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Lithium for the “Hungry Red Dragon”

Part two of a look at Oxford Resource Explorer's lithium teaser pitch

By Travis Johnson, Stock Gumshoe, July 26, 2017

I went into a lot more detail on the David Fessler’s teased “ultra-lithium” company on Tuesday, but there was also some curiosity about the second lithium stock he hinted at in those ads for his Oxford Resource Explorer, so I’ll take a quick look-see at that one as well.

If you want to go back and start at the beginning and read my more exhaustive blather about the lithium market, just click here for that piece.

Go ahead, we’ll wait.

Ready? OK, here’s what Fessler says further down the ad:

“I’ve also found another play to help you pocket substantial gains from the lithium megatrend…

“Fourfold Demand From the ‘Hungry Red Dragon’ ….

“… in early 2016, spot prices in China for battery-grade lithium leaped 196% higher in just six months.

“In other words, the price nearly tripled in about half a year.

“It’s just the start of China’s lithium supply shortage, which is setting up to become one of the biggest gaps in history, dwarfing every other commodity crisis.”

OK, so what’s the stock? He implies that his previous teased company, which we now know was Orocobre, “is going to take care of America’s massive lithium needs,” and that this other stock, which is Australian, is going to benefit from China.

Which is a little silly, it’s a global market and companies sell where they get the best price — though Australian lithium does have a nice transportation advantage over South American lithium. Orocobre has talked about shipping lithium carbonate to Europe and Asia, I don’t know if they’ve shipped any to the United States, and their joint venture partner, Toyota Tsuho, has first purchase rights (Toyota Tsuho is the trading arm of the Toyota conglomerate, one of their jobs is to source raw materials — about a third of the company is owned by a combination of Toyota Motor Corp. and Toyota Industries), so their production is much more likely to be headed to Japan and China than anywhere else… though Toyota, of course, manufactures around the world (and has talked about building additional lithium ion battery plants in both Asia and North America).

But silliness aside, who is this other company?

“They Wisely Loaded Up on a Resource No One Wanted…

“This company holds all the rights to a mine site in Western Australia, a relatively close distance to mainland China….

“They saw this lithium shortage coming, and they bought up the rights to one of the best production sites in the world on the cheap, back when no one else wanted it….

“Their traditional “hard rock” mine is already up and running… and on January 2, 2017, the company proudly shipped about 10,000 tonnes of lithium to Lianyungang Port in China.

“Better yet, it’s on track to up production to 160,000 tons in 2017. At full capacity, the mine could produce more than 1.6 MILLION tons of lithium per year.”

OK… any other clues?

Sure, here’s one:

“This company has large resources, a new mine and other new projects in the pipeline… and yet it’s still small, with a $780 million market cap.”

And a final tease from Fessler:

“All I know is that I expect that the stock could surge 200% for a potential triple in the next two years.”

OK… well, we already know from our previous piece that Fessler expects the price of lithium to rise by about 300%, so presumably it should be pretty easy to make a lithium producing stock keep up with that rise. Which one is this?

This, sez the Thinkolator, is Galaxy Resources (GXY in Australia, GALXF OTC in the US), which is the other company that has recently started up a new lithium production facility — though theirs is a hard rock mine at Mt. Cattlin in Australia, producing spodumene that is crushed and turned into a lithium ore. Right now, they have facilities on site to refine things a bit and bring the ore up to about 6% lithium, and then that ore is shipped to China where lithium carbonate or lithium hydroxide is produced.

This is not a new process, one of the largest lithium producers in the world is Talison, which owns 51% of the Greenbushes mine, nearby in Western Australia — Greenbushes is the source of much of the world’s tantalum and a good chunk of the world’s known lithium reserves (about 13 million tonnes of lithium, I think). Greenbushes is also in the process of expanding and will soon be able to produce roughly 180,000 tonnes of lithium carbonate equivalent, with Talison and Albemarle (which owns the other 49% of Greenbushes) both planning local processing plants to produce lithium hydroxide and reduce the need to ship ore to China.

And it’s mining, so of course it’s not particularly easy or simple — Mt Cattlin produced lithium concentrate for several years until it was put on “care and maintenance” back in 2012, presumably because of lack of financing or demand, and the “restart” last year took longer than expected and had some cost overruns… but so far, at least, it appears to be going well this year. They have had three shipments of ore to China, the ore is better than the minimum (it has to be at least 5.5% lithium, it has been closer to 6%, so pricing has beat expectations), and they do indeed have the capacity to ship 160,000 tonnes to China each year.

This mine has a long life based on current reserves, the last update I saw was that it has 17 years of production — so that’s good, and they are spending some money to upgrade the production facilities to provide a higher grade spodumene ore to their Chinese customers, which could improve pricing a bit further. This spodumene production has recently had a cash cost of $393/tonne, and they are contracted to receive $830/tonne for 5.5% grade ore, so that’s a nice cash operating margin of better than 50%, though I don’t know that it accounts for shipping or marketing costs or debt service. At 160,000 tonnes a year, that would mean the mine has roughly $70 million in cash flow before marketing and other costs, presumably including taxes and royalties (I don’t know what those are).

