LITHIUM CONF: Seven key takeaways on lithium project investments, offtakes

Fastmarkets rounds up the key discussion points on lithium project investments and offtake agreements from the first day of its virtual Lithium Supply & Markets conference from October 26-28.

Covid-19 has given optimism to the lithium industry
“The electric vehicle [EV] industry has been indirectly [yet] positively affected by [the pandemic] in great part because of increased consciousness on the climate. That was translated into recovery packages [and] all of them have a very large component for EVs. [It has] infused the industry with much needed optimism,” Ana Cabral, managing partner and co-founder of A10 Investmentos, said.
Lithium prices have shown early signs of recovery after falling steadily for the past two and a half years. Fastmarkets’ price assessment for lithium carbonate 99.5% Li2CO3 min, battery grade, spot price range exw domestic China stands at 39,000-41,000 yuan ($5,834-6,133) per tonne as of the October 22 assessment, compared with 37,000-41,000 yuan per tonne on October 8.
“It’s not going to be a boom or a bust. The prices have to land up in some sort of equilibrium,” Cabral added.
Opportunities in hydroxide as market moves into ‘Lithium 3.0’
Investors believe there is an opportunity in hard rock lithium assets that lend themselves to battery-grade hydroxide production.
“It’s the hydroxide surge…when you look at BMW, Volkswagen and Tesla, they’re voting with their wallet for hydroxide because of nickel intense applications,” Howard Klein, partner at RK Equity, said.
Nickel rich batteries come with the benefit of longer-driving ranges, giving them more practical and mainstream appeal. Lithium 3.0 is geared toward expected 2030 lithium demand, which equates to the equivalent of 50 new 20,000-tonnes-per-year hydroxide plants and $30 billion of capex, delegates heard.
“The lithium-equity spirits have woken up over the summer and I believe we have entered lithium 3.0,” Klein added.
Tesla’s move upstream can reassure investors
“The upstream is being demystified. Investors don’t like resources and they usually shy away [but] now they’re wondering if they should jump back in because Tesla has paved the way,” Cabral said.
Last month, in fact, Tesla said that it would mine its own lithium and make its own lithium-ion batteries for EVs.
“You now see a lot of institutions doing their homework in battery materials that weren’t there before. They thought it was mining and sustainability issues and they stayed away [but] as Tesla enters the value chain further and further upstream they demystify the risk and uncertainty,” Cabral said.
Lithium juniors still need investment
“This industry needs capital fast… there’s going to be losers and winners and it’s ok. The US auto industry used to have 300 automakers [and] in the boom of the 1920s, investors were very happy to fund those. We need to overfund - we need an overheated equity market for lithium juniors. Lots of money thrown at it both [in the] retail and institutional [sectors],” Klein said.
An overheated market will not necessarily make it harder for institutions to invest, William Turlington, director of mining, metals and industries finance Americas at Société Générale, said.
“It’s a matter of diligence and selecting the right projects from the start. [They should be] robust from a first principles perspective. We can be agnostic to the backdrop in terms of equities blowing up. It just means there’s probably alternative routes in terms of financing that project, but it’s already a very good project in its own right,” Turlington said.
But offtake activity has been in decline…
Lithium hydroxide is accelerating to account for 60% of the market share and by 2028, will account for nearly two thirds of lithium supply, analysis from RK Equity shows. “We [believe there could be] a hydroxide shortage as soon as within 12 months while a carbonate shortage is materially later,” Klein said.
A minimum incentive price of $12,000 per tonne, possibly higher, for battery quality hydroxide is needed to incentivize supply, Klein added.
Fastmarkets’ price assessment for lithium hydroxide monohydrate 56.5% LiOH.H2O min, battery grade, spot price cif China, Japan & Korea stands at $8.50-9.50 per kg, ($8,500-9,500 per tonne) as of the October 22 assessment.
Between 2017 and 2020, 59 lithium offtake agreements were signed, but volume commitments have scaled back more recently, Daniel Jimenez, partner at Chile-based mining consultancy firm IliMarkets told delegates. Greater volumes were signed back in 2018 with about 700,000 tonnes agreed over a five-year period but in 2019, signed offtakes amounted to less than 300,000 tonnes.
Upfront payments from those agreeing to accept offtake are key for project developers, but these have also taken a hit, falling to $100 million in 2019 from $500 million in 2018.
“There has basically been very little money flowing into the market to obtain offtake agreements, which is going to be a hurdle. It implies a risk on supply in about three or four years from now,” Jimenez said.
Contracts referencing a fixed price always have a winner and a loser
Lithium contracts have often referenced a fixed price and benefit from simplicity, but “it’s not a win-win situation,” Jimenez said. “We have seen already that these types of mechanisms have produced significant changes in management at the companies on the wrong side of the bet.”
One alternative is introducing price caps and floors within contracts. Such a mechanism brings the benefit of more stability in terms but are also a “moderate version of a fixed price,” and carry some risk if floors are significantly higher than prevailing spot prices, for example, Jimenez said.
“As long as somebody doesn’t feel comfortable, the tendency to try and break or modify [the contract], it complicates a long-term relationship between buyers and sellers," he added
Variable pricing structures are good for long-term relations
“In my opinion we should move more toward variable pricing, which better follows what’s happening in the spot market,” Jimenez said, adding that such a structure would mean buyers are doing so competitively when the market moves and lets sellers capture the upside when the market turns, which has the benefit of making relations easier between parties.
Contracts with a variable pricing structure reference a mix of trade statistics and prices discovered by price reporting agencies (PRAs). Trade data is publically available but has a time lag, without differentiating between grades and spot and contract deals.
PRA prices are the best proxy for today’s spot price, Jimenez said.

Charlotte Radford

charlotte.radford@fastmarkets.com

Published

Charlotte Radford

October 27, 2020

12:06 GMT

London