If you’re reading this article, it means you probably have at least a passing interest in the mining and metals space. You may even be an investor, or were at one point, until your portfolio was decimated by falling metal prices, absurd value destroying M&A transactions, and an endless stream of incompetent management teams. During a decade of near unprecedented growth in the equities markets commodities have been pretty much pulverized; seeing prices drop in a manner not witnessed since the dot-com boom of the 90’s.
Sad times for the would-be mining speculator.
However, there has remained a bastion of hope in the so called “battery metals” space; the undeniable star of which is lithium.
I’ll be the first to admit that I was slow to take notice of the lithium space, and it wasn’t until this past spring that I decided it was time to play catch up and get to know the sector.
The fundamentals are compelling (more on that later), but an aspect I found challenging was actually visualizing a lithium project and the extraction process. Extracting lithium from liquid brines is a very different process than the hard rock mining I’m accustomed to, and I was keen to get out in the field and see firsthand what these operations actually look like.
After a bit of research, and many recommendations, I got in touch with Millennial Lithium who offered to show me around their Pastos Grandes project in the Salta region of Argentina.
Salta the city, capital of Salta the province, is a beautiful town located in the foothills of the Andean Cordillera in North Western Argentina. The streets wind amongst neo-classic architecture and a never-ending series of bodegas and steak houses.
Only a few hours from the capital the province plays host to some of the country’s most promising lithium deposits and has been at the heart of a “lithium rush” that’s occurred in the region over the past two years.
In 2016 Millennial Lithium (TSX.V: ML) secured the 8,664 Ha Pastos Grandes project 4 hours north west of Salta, in a region referred to as the lithium triangle.
The first thing you notice when visiting a salar in Salta Province is that they’re high… like, really high.
After rounding a pass at almost 5,000m elevation a couple of hours outside the city I promptly proceeded to pass out in the back of our truck on the way to site. In my defense, a long flight and copious amounts of steak and Malbec the night before greatly aided in this process. But it’s hard to complain too much about a drive that affords views like these (even with the lack of oxygen):
Despite the height, and the cold Argentina, is the place to be these days when it comes to lithium. Home to some of the largest, and richest lithium brine bearing salar on the planet Argentina, and Salta in particular, has been receptive to international exploration companies. Unlike their Chilean neighbors who, despite typically offering the most attractive investment environment in the region, declared lithium a strategic metal in the 70’s and have hampered foreign investment ever since. Today only two firms (SQM and Albemarle) are allowed to extract brines in Chile and are subject to strict production quotas.
By contrast Argentina’s new president Mauricio Macri has worked to undo years of protectionist policies implemented by the previous government and beginning the process of opening up the country to foreign investors (including lithium).
If you’ve been looking into the Li space you’ve probably heard the term lithium salar thrown around on more than a few occasions. Salar is the Spanish term for a salt flat, a dried lake where salt and other minerals have filled a basin and crystalized over hundreds or thousands of years. A lithium salar is a salt flat that contains lithium bearing brines underneath.
And, what are brines, you ask?
Essentially, salt water that contain other dissolved minerals such as iodine, lithium, magnesium, potassium, and bromine. Lithium bearing brines are those that contain enough dissolved lithium to be considered economically viable to extract. The liquid brines are contained beneath the surface and must be drilled for and pumped out of wells to obtain the dissolved lithium.
Not all lithium is produced from brines, it is also found in hard rock (primarily pegmatites) and clay. But more than 50% of the worlds lithium production is extracted from brines, and the lithium triangle contains 54% of the planets known lithium resources.
Australia is the world’s largest lithium producer, despite the fact that production comes from hard rock deposits that are far more expensive (≈2x) to operate than lithium brine operations. Despite having only 17.3% of global lithium resources Australia manages to generate 43.6% of the world’s production.
This should largely be attributed to the ease of conducting business in Australia (compared to South America).
But, if Argentina continues to transform itself into a mining friendly jurisdiction where companies can reliably operate (as appears to be the intention) the opportunity is massive.
Because one thing is for certain: it’s a hell of a lot cheaper to pump water than mine rock.
The first thing you notice when stepping onto the Salar de Pastos Grandes is that it’s white… blindingly white.
(I know it was the heart of the Argentine winter, but when you live in a city that winter equates to rain and darkness it’s always somewhat confusing to see the sun and freeze at the same time.)
Despite being located nearly 4,000m above sea level the project is only 154 km from the city of Salta and easily accessible by car.
After an early start we arrived on site well before noon. Key to this visit, and the person I was most looking forward to meeting was Iain Scarr, COO of Millennial.
Ian is an English/American geo who has spent over a decade in Salta. He was previously a senior executive with Rio Tinto’s industrial metals division in the region, after that he took an Argentine lithium project (Lithium one) through to feasibility. Ian is exactly the type of person investors need to be looking for when evaluating a project, namely: someone who has done it before.
Tolstoy said, “Happy families are all alike; every unhappy family is unhappy in its own way.”
Exploration projects are much the same, failures all seem to have their own unique way of fucking things up… but every successful project has:
- An experienced technical leader;
- Someone who knows how to get things done in the jurisdiction they are operating;
- …and has a track record of executing on similar projects.
Ian also carries the added benefit of being married to the premier hydrologist in the region, a scientist who has studied nearly every salar in the area (makes for productive dinner table conversation no doubt).
The site consists of a series of drills, pumps and ponds. ML is in the process of upgrading their resource estimate, completing a feasibility study and constructing a series of test ponds. The key at this stage of the project is test work, optimizing the processes, and working out any kinks prior to moving towards full-scale production.