The real goal, however, seems to be to use this cash flow to develop Galaxy’s own lithium brine project in Argentina, Sal de Vida. Sal de Vida has, they say, the potential to generate operating cash flow (before interest and taxes) of $273 million/year at full production, which is a big upgrade from the numbers they had for this project a year ago. The Galaxy-estimated post-tax Net Present Value (NPV) at an 8% discount rate is now $1.4 billion for Sal de Vida.

So that’s a lot for a company with a market cap of A$750 million, which is only about UYS$590 million. Sounds fairly promising, though there is obviously some investor concern about the pace of production or about how much they’re going to spend in Argentina, because the stock has been drifting down this year. They did do a 5:1 share consolidation a few months ago, so keep that in mind if you browse through the analyst research reports and see older 50-cent price targets (that would be A$2.50 now, for example).

It’s a pretty compelling story, with the major negative for the year seemingly to be a fear of oversupply — there’s a bunch of spodumene apparently coming on the market from Mineral Resources (MIN.AX, MALRY) thanks both to its Mt. Marion spodumene mine and to the recent large lithium upgrade at their Wodgina mine in Pilbara, which had previously really just been an iron ore mine but now seems likely to turn into a spodumene operation 2-3X as big as Galaxy’s Mt. Cattlin. Wodgina, particularly, appears to be one of those things that pops up every now and then to surprise markets and upset the consensus a little bit, “hey, I didn’t realize that lithium was there!”

Which means, if the primary concern is that there might be a temporary oversupply of spodumene for Chinese buyers, there could be pricing worries. That hasn’t shown up yet in the numbers or projections, from what I can tell, so it’s really just a question of whether the end market demand is going to continue to grow and overwhelm supplies in the next few years or whether the global supply ramp-up will have overshot demand, at least temporarily.

You really can’t swing a stick without hitting an opinion about the lithium markets, with lots of pundits opining about how the supply/demand dance is going to play out — we know that demand is surging, but we also know that there has already been a pretty strong supply response, and that supply in the past has been constrained more by lack of demand than by scarcity… there is a lot of possible production growth to come not just from these hard rock spodumene miners in Australia, but from Chile and Argentina in the heart of lithium country, and even from Bolivia over the much longer term if that country ever decides to exploit its massive untapped salars. Spodumene mining startups can be pretty quick at established mines, and for the established salar players like Albemarle and SQM it’s also relatively easy to expand production — it just takes 2-3 years to get new evaporation pools up and running and cycling through on a commercial scale, since the evaporation process requires time.

Or it’s easy theoretically at least — Chile has quotas that SQM is close to hitting, and lots of political drama about whether SQM will be allowed to expand, which has taken some efficiency out of that situation — though Albemarle got the green light for a big expansion in the Salar de Atacama in Chile, which is by far the top lithium producing area in the world and the most established, efficient area for extraction.

Other countries can get there and have the resources, particularly neighboring areas like the salars being produced by Orocobre and explored by others in Argentina, but, as we’ve seen with Orocobre, starting up fresh in a brand new area takes a lot longer than just putting a couple new pools into the massive lithium-industrial complex that SQM and ALB have established in Chile. There’s another column that Reuters published just last week on the supply/demand projections here, and the guesses shared there are probably better than mine. There are a lot of moving parts, and nobody knows for sure.

But yes, though different battery chemistries are in R&D and being tested all the time, most folks I hear from seem pretty convinced that the next decade or so (at least) of electric vehicles is going to rely on lithium ion batteries — and even if those batteries tend to get slightly more efficient and use less metal each year, that’s going to mean a substantially higher baseline demand for lithium.

Lithium producers are not surprised by this, it’s been expected and understood for a decade, but predicting the timing of that imbalance, if it comes, is trickier than the overly simplified charts that indicate “oversupply in 2019” or “deficit in 2022” would make it appear.

Galaxy Resources is interesting, and the economics seem to make sense — their Mt Cattlin mine, at least at first glance, looks like the numbers are better than I would have thought for a relatively small spodumene mine, and it’s promising that they have possible growth from the development of Sal de Vida over the next five years or so (if all goes pretty well), but certainly a lot depends on the actual operations as they ramp up Mt Cattlin and try to begin to develop Sal de Vida (which will be expensive and time consuming, probably similar to Orocobre’s development story over the past five+ years), and, even more so, on what the actual price of lithium turns out to be over the next few years.

I’m sure there are many among you who have a strong opinion on those vicissitudes of lithium supply and demand, or on the prospects for Galaxy Resources (or the next wave of developers behind them in both South America and Australia)… if you’ve got thoughts or ideas to share, please spit ’em out with a comment below. Thanks!

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5 years ago

Travis, please tell us about the other 1/3 of a lithium battery, Cobalt

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👍 15112
5 years ago

When did you buy into eCobalt Solutions?

5 years ago

Would appear to be a pretty ugly chart. Potential topping pattern on the weekly.

👍 45
5 years ago