as usual, do really know what they are talking about. Joe Lowry, Chris Berry and Andrew Miller from Simon Moores' Benchmark are taking the floor below.
And The Switch ... The Switch is the coming tide when literally millions of people will be switching very fast (as fast as all those millions of EVs can be made) to the electric cars. GM Bolt will give us the first taste of what is coming. The first two electric cars priced below $40k and with a range of over 200 Miles will change everything. Tesla Model 3 will start the real flood of affordable electric cars which are just better than anything else at the same price from the ICE age. Despite all headlines about Electric Cars on my blog, 99% of all new cars are still powered by the last century technology of controlled explosions and by burning oil in different compositions while killing us all and our planet at the same time. Do you remember the 90s - The World Before The WWW and Information Revolution? Now we have 21st Century and Energy Revolution: The World Just Before The INTERNET. Read more."
And The Switch ... The Switch is the coming tide when literally millions of people will be switching very fast (as fast as all those millions of EVs can be made) to the electric cars. GM Bolt will give us the first taste of what is coming. The first two electric cars priced below $40k and with a range of over 200 Miles will change everything. Tesla Model 3 will start the real flood of affordable electric cars which are just better than anything else at the same price from the ICE age. Despite all headlines about Electric Cars on my blog, 99% of all new cars are still powered by the last century technology of controlled explosions and by burning oil in different compositions while killing us all and our planet at the same time. Do you remember the 90s - The World Before The WWW and Information Revolution? Now we have 21st Century and Energy Revolution: The World Just Before The INTERNET. Read more."
Energy rEVolution: The World Just Before The INTERNET - Lithium’s Boom Year: 2016 In Review.
‘China’ the Centre of the Lithium Universe.
Chris Berry:
Lithium in 2017: Quacking Ducks, Execution, and Continuation of the Secular Bull
By Chris Berry (@cberry1)
There is a famous phrase in resource investing:
“When the ducks are quacking, you feed them.”
The “ducks”, of course are the investment community and the “feeders” here are the companies with shares for sale.
In 2016, the ducks quacked loud and continually for lithium, and rightfully so. The price of lithium chemicals rose dramatically and almost all publicly traded lithium juniors rose as well with some well into the triple digits. Other than zinc or iron ore, lithium was a star performer in 2016.
As I said in June, managing risk and profit taking in the face of lithium’s impressive strength and secular bull market seemed to be the prudent strategy. My warning turned out to be accurate as many of the high flyers in the lithium space ran out of steam.
“When the ducks are quacking, you feed them.”
The “ducks”, of course are the investment community and the “feeders” here are the companies with shares for sale.
In 2016, the ducks quacked loud and continually for lithium, and rightfully so. The price of lithium chemicals rose dramatically and almost all publicly traded lithium juniors rose as well with some well into the triple digits. Other than zinc or iron ore, lithium was a star performer in 2016.
As I said in June, managing risk and profit taking in the face of lithium’s impressive strength and secular bull market seemed to be the prudent strategy. My warning turned out to be accurate as many of the high flyers in the lithium space ran out of steam.
Source: Bloomberg as of 12/29/2016; Returns and market caps in currency of primary exchange.
While I’ve always considered forecasting a fool’s errand, this note offer some thoughts on how those of us involved in the lithium supply chain should approach the sector as tight lithium markets appear to be a foregone conclusion for the next couple of years.
2017 will be the year when execution outranks exploration in lithium value creation. With dozens of lithium juniors claiming promising discoveries, finding lithium is no longer the optimal path to wealth creation. Instead, producing battery grade material at scale for a voracious downstream appetite is. This is the segment of the market that has the most to prove – those companies with de-risked projects and well-defined economics –with most long-term upside.
Based on my analysis, to bring a new lithium mine on-stream will cost approximately $400M USD (about $16,000 per tonne of LCE). In 2016, approximately $400M USD was raised globally in the sector to advance projects. Given my projections of needing one new lithium mine to come on-stream every year between now and 2025 to meet anticipated demand, the supply response is already lagging, requiring accelerated investment in the lithium sector. The lithium market will remain tighter for much longer with every month without a major financing deal.
This means companies such as Lithium Americas (LAC:TSX), Nemaska Lithium (NMX:TSX), and Galaxy Lithium (GXY:ASX) must become creative to avoid excessive dilution to equity holders and take advantage of the current robust pricing environment in the lithium space. I think you’ll see at least one major lithium financing deal announced in the first six months of 2016. Therefore, capital deployment and capital efficiency are the true keys to wealth creation in lithium going forward.
This execution risk extends to major producers as well who could certainly just maintain their operations and continue to generate cash flow from their lithium businesses. However, Albemarle’s (ALB:NYSE) expansion at La Negra, FMC’s (FMC:NYSE) expansion of hydroxide capacity and SQM’s (SQM:NYSE) doubling of capacity allow them to capture both market share and additional margin subject to successful execution of their strategies – a wise investment given this bull market and the oligopolistic market structure.