Brines are pumped from wells beneath the surface into a series of large shallow evaporation ponds. The brines flow from pond to pond, each subsequent step increasing the concentration of lithium and reducing impurities by solar evaporation. At Pastos Grandes brines will move between 3 sets of ponds before reaching a final concentration of 1.5-3.0% Li. After an initial concentration period of 8-12 months, beginning while the ponds are still under construction, feed to the plant will be continuous.
Upon completion of the evaporation circuit the concentrated brines are fed into a lithium carbonate plant which produces a dry “battery grade” lithium carbonate product that can be easily packaged and sold. Upon achieving commercial production Millennial intends to produce 25,000 tonnes of lithium carbonate per year.
The first series of ponds are currently under construction (check out a video of pond construction here), while plans are underway to begin construction of a test plant in Q4 of this year.
Today Millennial finds itself in somewhat of an unusual position. They have significant cash reserves (CAD$62M), next to no debt (< CAD$0.5M), and a track record of executing on their goals.
Pastos Grandes is sitting on a 400,000 tonne M+I resource, with at least a 25 year mine life, and has completed an initial PEA with very promising results.
But, Millennial is being hammered by the market…
With a market cap of CAD$139M Millennial has seen its share price drop by over 60% in the last 7 months; despite successfully progressing a new feasibility study, working to expand their current resource at Pastos Grandes, and beginning construction on the first set of evaporation ponds.
Add to this the fact that Chinese energy conglomerate GCL Poly Energy Holdings Limited has completed a nearly CAD$38m strategic investment into the company (now owning nearly 18% of ML), and you have a company well positioned for either a takeover, or the ability to move their flagship asset towards production.
The explanation for this lies in what is happening in today’s lithium market…
A Confused Metal
Unlike oil, only a very small portion of lithium is traded on the open market, because of this the spot price of lithium is largely inconsequential. Instead, most supply is sold through negotiated long-term contracts; The result is that indexing and charting of an accurate/representative price can be very difficult.
To give you an idea of how this effects pricing; current reports show lithium carbonate costs about $10,000/ton outside of China and a whopping $20,000/ton inside of China.
Because the market has trouble valuing lithium, it also struggles to value lithium companies.
While overall the market has seen a price surge over the past few years, the last several months have seen steep declines with many analysts expecting prices to slip further over the coming 2-3 years. This can, in large part, be attributed to an RBC and Morgan Stanley report projecting that over a dozen new lithium projects that will come online by 2021 (most coming from Chile and Argentina) thereby flooding the market with supply.
After reading through various reports, we’ve come up with a range of lithium supply and demand fundamentals on a very conservative basis (assuming low lithium prices).
Despite the fact that analysts are expecting a significant amount of new supply to come online, there is a very real potential for demand to keep pace, if not outpace, the market. These estimates are based on numbers assuming electronic vehicles (EVs) penetration of 4.5% by 2025.
EV bulls will likely claim that such a low penetration rate is heresy, considering the steady rise in EV sales, (even at historically low oil prices) but, below are even more conservative predictions completed by Joe Lowry of Global Lithium LLC.
What do you mean history repeating itself? I’m glad you asked.
Readers of this blog will be familiar with my lukewarm view of sell side mining analysts… but for the sake of augment let’s look at a few predictions leading into the present day. Here is a forecast leading up to 2015, compared to what actually happened:
Many factors account for why production predictions missed by such a wide margin, most of which are beyond the scope of this article.
But it bares mentioning that Morgan Stanley appears to be forgetting one of the key tenants of the mining industry: PRODUCTION TIMELINES PROVIDED BY JUNIOR MINING COMPANIES ARE TYPICALLY COMPLETE BULLSHIT!
[clickToTweet tweet=”Production timelines provided by junior mining companies are typically complete bulls**t!” quote=”Production timelines provided by junior mining companies are typically complete bulls**t!”]
Just because a company says they will be producing in X number of tonnes in Y number of months, in a 3rd rate PEA, doesn’t mean they actually will. In point of fact, they almost certainly will not.
So, when Morgan Stanley assumes that all of these miners will have come online by 2021, simply because they’ve said they would, they stand to seriously misjudge the realities of the industry.
Add to this the challenges of working in developing countries, with shifting economic policies, it becomes very difficult to make accurate predictions and one is safer to err on the side of caution.
So, while there is a plethora of different forecasts out there, and we may very well be in a price bubble, my view is that medium to long-term demand for lithium will continue to be strong.
Perhaps the most well publicized transaction in the lithium space was NextViews acquisition of Lithium-X (tsx.v: LIX) for$265M ($2.61 per share) in early 2018.
At the time LIX’s Sal de los Angeles Project had a resource of:
- 195k tonne Li (indicated)
- 189,130 Li (inferred)
Meaning NextView acquired Lithium-X for $1,359 per tonne of indicated resource (Note: we are ignoring inferred because that’s pretty much just guessing).
Comparatively, Millennial has a resource containing 400,000 tonnes of Li (measured & indicated) and is trading at a market cap of ≈139M. Applying the same metrics employed at LIX, Millennial would be valued around $540M ($6.60 per share), nearly 3x what it is trading at today.
Not only does ML have a larger asset, it’s located in a friendlier provincial jurisdiction, is nearing completion of a feasibility study expected to significantly expand the resource, has begun construction on its test ponds, and has substantial cash in the bank.
By any account Pastos Grande is a superior asset further along the development timeline.
The lithium market is in a state of flux at the moment, as long term demand clarifies and predicted supply fails to come online prices will reach an equilibrium reflective of the true state of the market. For those investors bullish on the sector, and in particular the role South America’s lithium triangle will play, there are few better ways to get exposer then Millennial Lithium.