PDAC 2016: How lithium has become a rare winner amid the commodity slaughter

The commodity slaughter of the last five years has left very little metal unscathed. Almost.

There is really a notable exception. Little-known lithium has been a solid performer for the last several years, and has simply skyrocketed recently due to expectations of soaring demand from electric vehicles and market distortions in China.

“You could argue it’s done better than anything,” said Jon Hykawy, president of Stormcrow Capital Ltd., which tracks the lithium market. Having said that, he noted the sky-high prices appearing out of China don’t tell the whole story.

The lithium market is tiny within the grand general scheme of things, with total need for roughly 180,000 to 200,000 tonnes annually. It is not an exchange-traded commodity, and it is instead bought from direct contracts between suppliers and users.

But it’s a space investors happen to be watching closely for years because of its crucial use within batteries, particularly for planet. As Tesla Motors Inc. along with other automakers increase electric vehicle production in the coming years, interest in lithium batteries is for certain to increase. Goldman Sachs called it the “new gasoline.”

That is reflected in the prices. Battery-grade lithium carbonate, which sold for around US$5,800 a tonne in 2011, was going for US$6,880 at the end of 2013 and around US$8,000 today. That performance looks incredible when harmonized against nickel or aluminum.

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China is really a story on its own, as lithium prices have doubled within the last five months to absurd amounts of as much as US$18,000 a tonne. There are concerns about inventory shortages in China as domestic information mill no more getting steady supply from an Australian operation they trusted for a long time. Consequently, they are desperate to get material and paying whatever it takes to secure some.

Hykawy said lithium demand could effectively double to 400,000 tonnes annually inside a decade. Other forecasts are more modest. But the overall outlook continues to be far healthier than most metals, that are being rattled due to oversupply and slowing demand from China.

No other commodity will keep up with lithium. Rare earth elements, which enjoyed one of the greatest commodity bubbles ever a few years ago, have dropped a lot that certain of the very most well-known companies in the space (Avalon Rare Metals Inc.) recently changed its name to Avalon Advanced Materials and shifted its focus to lithium.

Even graphite, another metal whose fortunes are closely tied to electric vehicle demand, has performed poorly.

The Tesla gigafactory is not yet pulling around the chain of supply, and you’re already seeing these crazy (lithium) prices.

“You might have thought graphite would rally like lithium, since it is included as well during these batteries in large volume,” said Guy Bourassa, leader of Nemaska Lithium Inc., a junior miner having a project in Quebec.

“But the capacity of the existing (graphite) producers is such that it can satisfy the increase in demand. That isn’t the case within the lithium sector.”

Lithium demand has been growing steadily by about nine or 10 % a year for the past 5 years. To date, supply continues to be sufficient to satisfy demand. But because demand rises alongside electric vehicle production, it will likely be tough for that supply side to maintain.



“It’s putting a large amount of onus on current producers plus some of the juniors to get their act together,” Hykawy said.

The lithium market is an oligopoly with only four companies manipulating the vast majority of supply: Albemarle Corp., SQM SA of Chile, FMC Corp. and the Chinese firm Chengdu Tianqi Industry Group.

There are only a handful of juniors in almost any position to add to supply within the next several years, including Orocobre Ltd., Nemaska, Galaxy Resources Ltd., General Mining Corp., Neometals Ltd. and RB Energy Inc. (that is currently in creditor protection).

Bourassa said there are four lithium development projects currently permitted (including Nemaska’s), and each you might have to reach production to satisfy a potential supply gap of 100,000 tonnes within the next couple of years.

That won’t be easy. The collapse of RB Energy, which had a liquidity crisis in 2014, demonstrated the challenges of bringing these projects to market. Orocobre has faced problems ramping up its operation. And also the businesses with lithium projects will have to raise significant capital with what remains a challenging market for junior mining companies.

Of course, not every signal is bullish. Lithium skeptics will point out the electric vehicle marketplace is still something of a question mark. Until the demand materializes, it’s impossible to understand how fast consumers will embrace these vehicles. And while everyone in the lithium clients are looking forward to Tesla’s gigafactory in Nevada, that is likely to produce more lithium ion batteries each year than the world produced in 2013, the factory won’t begin production until next year and is not expected to hit full capacity until 2020. Hykawy noted that gigafactories will replace some smaller production sites that will shut down, so they don’t necessarily represent an enormous transfer of demand.

But for the time being, the sheer excitement of what looks to be around the corner is driving major momentum within this industry.

“The Tesla gigafactory is not yet pulling around the chain of supply, and you are already seeing these crazy (lithium) prices,” Bourassa said. “It’s a fascinating spot to be presently.”

pkoven@nationalpost.com

Twitter.com/peterkoven