Given some of the stretched valuations of development-stage companies, I expect the voracious appetite of Chinese companies to extend to the project level rather than M&A surrounding entire companies. The thesis of wise capital allocation doesn’t stop at Chinese shores, though Chinese companies have overpaid for assets in the past.
Regarding lithium pricing, it’s important to think in terms of probabilities. The opaque nature of the lithium business requires this as multiple products are priced and sold to multiple customers. Guessing whether or not lithium prices will rise or fall in a binary manner in 2017 isn’t enough for your analysis. Understanding the probability of a given trajectory is what is important. I find it highly unlikely that lithium pricing will repeat its 2016 performance in 2017. I would agree with Joe Lowry that mid-teens pricing for both battery grade lithium carbonate and hydroxide are a reality in 2017 with a longer term average LCE price of $10,000 to $12,000 per tonne as this becomes the new break even.
As pricing remains robust, this will continue to re-define overall lithium mine economics. While hard rock operational expenses will not be able to match those of brine op exes, the potential for margin expansion across both types of projects means a détente of sorts between the two types of projects.
Part of the reason hard rock development stories in Australia had so much success in 2016 had to do not only with their proximity to China, but more importantly Chinese converters’ urgent need for feedstock. Recent spodumene pricing as high as $900 per tonne is an obvious sign that product will be had, no matter what the cost. The faster feedstock gets to market, the better (especially for investors). GXY and NMT have proven this.
The higher prices for lithium feedstock and chemicals have also reduced the need for extraction technology to lower costs. While I still believe that the lowest cost producer in a given industry will always ultimately win, the obvious need for additional lithium supply dictates that there is room for additional producers along with the expanded capacity coming from existing producers. It appears that “conventional” lithium production will be a resurgent theme in 2017.
While the lithium market overall will expand, this will also cloud the investment picture as marginal projects will be able to secure financing to live to fight another day. This is an unfortunate reality in the small cap resource sector. Your own due diligence here is crucial as most of these “lottery tickets” will end up in tears. Remember the $1 billion that was raised during the last lithium bull market in 2009?
There are, as always, threats to this thesis and they include: battery costs at the cell and pack level slowing their decline; currency fluctuations playing havoc with economic studies; capital sitting on the sidelines due to stretched valuations; another commodity becoming the “story of 2017” and so the ducks stop quacking.
Thinking in terms of probabilities, these are low probability events, but ignored at your own peril. 2017 promises to be more transactional in nature than in years past, but the lithium bull market will remain intact until ample supply can come on stream. This doesn’t appear likely until 2019 at the earliest.
Whether the ducks continue to quack in 2017 is immaterial to the long term shift in how we generate, use, and store energy - a theme I've discussed many times in the past. What is important is altering your strategic and tactical plan as the lithium market continues to grow and evolve in 2017 and beyond.
2017 will be the year when execution outranks exploration in lithium value creation. With dozens of lithium juniors claiming promising discoveries, finding lithium is no longer the optimal path to wealth creation. Instead, producing battery grade material at scale for a voracious downstream appetite is. This is the segment of the market that has the most to prove – those companies with de-risked projects and well-defined economics –with most long-term upside.
Based on my analysis, to bring a new lithium mine on-stream will cost approximately $400M USD (about $16,000 per tonne of LCE). In 2016, approximately $400M USD was raised globally in the sector to advance projects. Given my projections of needing one new lithium mine to come on-stream every year between now and 2025 to meet anticipated demand, the supply response is already lagging, requiring accelerated investment in the lithium sector. The lithium market will remain tighter for much longer with every month without a major financing deal.
This means companies such as Lithium Americas (LAC:TSX), Nemaska Lithium (NMX:TSX), and Galaxy Lithium (GXY:ASX) must become creative to avoid excessive dilution to equity holders and take advantage of the current robust pricing environment in the lithium space. I think you’ll see at least one major lithium financing deal announced in the first six months of 2016. Therefore, capital deployment and capital efficiency are the true keys to wealth creation in lithium going forward.
This execution risk extends to major producers as well who could certainly just maintain their operations and continue to generate cash flow from their lithium businesses. However, Albemarle’s (ALB:NYSE) expansion at La Negra, FMC’s (FMC:NYSE) expansion of hydroxide capacity and SQM’s (SQM:NYSE) doubling of capacity allow them to capture both market share and additional margin subject to successful execution of their strategies – a wise investment given this bull market and the oligopolistic market structure.
Given some of the stretched valuations of development-stage companies, I expect the voracious appetite of Chinese companies to extend to the project level rather than M&A surrounding entire companies. The thesis of wise capital allocation doesn’t stop at Chinese shores, though Chinese companies have overpaid for assets in the past.
Regarding lithium pricing, it’s important to think in terms of probabilities. The opaque nature of the lithium business requires this as multiple products are priced and sold to multiple customers. Guessing whether or not lithium prices will rise or fall in a binary manner in 2017 isn’t enough for your analysis. Understanding the probability of a given trajectory is what is important. I find it highly unlikely that lithium pricing will repeat its 2016 performance in 2017. I would agree with Joe Lowry that mid-teens pricing for both battery grade lithium carbonate and hydroxide are a reality in 2017 with a longer term average LCE price of $10,000 to $12,000 per tonne as this becomes the new break even.
