QUEBEC MINER RUES THE AUSSIE ADVANTAGE
Nemaska Lithium secures deal, but geography makes it tricky
This past spring, Nemaska Lithium Inc.’s chief executive Guy Bourassa returned to Canada from a trip to Asia, jet lagged and tired — and still months away from closing a deal to sell lithium from his company ’s planned operations in Quebec to South Korean battery maker LG Chem Ltd.
“It seems to be taking longer than we expected,” Bourassa said in an April interview.
This week, Bourassa finally closed the deal. LG Chem will buy 7,000 tons per year for five years beginning in 2020 when his mine and conversion plant are expected to be operating.
A major stumbling block, he explained in an interview this week, which helped drag negotiations out for six months, was figuring out where to obtain the ‘market’ price for lithium. In the end, both sides agreed on a formula that considers not only lithium prices in Asia, but also a proposed futures market that the London Metals Exchange plans to launch later this year, third-party reports and even import and export data from various countries.
“Since we started in this field, the main question always is what is the market price — what’s going to be the reference?” said Bourassa. “It differs from one deal to the other, from one country to the other, so it’s a cultural discussion and vision on what is reliable and what is not.”
Of course, things would be a lot easier if his mine were located in Australia instead of Quebec. That country is in the midst of a lithium mine boom whereas Nemaska’s development will be the first new lithium project in Canada in years, when construction is finished around 2020.
Because Australia is so much closer to Asia, where the major battery makers are and a budding electric vehicle industry has translated into rising demand for lithium, Bourassa said mines there can simply ship the hard rock lithium concentrates to an ample number of buyers in Asia.
In contrast, his company had to build an electrochemical plant to convert its mined lithium concentrates into lithium hydroxide, a higher margin product for which fewer buyers exist.
Only by creating a more refined product — lithium hydroxide as opposed to lithium spodumene concentrates — was it economically feasible to build a mine on the wrong side of the globe, in Canada, he said.
“In Quebec you cannot really compete with the Australians on selling concentrates,” said Bourassa. “You cannot compare the two, one has direct access to the market in China, and in Canada, we cannot have access — we need to do the conversion, so the (financing required) is bigger.”
Nemaska’s stock was trading at 86 cents on Friday, up for the week, but still down off its 52-week high of $2.44 like many other lithium producers.
The Quebec City-based company raised financing, including from investors in China, Japan and Korea, to build not only the mine, but an electrochemical conversion plant. As a result of the capital costs, locking up an off-take agreement with buyers such as LG, which ensures the company can sell its lithium, provided an important reassurance to some of Nemaska’s investors, Bourassa said.
Canada’s distance from Asia, and a lack of transparency in the lithium market, hasn’t only slowed Nemaska’s business deals.
Across North America, markets analysts occasionally have been at odds trying to determine what’s happening in the lithium market.
This week, Goldman Sachs published a research report that called fears about an oversupply of lithium, and recent drop in lithium equities, “overdone” and “overblown” — a veiled rebuttal to a widely cited report produced by Morgan Stanley in February that predicted an oversupply of lithium would take effect in 2019.
Goldman took the opposite view to the Morgan Stanley analysts, nine of which are listed on the February report that predicted lithium prices would crash.
“We expect lithium markets to remain sufficiently tight to handsomely reward incumbent producers,” the Goldman analysts wrote.
But they pinpointed two factors that make the lithium market difficult to analyze. First, it is tiny, at about 200,000 tons produced in 2016 compared to iron and steel, which each stood at about 1.6 billion tons. Secondly, it is experiencing rapid growth, and expected to quadruple by 2025.
Those dynamics also make lithium “more rewarding,” the Goldman analysts wrote, and identified 10 projects likely to come online in the coming years — seven of which were in Australia, but none of which are in Canada.
Three remaining projects were in Chile and Argentina, where many Canadian-listed companies are seeking to develop projects. Not mines, these companies plan to build vast brine ponds, sometimes called lakes or salars, which rely on solar evaporation from the desert heat to separate out the lithium needed for batteries.
“It takes time,” said John Wisbey, chief executive of Vancouver-based International Lithium Corp., which is developing a brine project in Argentina. “It can take two years to evaporate a lot, and you’re subject to the vagaries of bad weather — you don’t get as much evaporation if it’s a cold winter.”
Still, Wisbey said his project is located in a prime spot.
His company, however, owns only 17 per cent of its Mariana Lithium project in Argentina, with an option to buy an additional 10 per cent from its joint venture partner, China-based Jiangxi Ganfeng Lithium Co. Ltd, which owns the remainder.
It hasn’t been easy for lithium companies to raise money form Western banks, which see too much risk, said Wisbey. Instead, he noted they ’ve relied on partnerships, such as the one his company struck with Ganfeng, which is planning an offering in Hong Kong, expected to raise US$1 billion.
“It’s great to be able to have strong partners,” said Wisbey. “On the other hand, I’d rather be able to go to Citibank and borrow $200 million for a project ... then people wouldn’t need to do the partnering. But the West has lost out as a result,” he said.