Lithium Demand Will Rise Significantly: Mansur Khan
TICKERS: EUR53.17, BYDDF, FMC, GXY, LAC; LHMAF, LI, NMX; NMKEF,
ORL; ORE, ROC, RM; RDNAF, TLH, TYHOF
Source: George S. Mack of The Energy Report (5/17/12)
Lithium is lightest of all metallic elements, with low density and
high electrochemical potential. These are essential characteristics
that make the element especially suitable for use in various
power-storage applications, including electric vehicles (EVs). In
this exclusive interview with The Energy Report, Equity Research
Analyst Mansur Khan of Dundee Capital Markets talks about his
favorite junior lithium stocks that he expects to be major
beneficiaries of dramatic growth in lithium-ion battery demand over
the coming decade.
The Energy Report: EVs don't burn gas, but power must come from
some source of fuel, such as nuclear, coal, hydro, gas, solar, geo
or wind. So, what is the value of an electric vehicle (EV)? How
does it help?
Mansur Khan: From a societal and governmental point of view, there
are a number of benefits. EVs can really help reduce carbon
emissions. Their energy efficiency is very high, sometimes over
three times that of conventional combustion engines. I think it can
be argued that, even assuming an EV uses a power-generating mix
that includes carbon-emitting sources such as coal- or gas-fired
power plants, its life-cycle net carbon-emission production is
significantly less—anywhere from half to one-third of that from
comparable combustion vehicles. Reducing our dependence on oil is
another concern, although it's more geopolitical. I think there is
a top-down push to essentially steer the automotive industry into
adopting electric vehicles.
Finally, from the end-consumer point of view, the operating cost of
an EV is expected to be significantly less than an internal
combustion vehicle. On average, they are about one-third the cost
on a per-mile basis.
TER: In January, General Motors Inc. (GM:NYSE) announced that it
would be producing 60,000 (60K) Chevrolet Volts per year, beginning
this year. Does this signal a new wave of EV or hybrid development?
How positive is this for lithium consumption?
MK: GM's commitment to the EV model is reflective of what you're
seeing across the board with major auto manufacturers rolling out
some form of an EV model in their lineup.
Aside from GM and Toyota Motor Corp. (TM:NYSE), Hyundai Motor Co.
Ltd. (HYMLF

TCPK), Nissan Motor Co. Ltd. (NSANY

TCPK;7201:TYO), Volkswagen AG (VLKPY

TCPK)—all the majors have announced their own models. And when
you look on the battery side, you're seeing considerable research
and development (R&D) investment going into battery
manufacturing and technology development. Majors like Chinese
battery and car manufacturer BYD Co. Ltd. (BYDDF

