Lithium juniors still see appetite among investors despite depressed prices, cost overruns

The low price of lithium and cost overruns on junior projects have made investors cautious about the sector, creating doubt about whether lithium juniors will be able to access capital and ensure a supply of lithium in the years ahead.

There are a number of lithium mining projects stacked in the pipeline, all of which require further capital if they are to come into production. But one of the projects closest to entering the market has had problems in raising the required level of finance.

Nemaska Lithium, operator of the Whabouchi mine in the Canadian province of Quebec, recently filed for bankruptcy protection against its creditors, and market participants have queried whether that is a bellwether event for lithium juniors.

The factors behind this, coupled with the currently low prices, may restrict the ease with which other projects in the pipeline can access capital.

“The current challenge in raising capital and securing project finance is the depressed commodity price,” Simon Iacopetta, chief financial officer of Core Lithium, said. “Much of the capital raised for Australian hard-rock projects was [found] when lithium prices were higher.”

Fastmarkets’ latest assessment of the price for spodumene, 5-6% Li2O min, cif China, was $480-550 per tonne on December 25. This was the lowest the price has been since the assessment began in August 2017.

Core Lithium’s Finniss project is 25km south of Darwin, in Australia’s Northern Territory, and has capacity to produce 175,000 tonnes per year of spodumene concentrate. This will be shipped to converters in China, which will process it into lithium chemicals which will then be consumed by battery producers.

The project’s nearness to the port of Darwin, which is Australia’s closest port to Asia, plus the low start-up capital of $50 million and the project’s low cost of production - at $300 per tonne of spodumene concentrate - were all reasons put forward by Iacopetta to explain why the Finniss project would be an attractive investment.

Australian spodumene operations have a history of success in coming online and doing so in a short space of time.

In 2017, Galaxy Resources managed to produce around 155,000 tonnes of spodumene in what was its first year of production, having sent its first consignment of material in January of the same year.

Operators of spodumene projects can also react quickly to market conditions, as was highlighted by Albemarle’s decision to mothball its Wodgina project in Western Australia, citing “challenging market conditions.”

“The market has seen Australian hard-rock projects bring material to market quickly in recent years,” Iacopetta said. “The advantage of hard-rock mining is that you can adapt production levels depending on the balance of supply and demand, more quickly than brine[-based] projects can.”

In the next round of capital-raising, Core Lithium will hope to access A$73 million ($49.5 million) so it can build its processing facility.

Whetting investor appetite

Sitting low on the production cost-curve is necessary for survival in the sort of low-cost environment that the market is currently going through.

But a low cost profile may not, on its own, be sufficient to make a project a viable vehicle for investment.

Sigma Lithium, which operates the Barreiro spodumene project in Brazil, considers itself a low-cost producer, an assessment aided by an easily accessible supply of hydroelectricity to power its operations and by the high quality of its ore, which needs less processing to reach the industry standard of 5-6% concentrate.

Nemaska also benefits from a nearby source of hydroelectric power.

Although they are quite distinct, the two projects have other similarities. For example, both are non-Australian spodumene operations, although Sigma will send its spodumene for conversion in China, as do many of the Australian hard-rock producers.

But in contrast, Nemaska is building its own conversion plant next to its mine. It was the capital required to ramp-up the plant from the pilot stage that caused costs to overrun. Nemaska has to date received financing of C$1.1 billion ($834.8 million) and still needs a further C$375 million.

Meanwhile, its hard-rock competitor, Sigma, has circumvented any similar issues by locking in a ceiling for the capital expenditure (capex) required to finance the construction of a commercial plant.

Sigma is currently in the pilot stage, as is Nemaska. It needs $70-75 million, in addition to the $30 million already raised through offtake partner Mitsui, to bring the project to a point where it can make its first commercial shipments by June 2021.

The new capital would finance the ramp-up of the first phase of the project, raising production to 33,000 tpy of lithium carbonate equivalent (LCE).

The company can double its LCE capacity to 66,000 tpy but that would need additional funds, and it is currently at a pre-feasibility juncture for the second phase.

“We are very confident [in our ability to raise capital] because the long-term fundamentals are so favorable, because lithium demand is going to double between now and 2023,” Sigma’s chief strategy officer, Ana Cabral-Gardner, said.

“To make it through to 2021 [when Sigma has deliveries scheduled] the project must be sustainable in the current pricing scenario,” she added.

The Barreiro project has been assessed in feasibility studies for which the company ran “stress scenarios” to see if the project could survive with spodumene prices at $400 per tonne. “All of that helped us to build confidence among investors because we proved that the success of the project is not price-dependent,” Cabral-Gardner said.

Sigma will produce spodumene concentrate at a cost that would be equivalent to $342 per tonne cif Shanghai.

“Given that investors have made unsuccessful investments in previous lithium investment cycles, investors are now more educated and better equipped to evaluate viable projects, and that could mean that projects which are less viable may struggle to access capital,” Cabral-Gardner said.

“At one time, in the battery raw materials markets, it was believed that there would be no trough [in pricing]. The market did not envision a trough at this juncture and it has caught people by surprise. The fact that we are now in the trough has made commercial banks more cautious in their approach [to project finance],” she added.

“While lithium commodity prices continued to fall during 2019, the start of 2020 has seen an increase in Australian lithium stock prices,” Iacopetta said. “This could be interpreted as investor interest returning to the sector, and could suggest that the selling of stocks [that was seen] toward the end of 2019 may have been a little overdone.”

Iacopetta believes that many investors and financiers from Australia, North America and Europe are “sitting on the sidelines” and assessing the market before committing to any investment decisions.

Investing up the supply chain

Market participants have queried whether the possibility of a supply surplus could push automotive industry original equipment manufacturers (OEMs) to take a more active role in financing their raw material supplies.

Automotive OEMs were faced with the prospect of having to invest in mining when there was a supply crisis in rare earths in 2011.

Carmakers in the premium sector, for example, will be less exposed to raw material prices and therefore will be less concerned than OEMs that supply volumes to the consumer car market.

“If I were to put myself in the shoes of an OEM, and lithium batteries were a part of my future, then I would want a certain level of confidence regarding the availability of quality products,” Iacopetta said.

If investors are indeed cautious about investing in lithium production, which would delay the entry of new production into the supply chain, then the market could move to an undersupply situation.

This would be unsettling for the lithium market as a whole, which would probably welcome a degree of stability after two years of falling prices.

Michael Greenfield

michael.greenfield@fastmarkets.com

Published

Michael Greenfield

January 29, 2020

09:47 GMT

London