Lithium supply and demand fundamentals are such that demand should outstrip supply till at least 2020. Under these circumstances I think there will be four types of lithium companies that will offer the best risk reward which are as follows:
- Current producers not locked into fixed contracts.
- Current producers that can expand production.
- Development stage companies that will produce within the next few years.
- Explorers with promising and undervalued claims.
It’s important to note that I’m not too concerned right now with production costs at the moment. Even the highest cost Western Australia pegmatite plays are viable at these prices. There are implications for this further down the line but for now it’s all about the size of the find, the amount of capital the companies can attract and the speed at which they can come to market.
Starting with current producers we can quickly dwindle down the available companies when we realize that Talison is a privately owned company, FMC and SQM are large conglomerates where lithium makes up a sizable but not substantial enough source of earnings to dramatically alter the valuation of the company. Although SQM is partnering with various companies in the lithium triangle in South America such as Lithium America Corp (LAC) and with a few potential other plays in their sights as well. I am not yet ready to throw SQM out entirely but there are in my mind better pure plays such as Orocobre Limited (ORL.tsx).
Orocobre Limited is an Canadian company that is currently producing 17,500 tpa of LCE at one of the lowest cost of production (<$2000) in the world. With a current market cap of C$ 670M it’s one of the larger pure lithium producing plays out there. ORL’s flagship and currently producing resource the Olaroz Project is situated next to another promising find that would allow for additional production upgrades at a reduced cost. The company also holds an interesting portfolio of potential lithium finds in the region show below.
With a dozen possible projects and the technology and team capable of exploiting them on top of a producing find with expansion potential it’s not hard to see why I like ORL’s position in the lithium market.
Next up on the producer list is Galaxy Resources (GXY.asx), an Australian miner with projects in Canada, Argentina, and Western Australia. Currently it’s only producing project is located in Western Australian which mines the expensive pegmatite and converts the mineral into Lithium Oxide which is then shipped to China and processed into either lithium carbonate or lithium hydroxide. Either way, the costs are on the higher side and the product they sell is of lower quality than what you’d get out of a brine. Due to an agreement the company splits the profits from the currently producing mine with General Mining (GMM.asx).
The Western Australia project should provide the company with enough cash to secure the financing it requires to move forward with its sizable Argentinian Brine project. A definitive feasibility study (DFS) was completed way back in 2013 which showed proven reserves of 181,000 LCE and probable up to 985,000 LCE. The permits are up to date as well, the only thing standing in the way is funding. Given the economics of lithium brines, this project should be a no brainer, but the construction costs are estimated at $375M so it may take longer than expected to bring together.
I think GXY offers a similar risk reward to ORL but perhaps at a better price with a market cap of A$ 440M. Both companies have operating projects with potential expansion targets. In GXY’s case, the expansion target is fully permitted and the company just needs the necessary funding to push through.
Moving on to companies that are not producing currently but have made significant developments in their proven resources, I’d like to start with Lithium Americas Corp (LAC.tse), which is not as straight forward as the other companies appear. The most straight forward nature of the company is its lithium brine project in Argentina which it recently signed an agreement with SQM to take a 50% interest in and begin construction on a facility immediately. The company has two subsidiaries which it offers little to no information on. The company website is the relatively blank and offers very little information on the company, its subsidiaries and its various projects, which certainly isn’t a good sign.
I recently sent them an email informing them of their pathetic website and inability to inform investors. Hopefully, they respond. Until they do, and offer better data, I find it hard to invest in such a reclusive company. Supposedly they have a potential play in Nevada that takes advantage of lithium concentrated clay known as hectorite but I have been unable to find anything of substance on that property.
Next up is Bacanora Minerals Limited (BCN.cve) which is a Canadian miner with its main project in northern Mexico. The project contains a high grade (+2000 ppm of Li) hectorite clay with a probable reserves estimate of 2 million tones of LCE. Open pit mining is a fairly straight forward process and the company plans on producing 35,000 tpa of LCE within 3 years of mine completion. The mine itself will begin construction in Q1 2017 and should be completed half way through 2018. With a plan in place, a sizable and high grade resource, and the option of either selling to China or the closer Tesla Motors, I like BCN especially at its relatively small market cap of just C$ 132mm.
That concludes the “safe” lithium investments. From here on out the name of the game is high risk high reward. These companies are a combination of prospectors with interesting claims and small companies without the capital to exploit their current but unproven resources.
Arguably the most speculative location in lithium is Nevada, which is home to the US’s only producing lithium mine – the Clayton Valley Project (CVP). A lot of companies have set up shop and acquired land surrounding the CVP.
