Lithium 2019: Dazed & Confused

As is my normal practice, I have spent a lot of time flying to various corners of the lithium world this year. For the record what I write is my perspective. You should always DYOR and challenge assumptions – mine or anyone else’s. Of course I am not always correct but I write without equivocation and I stand on my record.

Last week I was in Australia. Over the course of a week I spoke at three events and had various meetings in Perth and Melbourne with over four dozen individuals at some level of the lithium supplier/investor food chain. I recorded #GlobalLithiumPodcast episodes with Pilbara (CEO Ken Brinsden and COO Dale Henderson) and Primero CEO Cam Henry. Remember? It was well over two years ago when I first wrote that Primero would become a significant influence in the lithium world.

I also met and recorded an episode with Colleen Yates, the CEO of Regional Development Australia – Perth, the woman behind the “Lithium Valley” report. I met the governor of Western Australia at a dinner and heard presentations / updates from several juniors. A conference I attended (LatAm Down Under) included many participants from South America which provided the added benefit of getting to spend time with mining officials from Argentina and Chile. I also met the new Chairman of SQM for the first time. On my 2018 visit to Perth I met with Wesfarmers so I was well aware of their interest in lithium. Their recently announced deal with Kidman was a major topic of conversation during my time in the city. It was a busy week with a decidedly more global feel than most visits “down under”.

My presentations focused on a few key topics: 1) the ongoing lithium oversupply myth, 2) the fact that despite claiming over 40% of the global lithium market (even the Honorable WA Governor Beazley cited the share number in prepared remarks at a dinner I attended) currently Australia has zero % share of the global lithium chemicals market, 3) the rapidly growing battery market needs all the hard rock and brine based lithium it can reasonably expect to get in the coming decade so the debate over which source is “better” is pointless – each has strengths and issues, 4) it was over two years ago when I first said that despite “panic based” prices in excess of $20K / MT in 2016 that lingered into 2017 the “new normal” price for battery quality lithium carbonate would settle into a range of $12K to 14K/ MT. My message in Oz was that Morgan Stanley’s early 2018 call for price to fall to almost $7K/MT by early in the next decade was then and is now - nonsense. Even if short term circumstances result in a brief period of battery quality material falling below $12K; this will be a short lived exception not the rule in the next two or three years.

Of course, those who want to believe the lithium chemical oversupply narrative take comfort in the fact that pricing for low quality brine material from Qinghai and Orocobre has dropped below $10K MT but this is a small part of the market and most of this material cannot be used even in low end batteries without additional processing. Yes, the pricing of three of “Big 4” has fallen (ALB is the exception because they were supplying at below market pricing based on their curious “strategy”) but not because of massive oversupply.

I said back in 2017 and will say again, that you don’t need a third party to get a bellwether price, simply look at SQM’s quarterly numbers which provide a reasonable reflection of global pricing. SQM’s reporting enables a simple calculation the LCE price on the two major products going into the battery market. Since the vast majority of SQM’s sales are carbonate the LCE price is currently only slightly inflated based on the hydroxide volumes and the quarter to quarter to change is an excellent trend barometer. The Q1 2019 number will be published tomorrow.

Forgive this brief digression to put my price belief into perspective……

My Lithium 2017 Halftime Report published on 7/3/2017 was not the first time I wrote about the “new normal” price. So at a time when I was personally selling hydroxide for prices well north of $20K/MT I clearly stated that my belief that battery quality lithium supply would remain tight for five to seven years but prices would moderate based on the cost curve. I believed the panic induced price peak was unsustainable. I called for lower prices long before Morgan Stanley came out with their thesis on oversupply. Ironically Morgan Stanley initially had a supply number LOWER than mine in 2025. People forget their bigger miss was on demand which was grossly understated.  

Back to my time in Oz – the final key presentation point was 5) the lithium industry’s massive unmet need for capital caused by a combination of the oversupply myth AND high profile project failures like RB Energy and “emerging failures” like Nemaska that have discouraged investment in deserving projects. Continued lack of investment will prevent a sustained oversupply of battery quality lithium chemicals between now and 2025. The current excess supply of spodumene concentrate does not equal an oversupply of lithium chemicals due to the current mismatch of conversion capacity in China (and, in time, Australia) able to process the increasing volume of spodumene aka lithium chemical precursor from WA mines. Also don’t believe the narrative to 6% spodumene is a requirement for battery grade chemical production. FMC, now Livent, initially supplied 100% of lithium ion battery demand in the mid-1990s from a hard rock mine producing 5 to 5.1% concentrate. The more critical side of the equation is the chemical processing. Yes, 6% is the current target but only the ill-informed believe this is a requirement to produce “battery quality”.

Lithium is still a very immature industry in Australia where most people improperly classify it as “mining” rather than correctly thinking about hard rock lithium as a chemical business with a mining component. I understand that Australian supply of spodumene concentrate is critical to the battery industry but until Australia gets the chemical part of the lithium equation in place, the major value capture will happen elsewhere.