TCBB), of which Warren Buffett owns approximately 10%, and
BASF Corp. (EUR53.17:XETRA) are making inroads into the
technology's development.
To answer your question, this is of course positive for lithium
demand and consumption. Industry consultancy SignumBOX put out an
estimate that electric and hybrid electric vehicles made up about
5% of total lithium carbonate equivalent (LCE) consumption in 2011,
and that's expected to grow to about 25% by 2020. So there's quite
a bit of room for growth there. The industry still has a long way
to go, but in general, it's absolutely positive.
TER: Mansur, what is the lithium-ion battery industry's biggest
challenge right now?
MK: The industry's main challenge is really to scale up in size,
from the small consumer electronics to the larger batteries
required for EVs, and to be able to do this without compromising on
cost, safety and longevity. Technological development may not be
happening as quickly as people had expected a few years ago, but it
is certainly happening, and I think you will see these growing
pains addressed over the coming years as other derivative
applications are opened up.
As manufacturing capacity continues to expand, the cost of these
lithium-ion batteries will come down, and that is already
happening. A few weeks ago a Bloomberg report said the cost of
lithium-ion batteries fell 14% year over year, and has fallen about
30% since 2009.
TER: Your February 2012 report cited a third-party consultancy
firm, Roskill, which found that lithium consumption has
outperformed both industrial production and GDP trends since 2002.
But I don't see that reflected in equities. An index of small-cap
lithium stocks shows a 40% decline over the last 10 years. A mix of
larger- and small-cap companies is down 30% during the same period.
Can you talk about the disconnect here?
MK: Without knowing the specifics of this particular index, I think
I can make some general comments. Our view on this is that there
are two aspects at play here, and both stem from the global
recessionary environment that we are in.
Against this backdrop and coupled with slower technology
development, we have seen a slower-than-expected uptake of
lithium-ion batteries and EVs. The consensus view still holds that
you're likely to see a mass adoption of EVs by about 2015 and
thereafter. We argue that the equities are taking a bit of a
wait-and-see approach to this, and so that would probably be one
aspect of why they have not done so well. EVs currently make up
only a small part of the overall lithium market, as just mentioned,
but they are expected to really drive the majority of the growth
over the coming decade.
The second aspect is more directly linked to equity markets in
general. As you know, stock markets dislike uncertainty and
volatility, and unfortunately we have plenty of both right now. In
this kind of risk-averse environment, small-cap stocks can face the
additional challenge of financing their exploration and development
projects without causing a lot of dilution. So there's a bit of an
added risk that is reflected in small-cap performance. We think
these factors explain why the equity markets have not really kept
pace with the underlying growth and demand for lithium that we are
seeing.
TER: You've written that the lithium market is currently in a tight
supply-demand balance, and that this has prompted capacity
expansions by three of the four major lithium producers. You also
wrote that prices have stabilized in the $5,500–6,500 per ton (/t)
LCE. I realize there are different lithium compounds, but do you
foresee a futures market for lithium?
MK: I think it's too early for that. You would need a market
sizeable enough to maintain a spot supply inventory. Right now,
what we are seeing is that most of the supply and demand is on a
contract-by-contract basis, and these are typically one-year
contracts. There isn't much of a spot market to speak of, and until
you have a secondary market open up, you are unlikely to see a
futures derivatives market develop.
TER: Looking at the lithium equities market today, do you see it as
a deep-value market? Or do you see it as a growth market? Are we at
the foot of a growth curve?
MK: Going to the question of growth, I think that's definitely
there in our view. The majors have been reflecting that, not just
in what they've reported, but also in their outlooks. If you peruse
through some of the recent commentary by the majors, they are all
reporting strong growth in volume and prices, and in general they
expect real growth in lithium demand to continue—anywhere from
6–11% by 2020. So that's a fairly healthy growth in demand. If you
look at Talison Lithium Ltd. (TLH:TSX; Not Rated), for example, it
is saying that the lithium market will almost double by 2020, and
that's even excluding the EV component that you hear so much about.
So that's definitely positive, and there's growth absolutely
happening there.
TER: What lithium equities are you recommending to investors?
MK: When you're looking at the juniors, we believe that only
companies with quality assets that are in advanced stages or have
strategic backing will have a reasonable chance of making it to
production.
I would highlight Nemaska Lithium Inc. (NMX:TSX.V;
NMKEF
TCQX). We have it rated Buy, Speculative Risk with a $1
target price. Unlike the brine developers in Argentina and Chile,
this is a hard-rock developer based in Québec. Its Whabouchi
property project has a Measured and Indicated resource estimate of
25 million (M) tonnes (metric ton or mt) grading at 1.54% lithium
oxide. It also has an Inferred resource of 4.4Mmt grading at 1.51%
lithium oxide.
The company is envisioning a two-phase strategy. Phase one will see
production of 200K tonnes per year (tpa) of lithium concentrate.
This is concentrate, not carbonate, at about a 6% Li2O grade. The
operating cost is about $138/t of concentrate. And the preliminary
economic assessment (PEA) from last year had an initial capex of
$86M for the project.
Phase two essentially envisions a chemical conversion plant that
would produce higher-value downstream chemicals, and in particular
they're looking at lithium hydroxide. The PEA on this option was
just commissioned. It has also done some pilot-level testing that
shows some innovative departures from the conventional process used
to produce lithium hydroxide, and the company is going to be filing
for a patent on this pretty soon. This could be an interesting
development.
Both the definitive feasibility study (DFS) of the concentrate
production and the PEA are expected to be out in Q3/12. The company
has a strategic partner behind it, Chengdu Tianqi Industry Group
Co., the largest lithium battery material supplier in China, which
owns 20% of Nemaska. Tianqi recently entered into an agreement with
Targray Technology for international distribution of lithium
compounds in North America and Europe. We see Nemaska fitting in
quite well with this strategy.
Another thing we like about Nemaska is that it's located in a
mining-friendly jurisdiction of Québec, which is trying to build a
world-class EV industry by supporting R&D and bringing mining
companies and strategic partners together. And of course you could
argue that the open-pit conventional mining process has less mining
and processing risk. Also, there are a couple of upcoming
milestones, the DFS and the PEA. So we like that name.
TER: Another company?
MK: Going over to the brine-developer world, I would highlight
Rodinia Lithium Inc. (RM:TSX.V; RDNAF

