The electric vehicle market has sparked an insatiable appetite for lithium; mining companies are eager to cash in before the bubble bursts
Miners rushing to capitalize on big demand before bubble bursts
It’s 11:55 p.m. and Steven Howard has just returned to his hotel room in Beijing after a draining day of meetings to promote his lithium exploration company. The next morning, he would fly to Seoul to do it again, and then on to Tokyo.
“I’ve got wings and wheels strapped to my rear end,” said Howard, who returned from Asia before Easter, about his travel schedule.
Howard, chief executive of Lithium Energi Exploration Inc., has a background is in oil and gas. He leads one of the dozens of Canadian-listed mining companies looking to capitalize on the roaring demand for lithium being created by the world’s budding electric vehicle industry, before the bubble bursts.
But his firm faces an odd dilemma: Lithium prices have never been this high, estimated at more than US$13,000 per tonne, yet fears are growing that the supply and demand forecasts are out of whack, and that prices will crash. Unlike the other materials that are key to electric vehicle batteries, such as copper and nickel, the market for lithium is relatively opaque — with no futures’ market and no benchmark price as most lithium is sold in private transactions.
The fruits of looking in Asia came into focus on Thursday evening when Japan’s SoftBank announced a $100-million investment in TSXlisted Nemaska Lithium, which aims to begin construction this spring on a 33,000-tonne per year lithium mine and electrochemical plant in northern Quebec.
“This is a cornerstone of what we needed,” said Nemaska chief executive Guy Bourassa, who still needs to raise around $725 million. “And it opens up a lot of doors.”
Bourassa said SoftBank contacted his company last fall after studying whether to invest in an electric battery factory and struck the deal for 9.9 per cent of the company, plus rights to 20 per cent of its lithium production. The Japanese company, which owns a 15-per-cent stake in Uber Inc., controls huge fleets of taxis in India and China that it wants to convert to electric vehicles.
As a result, lithium explorers are feeling more pressure than ever, and are having a harder time raising cash on the stock exchanges, in what should be a bull market for the metal producers. That’s sending them into Asia, where a more advanced electric vehicle industry is creating real demand for lithium, and opportunities to lock in sales deals, even for mines that remain years away from being built.
Based in Dallas, Texas, Howard has been using the TSX Venture Exchange to raise funds to convert a plot of land in Argentina into a brine pond, from which lithium can one day be extracted, and — if his recent trip pays off — sold to a battery maker or auto company in Asia. The company has yet to drill any holes, which puts it several years away from production, assuming it finds lithium of sufficient grade and quantity in the first place.
Analysts say average lithium prices, as reported by the largest producers and found in spot prices in China, have doubled in the past two years, leading to a proliferation of exploration companies. Between the TSX and the TSX Venture Exchange, at least 75 companies were mining or exploring for lithium, and that number doesn’t include the companies seeking to extract lithium from industrial wastewater or batteries.
But even as a rush ensues, lithium prices remain hazy, in part because a few large players dominate the market and keep their prices private, said Chris Berry, who advises firms and is founder of New Yorkbased House Mountain Partners. “Because there’s no futures market with respect to lithium ... you’re really left to talk anecdotally.”
A number of events have also conspired to throw cold water on lithium mining companies. Most recently, a Tesla Inc. driver in California died in a fiery crash that drew concerns about the flammability of electric vehicle batteries, which, coupled with the Palo Alto, Calif.-based electric vehicle company’s rising debt load, has raised questions about its business model.
In late February, Morgan Stanley released a report that suggested the price of lithium could drop 45 per cent to around US$7,000 per tonne by 2021. The report suggested that growth forecasts for electric vehicles, currently 1.6 per cent of global sales, may be overestimated, and that there could soon be an oversupply of lithium.
It also noted the Chilean Economic Development Agency has increased the production quota for Sociedad Química y Minera de Chile S.A — a large producer that is 32 per cent owned by Saskatoonbased Nutrien, the company created by the merger of Agrium Corp. and The Potash Corporation of Saskatchewan. Combined with a quota increase for another large producer, Albemarle Corp., an additional 200,000 tonnes of lithium could come online by 2025, according to Morgan Stanley analysts.
For perspective, Rupert Merer, an analyst with National Bank Financial, pegs current lithium production at around 200,000 tonnes per year, and forecasts demand will quadruple to 800,000 tonnes per year by 2025.
“When you have that kind of growth, it’s always going to be hard to nail that kind of demand and supply accurately,” said Merer.
Meanwhile, stocks of the biggest lithium producers are in the doldrums: Albermarle, Sociedad Química y Minera de Chile and FMC Corporation are all trading down at least 20 per cent since January. Junior explorers have not been spared either: Howard’s company’s stock price has nearly halved, from 93 cents in November down to 46 cents on Tuesday.
If prices stay that low, Howard and others are convinced a wave of mergers will sweep the industry as buyers snap up cheap assets.
That helped convince him to hop on a plane to China and spend a week meeting with executives from car companies and battery cathode makers, about one day purchasing lithium from his company.
In China, as part of an initiative to upgrade its industries, the country has set a strategic priority to lead the world in electric vehicle production and targets seven million new electric vehicles by 2025 compared to 330,000 in 2015, according to the research firm CRU Group.
That’s helping to drive consensus that the electric vehicle industry is set for big growth in the next five to seven years, but both the supply and the demand forecasts are predicated on multiple assumptions.
“The point is there’s a lot of growth and demand coming,” said MacMurray Whale, an analyst with Cormark Securities.