Pure Energy Metals (PEM) which has a claim bordering the CVP was the first company to successfully find a significant amount of lithium with inferred resources measuring 800,000 tons of lithium carbonate equivalent (LCE). Which on paper sounds great, however the quality of this claim is dubious at best. The resource is inferred, which is a technical term for a guess based on small quantity of data points. And of that resource, the Li grade (mg/L) only 5% at 370 mg/L is of any consequence the rest is sub 200 mg/L. To put this in context, lithium brines in Argentina and Chile have a cut off of at least 300 mg/L.
But it’s not all bad news, the Mg/Li ratio < 2 is arguably the best in the world and this find proves that there exist other Lithium resources in Nevada waiting to be found. I just don’t think this company warrants any investment…yet. Granted they are performing a PEA this summer which will certainly be noteworthy if anything improves, but as of now, I’m staying away.
With the knowledge that there exists lithium in the ground in the area, there opens up a few potential lithium miners in the area that offer interesting risk rewards. My two favorites are Dajin Resources (DJI.cve) and Nevada Energy Metals (BFF.cve) who have each acquired vast swaths of land in Nevada with some of it directly bordering the CVP. Dajin also happens to have claims on 230,000 acres of land in Argentina. The company is not well funded, but their team unlike most of these other speculators have significant experience in lithium and appear to have some interesting claims in the Nevada region. 230,000 acres is a large amount of territory to inspect and they have trouble examining their finds in Nevada and have paid Nevada Energy Metals to help them with one of their projects. Once again, I’d like to reiterate that these are highly speculative plays with no proven resources just interesting claims that if successful could produce big returns for the companies.
Moving on to Western Australia, where recently one of the largest new finds of lithium has created another rush similar to the one in Nevada. The funny thing, the company that found the initial resource Pilbara Minerals Limited (PLS.asx) wasn’t even looking for lithium. But now that it’s out in the open, and the company boasts a A$ 700M market cap, without even a Feasibility Study to its name. Needless to say, other companies have been attracted to the area, and the most interesting of all these is Dakota Minerals. With a market cap of A$ 54.26M it is relatively expensive considering it has no proven or probable or even inferred resources to its name. Make no mistake this company is a gamble like DJI and BFF however, I would not be talking about it if I didn’t think it had potential. Its claim borders the eastern edge of Pilbara’s and they have found a significant amount of rock chips containing 1-5% Lithium Oxide.
Now why is this significant? Because another company by the name of Altura Mining (AJM.asx) found similar rock chips before they made their lithium discovery way back in 2009. That company now trades at A$ 180M, and according to some analysts given the current price of lithium is at a significant discount to where it should be. Dakota minerals’ find may not be as big, but the odds are in their favor that they will find something and it will be a boost to their stock price.The company is currently drilling in that area as we speak and will have initial reports by the end of Q2.
Last but certainly not least, I’d like to talk about Lithium X (LIX.cve) a company with two claims, one in Argentina and the other borders the CVP in Nevada. First let’s talk about their find in Argentina which based on a 2011 Preliminary Economic Assessment has 2.8 million tons of LCE at an average grade of 556 mg/L. At an average production cost per ton of LCE of $1500 this is quite an impressive find. But little work has been done since then, which does trouble me, and I do expect the size of the resource to be downgraded further. The project would would cost $144M for an average annual production of 15,000 tons. An additional $80M invested could increase production to 25,000 tpa. LIX has great potential and at just $90M market cap could be the most undervalued company I have mentioned thus far. Who knows whether or not they strike it rich with their claim next to the CVP in Nevada, but that would just be icing on the cake.
All in all I think all of these companies have great potential, whether they are able to realize it is something else entirely. And that’s sort of a big question mark for a lot of these companies, most of them were near death until a few months ago, are they able to recover and capitalize on the rising demand for lithium before it’s too late?
I truly believe that China is a ticking time bomb waiting to go off. The implications for such a risk off move are not fathomable. At the very least we would see a massive sell off and a tightening of liquidity and capital which could be quite devastating for some of these lithium companies that were near death. Like all investments, you have to see how they fit into your portfolio, if by going long lithium you are over exposed to a massive risk off move, perhaps you hedge that with a long US treasury position of short equities. The choices are yours, but for me I’ve made mine, and I’m going long lithium.
Here are my official rankings of these companies as well as their current price. It will be interesting to see how they do over the coming years:
|Ranking||Company Name||Ticker||MKT Cap (M)||Share Price|
|7||Nevada Energy Metals||BFF.cve||14.21||0.2|