TCQX). We have it rated Buy, Speculative Risk, with a target
price of $0.80. This is a lithium brine developer with its flagship
100%-owned Diablillos project in the province of Salta in
Argentina, which hosts resources of about 5 Mmt of LCE and is
adjacent to one of the largest lithium producers in the world, FMC
Lithium Corp.'s (FMC:NYSE; Not Rated) Hombre Muerto project, which
has been producing for decades.
Diablillos is also adjacent to Lithium One Inc.'s (LI:TSX.V) Sal de
Vida project. As you know, Lithium One is currently in the process
of being acquired by Galaxy Resources Ltd. (GXY:ASX; Not Rated),
which has a wholly owned lithium carbonate plant in China. So
that's definitely an interesting development in the area.
Diablillos has high lithium and potassium grades and low impurities
that could enable economic extraction, and the PEA put out last
year suggests robust economics. With cash costs coming in at a bit
over $1,500/t of LCE, along with a strong potash byproduct credit
potential, the company is envisioning production of 15K tpa of LCE.
Aside from the flagship project, Rodinia also has a brine project
in Nevada adjacent to Chemetall Foote's [subsidiary of Rockwood
Holdings Inc. (ROC:NYSE)] existing project there.
But despite all this, the company trades at a large discount to its
brine-base developer peers. We estimate an enterprise value of
about $3/t, compared to the average of about $10/t. We would say
that part of this has to do with Rodinia's relatively early-stage
project and tight cash position. That's a risk, given the nature of
current markets. Management is being prudent with cash, but it is
steadily moving the project forward. Also, it does have the Chinese
company Ningbo Shanshan Co. at its side.
TER: You said your target on Rodinia was $0.80. You have just taken
that down from $0.90, is that right?
MK: That's correct. We put out a commodity update at the end of
every quarter where we go back to the drawing board and look at
foreign exchange (FX) rates and commodity assumptions. So part of
the discount was about the FX, and the other part is that we are
applying a slightly higher discount to the brine developers in
Argentina due to the investment climate resulting from
expropriation of Argentina's largest energy company, YPF from
Spain's Reposol.
TER: You mentioned Rodinia's neighbor producers. You must be
implying potential M&A.
MK: Yes, and overall, what we like about this story is that the
company has a salar that it is not sharing with anyone else, and it
will potentially have two large lithium producers right in its
backyard, FMC and potentially Galaxy, both of which have talked
about expansion. The company has a strong management team, and both
CEO Will Randall and head of exploration Ray Spanjers have
extensive experience in managing projects. And Ray actually was
previously with FMC's lithium division.
TER: Another company?
MK: The second brine company that I would highlight is Lithium
Americas Corp. (LAC:TSX; LHMAF