As pricing remains robust, this will continue to re-define overall lithium mine economics. While hard rock operational expenses will not be able to match those of brine op exes, the potential for margin expansion across both types of projects means a détente of sorts between the two types of projects.
Part of the reason hard rock development stories in Australia had so much success in 2016 had to do not only with their proximity to China, but more importantly Chinese converters’ urgent need for feedstock. Recent spodumene pricing as high as $900 per tonne is an obvious sign that product will be had, no matter what the cost. The faster feedstock gets to market, the better (especially for investors). GXY and NMT have proven this.
The higher prices for lithium feedstock and chemicals have also reduced the need for extraction technology to lower costs. While I still believe that the lowest cost producer in a given industry will always ultimately win, the obvious need for additional lithium supply dictates that there is room for additional producers along with the expanded capacity coming from existing producers. It appears that “conventional” lithium production will be a resurgent theme in 2017.
While the lithium market overall will expand, this will also cloud the investment picture as marginal projects will be able to secure financing to live to fight another day. This is an unfortunate reality in the small cap resource sector. Your own due diligence here is crucial as most of these “lottery tickets” will end up in tears. Remember the $1 billion that was raised during the last lithium bull market in 2009?
There are, as always, threats to this thesis and they include: battery costs at the cell and pack level slowing their decline; currency fluctuations playing havoc with economic studies; capital sitting on the sidelines due to stretched valuations; another commodity becoming the “story of 2017” and so the ducks stop quacking.
Thinking in terms of probabilities, these are low probability events, but ignored at your own peril. 2017 promises to be more transactional in nature than in years past, but the lithium bull market will remain intact until ample supply can come on stream. This doesn’t appear likely until 2019 at the earliest.
Whether the ducks continue to quack in 2017 is immaterial to the long term shift in how we generate, use, and store energy - a theme I've discussed many times in the past. What is important is altering your strategic and tactical plan as the lithium market continues to grow and evolve in 2017 and beyond.
DISCLAIMER AND INFORMATION ON FORWARD LOOKING STATEMENTS
The material herein is for informational purposes only and is not intended to, and does not constitute, the rendering of investment advice or the solicitation of an offer to buy securities. The foregoing discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (The Act). In particular when used in the preceding discussion the words “plan,” confident that, believe, scheduled, expect, or intend to, and similar conditional expressions are intended to identify forward-looking statements subject to the safe harbor created by the ACT. Such statements are subject to certain risks and uncertainties and actual results could differ materially from those expressed in any of the forward looking statements. Such risks and uncertainties include, but are not limited to future events and financial performance of the company which are inherently uncertain and actual events and / or results may differ materially. In addition we may review investments that are not registered in the U.S. We cannot attest to nor certify the correctness of any information in this note. Please consult your financial advisor and perform your own due diligence before considering any companies mentioned in this informational bulletin.
The information in this report is provided solely for users’ general knowledge and is provided “as is”. We make no warranties, expressed or implied, and disclaim and negate all other warranties, including without limitation, implied warranties or conditions of merchantability, fitness for a particular purpose or non-infringement of intellectual property or other violation of rights. Further, we do not warrant or make any representations concerning the use, validity, accuracy, completeness, likely results or reliability of any claims, statements or information in this research report or otherwise relating to such materials or on any websites linked to this report.
The content in this report is not intended to be a comprehensive review of all matters and developments, and we assume no responsibility as to its completeness or accuracy. Furthermore, the information in no way should be construed or interpreted as – or as part of – an offering or solicitation of securities. No securities commission or other regulatory authority has in any way passed upon this information and no representation or warranty is made by us to that effect. Chris Berry owns no shares in any of the companies mentioned in this report.
All statements in this research report, other than statements of historical fact should be considered forward-looking statements. Some of the statements contained herein, may be forward-looking information. Words such as “may”, “will”, “should”, “could”, “anticipate”, “believe”, “expect”, “intend”, “plan”, “potential”, “continue” and similar expressions have been used to identify the forward-looking information. These statements reflect our current beliefs and are based on information currently available. Forward-looking information involves significant risks and uncertainties, certain of which are beyond our control. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking information including, but not limited to, changes in general economic and market conditions, industry conditions, volatility of commodity prices, risks associated with the uncertainty of exploration results and estimates, currency fluctuations, exclusivity and ownership rights of exploration permits, dependence on regulatory approvals, the uncertainty of obtaining additional financing, environmental risks and hazards, exploration, development and operating risks and other risk factors. Although the forward-looking information contained herein is based upon what we believe to be reasonable assumptions, we cannot assure that actual results will be consistent with this forward-looking information. Investors should not place undue reliance on forward-looking information. These forward-looking statements are made as of the date hereof and we assume no obligation to update or revise them to reflect new events or circumstances, except as required by securities laws. These statements relate to future events or future performance. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. For a more detailed disclaimer, please click here."
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