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.

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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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July 26, 2017 10:57 am

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

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July 29, 2017 1:27 pm

When did you buy into eCobalt Solutions?

July 26, 2017 11:00 am

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

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July 26, 2017 1:04 pm

A factor not to be ignored, is described in US Patent 3,331,695 once owned by WR Grace & Co and now expired. Alpha-Spodumene, the substance described as a “lithium concentrate” containing about 6% lithium, acts as an accelerant for the hardening of Portland cement. The patent describes adding about one percent of spodumene to 99% of Portland cement, then mixing in the conventional way with sand and fine aggregate, moistening, and casting it into forms to make concrete things…bridge decks, culverts, pipes, wall footings, etc. The compressive strength of the concrete increases by almost a factor of 5, with small additions of Spodumene to the dry cement, usually best done at the mill while the cement is being ground into it’s final, powdery state before shipment to the construction site.

China has set up a financial institution called the Asian Infrastructure Investment Bank and has embarked on a major construction initiative, formally “One Road, One Belt”, colloquially “Silk Road 2.0”, aimed at providing transportation and communications in it’s rural west, and in the adjoining central Asian nations. About half a billion people live in the region, and their poverty is little changed over the past five thousand years. Getting adequate transportation to enable trade, will induce economic growth, because if there’s one thing people don’t voluntarily do, it’s stay poor, when there’s a choice in the matter. At least, that’s the gamble AIIB is taking. A second phase of the gamble: There probably are mineral reserves in Central Asia that could supply the needs of China’s factories. But without transportation to bring in machinery and explore for those minerals, the reserves will never be discovered and the mines will never be built. So, transport is getting built, initially to gain access to Kazakh and Russian natural resources and to provide land routes for exporting China’s industrial goods to Europe, and while those uses help to pay for the construction, risk capital will be applied toward exploring for useful minerals along the new routes.

Hence, a spodumene deposit, in Australia, will find use in that surge of construction activity, because roads, railways, and pipelines are going to require culverts and bridges that will be built with concrete.

Brine-based lithium production is pretty-much tied to battery making and other chemical products. Brine-derived lithium compounds made in South America, can be sent to the Tesla-Panasonic Gigafactory in Nevada for conversion into batteries, then shipped across the Pacific to Asian factories which make the consumer products that will use the batteries. That’s a flaw in the “Hungry Red Dragon” analysis…if empty shipping containers that stocked US store shelves with consumer goods, return to Asia carrying batteries, there’s a net cost savings in both directions, because no one is paying a ship and crew to move empty space across the sea.

Toyota, who are mentioned in this thread, recently unloaded their holdings in Tesla and hence the Gigafactory. Yesterday they announced a “fast-recharging” lithium battery, which instantly captured the imaginations of all the talking heads on TV, guessing that if a car could recharge in 5 minutes, people would be willing to stand outside at a charge station and recharge it every day, on their way home. Obviously, the same talking heads would have taken the story differently, in a blizzard, than on a warm summer’s day. But the big issue that Toyota’s development raises, impacts the market for lithium quite negatively.

Hybrid cars, the ones that have a conventional piston engine but replace the manual or automatic transmission with a generator, a motor, and a battery pack, absolutely depend on fast battery charging…and discharging. The purpose of the battery, in a hybrid car, is to accelerate the car from a stop and bring it up to speed. If Toyota have a breakthrough on faster recharging of batteries, it will be used to improve the performance of their hybrid autos…and likely, everyone else’s at some point. The typical automobile engine is grossly oversized, so that it has enough power to start the car moving from a standstill, without stalling, and with a lot of help from the gears of the automatic or manual transmission. Shift some of this work to a battery, and the engine can be smaller, weigh less, and cost less energy to operate.

Ideally, a car engine should work like an airplane engine…it should run at full power most of the time, and rely on the battery to soak up excess power when the car is stopped in traffic, then use the battery power to speed itself back up. High-octane fuels like E85 ethanol have the greatest value in high-compression engines. When airplanes used to run on piston engines, high-compression engines were the rule, as they made the best use of the engine’s weight, in creating power. A low-compression engine simply wastes energy lifting itself off the ground, and lacks power to haul much of a payload. Many piston aircraft needed 100 octane gasoline. E85, which is 106 octane, could do a great job in car engines designed for high-compression and efficient use of weight. Unfortunately, the wasteful way car designers use engine power, where it’s a factor the 1% of the time that the car is accelerating and it’s unused the 99% of the time that the car is cruising, makes for inefficient use of engine weight. So, presently, we have a surplus of capacity to create high-octane fuel for the next generation of hybrid autos. We certainly know how to build the high-compression, weight-efficient engines for the task…we had them in World War II fighter planes. Generators and electric motors? Ditto. If Toyota have created a superior battery for hybrid autos, the lithium market may be due for a surprising correction.

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July 26, 2017 9:01 pm
Reply to  schubrrw3212


One of the most informative posts I have ever read in Gummyland. Well done!

July 27, 2017 1:19 am
Reply to  schubrrw3212

Thank you for all that info. I thought I was moderately well versed on concrete, but I haven’t previously heard of the spodumene additive and what it does…very interesting. Where it leads to in China looks like it could have an effect – long term of course – but China has a habit of being able to get things built rapidly. Far quicker than we do in the west with all the union slowdowns and so on.

I’m hoping that lithium batteries become available for storing solar power produced electricity at reasonable prices. I spent 17 years living on solar power, and we had to use lead acid batteries for storage. Hopefully, there will be plenty of demand and an equally good supply of lithium for future battery banks.

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July 26, 2017 1:43 pm

I view Galaxy Resources as very undervalued for a new lithium producer that is shipping product and increasing production. They have exceeded production targets and continue with plant optimization. The next 3 shipments are already confir