I was very happy to meet Colleen Yates and hear her narrative on the “Lithium Valley”. Our discussion with Colleen will be episode 41 of the GlobalLithiumPodcast. Colleen’s common sense ideas on where WA should go with respect to the lithium battery market are extremely logical and a contrast to many hyped laden articles/statements that have emanated from various places in Oz. Pilbara’s Ken Brinsden also is from the common sense camp but it seems many others in Australia are still suffering from a southern hemisphere version of “Great Expectations”.

Despite feeling like I didn't change many minds in Perth or Melbourne, my remarks sure got a lot of press - some articles a more accurate reflection of what I said than others.

I found near euphoria on the part of many regarding the Wesfarmers offer for Kidman. Having spoken to Wesfarmers on my 2018 trip to Perth, their interest in lithium did not surprise me. It is too early to tell whether the move by Wesfarmers is the beginning of a re-energized investment cycle in lithium. I am hopeful but what surprised me the most in this regard was the belief that Wesfarmer’s move was the beginning of a bidding war for Kidman. It is possible but in my opinion doubtful. Spoiler alert: stay tuned for episode 42 of the podcast where I tell Wesfarmers why they should be looking at Livent if they want to become a real player in the lithium world holding both hard rock and brine assets. I left Australia with the feeling I always have that I didn’t stay long enough.

I returned home to the announcement that my China favorite Ganfeng continues to make investments holding disproportionately high benefits on the offtake side. The Bacanora deal is just the latest in a series. Ganfeng currently has a full development dance card with their own expansions in China, Cauchari (along with partner LAC) in Argentina and supporting Thacker Pass. I view the Bacanora deal as substantiating confidence in their ability to unlock “soft rock”. Certainly great news for Bacanora shareholders but unlikely to result in meaningful supply from northern Mexico in the next five years. Remember, Ganfeng plays the long game.

As I write this on a bright and sunny North Carolina morning, I remain convinced that it will likely take another full year before many holding the belief in a long term oversupply scenario and a move to sustained battery quality price approaching $7K/MT realize that bringing on new lithium capacity producing >90% of battery quality material is hard and that faith in Morgan Stanley was wrongly placed. If you go back and study Morgan Stanley’s supply and demand numbers supporting their thesis the wrongheaded thinking becomes clear. Look at their near and mid-term supply projections for Wodgina, LaNegra III, Enirgi, Bacanora, etc. How close are they? Time will demonstrate that they were not “in the ball park” regarding lithium chemical supply.

A lack of understanding of how the battery supply chain works has also contributed to the conversation about what is happening in lithium. The 2018 – 19 time frame has seen many lithium and cathode producers miscall the speed of the transition to high nickel cathode. If you don’t believe me – read the earnings call transcripts from Livent and others. The draw down in carbonate inventories preparing for high nickel demand that hasn't happened was another event that made many declare slumping demand. We will see soon enough that the inventory draw down, causes cathode production issues in the next 12 to 18 months and ultimately results in a "spot price" spike. Imagine that - think 2007 and 2016.

EV subsidies are a short term influencing factor on demand but will become less and less important over time. Long story short, the lithium demand growth story to 2025 and beyond is still intact. Many have failed to read the China tea leaves properly and flamed the fires of the oversupply narrative. My belief in a tight market to 2025 and likely beyond will not be fully validated until 2020 or 2021 but I can live with that. Like Ganfeng I am playing the long game.

By early in the next decade we will see annual demand increases for battery quality material in the 100K MT range growing to 200K MT by mid-decade.

So what else is going on in the lithium world? Watch the organizational changes. SQM has made significant changes at the top and, in my opinion, not for the better – time will tell. The recent departures at Livent were appropriate pruning – no doubt in my mind. Management matters which is another reason why you should look at the team LAC has assembled. The recent move of industry veteran Jon Evans into the CEO role is great news for shareholders ensuring LAC is “ready for prime time”. Jon complements an already stand-out technical team. Hard to figure Galaxy’s recent change. The continued dithering at SDV and seemingly desperate press release trying to extrapolate the future of Mt Cattlin from a one-month trend line is a troubling sign.

Look for a long start-up at Kwinana for Tianqi but at least they picked a good industrial site. ALB’s curious choice of Kemerton will likely prove problematic.

The concentrate coming from Wodgina will exacerbate the drop in spodumene price but excess spodumene supply does not create matching conversion capacity so I have no expectation of even a one-year significant oversupply of lithium chemicals in the coming six years. It will take a few years for conversion capacity capable of supplying battery quality lithium chemicals to catch up with spodumene supply - and by then demand will more than match supply.

There is a lot more I could comment on but for now I will leave it to you to consider whether you should buy low now while most lithium share prices are depressed or wait a couple of years and live with the regret that you missed a great entry point. DYOR. As I say on the podcast: “Goodnight and good luck”.