TCQX). We are rating it a Buy, High Risk with a target price
of $2.60. Now this is a more advanced brine developer, located in
the province of Jujuy. Its Cauchari project hosts a high-grade
resource of 8Mmt LCE. It's had extensive pump tests, pond- and
pilot-level tests, as well as hydrological work done, and the
company is currently on the verge of putting out a DFS on the
project. It's also interesting to note that the DFS will trigger a
decision by its strategic partners, Mitsubishi Corp (8058:TYO) and
Magna International Inc. (MG:TSX, Not Rated), who have the option
to secure 37.5% of lithium production in exchange for financing up
to 37.5% of capital costs. So that's definitely a good arrangement
to have in this kind of market.
Lithium America's PEA from last year had estimated low cash costs
of about $1,434 per ton, based on 20K tpa of phase one production.
And of course one common theme with these brine projects is that,
given their low impurities, there's strong byproduct credit
potential. There's good infrastructure in place. And as I said
they're currently working through the final project approval from
the province of Jujuy, which should be another catalyst for the
stock. By the way, the province of Jujuy had essentially designated
lithium as a strategic metal last year, and both Lithium Americas
and Orocobre Ltd. (ORL:TSX; ORE:ASX) are currently working out
approvals here.
Orocobre will be the last one I'll mention today. We have it rated
Buy, High Risk with a target price of $2.80. This is the most
advanced brine development project in our universe of coverage.
Immediately north of Lithium Americas' Cauchari project is
Orocobre's flagship Olaroz project, which also hosts a high-grade
lithium resource of 6.4 Mmt of LCE. The company already has a DFS
out on the project, and the cash costs are estimated at $1,512/t of
LCE, and once again, given the low impurities, there is potential
for byproduct credit.
A production rate of about 16K tpa is expected by the second half
of 2013, and at the end of last year Orocobre finalized terms with
its strategic partner, Toyota Tsusho Group (TYHOF

TCPK). This will essentially enable Toyota to take an equity
stake of up to 25% based on the project's net present value (NPV)
estimated from the DFS. This also includes debt financing by a
Japanese consortium for 60% of the project capex, which is a bit
over $200M. So the final sign-off on these financing agreements
would occur once the Jujuy provincial approval comes through.
TER: I've enjoyed meeting you very much, Mansur.
MK: Thank you very much, George, I really enjoyed the interview as
well.
Mining Analyst Mansur Khan joined Dundee Capital Markets in 2007 as
an associate covering the industrial, aerospace and special
situation sectors. In late 2010, he switched into Dundee's mining
group, where he covers a range of exploration and production
companies in the uranium and lithium sectors. Since 2012, he has
been providing lead coverage on the lithium sector. Prior to
Dundee, Mansur worked for a number of years at a private design
engineering company on various information systems and operations
projects. He holds an MBA from the Rotman School of Management,
University of Toronto and a Bachelor of Commerce in systems
development from Ryerson University.
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DISCLOSURE:
1) George S. Mack of The Energy Report conducted this interview. He
personally and/or his family own shares of the following companies
mentioned in this interview: None. Streetwise Reports does not
accept stock in exchange for services. Interviews are edited for
clarity.
2) The following companies mentioned in the interview are sponsors
of The Energy Report: Lithium Americas Corp., Lithium One Inc.,
Nemaska Lithium Inc., Rodinia Lithium Inc. and Talison Lithium
Ltd.
3) Mansur Khan: I personally and/or my family own shares of the
following companies I mentioned in this interview: None. I
personally and/or my family am paid by the following companies I
mentioned in this interview: None.
4) Dundee Securities Ltd. and its affiliates, in the aggregate,
beneficially own 1% or more of a class of equity securities issued
by companies under coverage: None.
5) Dundee Securities Ltd. has provided investment banking services
to companies under coverage in the past 12 months: Nemaska
Exploration Inc.
6) All disclosures and disclaimers are available on the Internet at
www.dundeecapitalmarkets.com. Please refer to formal published
research reports for all disclosures and disclaimers pertaining to
companies under coverage and Dundee Securities Ltd. The policy of
Dundee Securities Ltd. with respect to research reports is
available on the Internet at www.dundeecapitalmarkets.com.
http://www.theenergyreport.com/pub/na/13395