INTERNATIONAL. Lithium, the flavor of the year, is in high demand—powering everything from hybrid cars to laptops and cell phones. In this exclusive Gold Report interview, Byron Capital Markets lithium analyst Jon Hykawy discusses key drivers for lithium, as well as vanadium.
He also recommends a few names in the still-small space, adding "these are early days;" the opportunities emerging should benefit the producers and investors.
The Gold Report: Jon, you're a very strong proponent of lithium and from what you've told us previously you believe it's hot. How hot is it?
Jon Hykawy: Hot and getting hotter. What we've seen recently is a number of deals coming to market looking for financing and those deals are getting done. We're currently in the midst of one Toronto IPO. It's an Australian-listed company called Orocobre Ltd. (AU:ORE).
The company just put out press releases suggesting that they're going out and raising US$22 million, to be exact. There's a rumor that we're going to see their direct neighbor on the salar in Argentina come to market soon with their IPO. We've seen a number of offtake and partnering agreements being signed including the Toyota Tsusho (OTCBB:TYHOF.PK) agreement with Orocobre. The interest in the sector has never been greater.
TGR: How are these deals getting financed so easily compared to other rare earth deals?
JH: I think part of it is we're seeing so much media attention paid to electric vehicles. I was actually just at the Geneva Motor Show. That particular event was actually being referred to by people in Geneva as the “electric car show”. I went in at the behest of my company president to take pictures some of the new hybrids and electric vehicles that are available.
I realised about 10 minutes in that I was going to have to ration the number of flashes I was expending from my cell phone camera because I was going to run out of battery.
Every major dealer of motor vehicles in the world was represented there and each of them had new hybrids and/or new pure electric vehicles.
TGR: Is the lithium ion battery going to be sustainable over the next two years with potential new technologies coming into the market?
JH: Absolutely. The new technologies that are potentially coming to market are largely new iterations of lithium ion batteries with new chemistries in the cathodes and new materials being used for anodes.
You can improve lithium batteries considerably from here. Keep in mind this is a technology that's only really been under development since the mid '80's and commercially since about the late '90's. This is a technology that has a long way to go.
TGR: You mentioned in one of your research reports that you're recommending that investors consider a basket of lithium companies. A lot of these are development companies from what I understand. Are they long-term plays?
JH: They are. Well some of them are longer-term than others. There's really no way to play lithium directly out of the existing producers with the possible exception of Talison Lithium (currently a private company) coming to market; should they come back for the IPO and should that succeed.
Talison, in the minds of most investors, I believe, is not going to play a major part in the battery industry. What you're looking for is lithium development companies that can play that role producing inexpensive battery grade lithium. That largely consists of brine and clay producers.
That's the basket that we're referring to. It's companies similar to the ones we have under coverage like Western Lithium Corp, Rodinia Minerals Inc and Salares Lithium Inc.
TGR: Explain the difference between brine and clay producers, if you don't mind.
JH: With regard to brine producers; lithium is commonly produced today by pumping salty water out of dry salt lakes in South America.
This has historically continued to be the least expensive way to produce lithium. The lithium is in the brine in the form of lithium chloride salt. What you do to simplify it dramatically is you basically evaporate the water leaving behind the lithium in the brine and then treating it to produce a chemically tractable form.
The clay producers are a different story. Western Lithium is one of those companies with an extremely large deposit of a lithium-bearing clay in Nevada, actually near the northern border with Oregon.
They have the ability to produce, according to their scoping study, relatively inexpensive lithium. It should be very clean lithium which also brings the cost down for producing that ultra pure battery grade. We're very positive on that possibility and we have a couple of other brine companies that we believe have relatively low cost and can find their way into the market as well.
TGR: You stated earlier that brine-based lithium supplies are active and cannot be produced too quickly, referencing evaporation. If the supply is there, won't it come down to companies that can bring it to market quickly in the long run as far as share value is concerned?
JH: It has to get to market relatively quickly and relatively inexpensively. With any commodity industry, your biggest issue is maintaining control of your costs. You must make sure that when the inevitable price decreases do hit the market, you are not one of the companies that fail as a result. Our basic approach at Byron has been to build a model for what we believe the pure variable cost for production out of a specific deposit is and then look to find the lowest cost potential producers.
TGR: Is the potential nationalization of lithium in Bolivia and Chile where Salares is going to potentially affect the price of lithium?
JH: Actually it's not even potential anymore. Bolivia has announced that they're going to be creating a national lithium company whose mandate I believe is to go out and develop Salar de Uyuni as a source. The media hype over the last year has been that Bolivia is the pending Saudi Arabia of lithium.
That Salar de Uyuni is the great deposit in the world. I'm afraid that is going to be much more problematic than most people think. Our original lithium report indicated that one of the major cost drivers is the amount of magnesium dissolved in the brine along with lithium.
The higher the level of the magnesium, the more expensive it is to produce the lithium and Uyuni is an absolutely marvelous source of magnesium. You're going to have a significant problem developing that economically.
We don't have any shortage of lithium. What we have is a shortage of inexpensive lithium and that's going to come back to bite the Bolivian company. I just don't see how they're going to be able to develop Uyuni at present price points. As far as Chile is concerned, there's been one senator that's proposed nationalizing the industry.
The government has just changed recently to a more central right government as opposed to the left-leaning party that was in power previously. I think you're going to see a much more pro-business and pro-mining stance taken by the government there. I don't think nationalization is in the cards.
TGR: When you're looking at a company like Salares in Chile and comparing them with Western Lithium in Nevada, would you as an investor take position in both?
JH: There are different risks associated with each. No one has yet produced commercial quantities of lithium from clay in Nevada or anywhere else for that matter. You have to balance the technology risk.
We believe it's relatively minimal because the processing of clay for lithium looks very much like the processing of hematite or magnetite ores for vanadium.
That's a process that's been conducted commercially for decades now. Balancing the two, I think you're probably better off finding a basket of collectively low cost potential producers.
Fifteen percent of world production comes from FMC at a place in Argentina called Salar del Hombre Muerto. That is expensive lithium and it's not an inexpensive place to produce from. It's significantly more expensive than Atacama. It leaves a fair bit of room for others to come in and try to take up some of that 15% market share.
TGR: That helps drive the market, does it not?
JH: It absolutely does. It's not only growth in the market overall which we see being significant over the next few years; it's the potential to displace some of the expensive supply that's in the market place today.
TGR: How many companies are in the lithium basket?
JH: We have three names under coverage and they are Canadian-listed companies. We haven't touched companies like Orocobre which has signed an off-take agreement with Toyota Tsusho. This will provide Toyota Tsusho with the ability to buy up to 25% of their first project. That's a significant endorsement making Orocobre a pretty strong company in the space. Beyond Rodinia Minerals, Salares Lithium and Western Lithium, which we like and have under coverage, another Canadian-listed name that is an obvious candidate would be Lithium One Inc (TSX.V:LI).
We don't have a recommendation on it at this point but people can look it up. What they'll find is that Lithium One is sharing Salar del Hombre Muerto with FMC. When you have a company producing 15% of the world's lithium just down the road, it's a pretty good indication that you know you might have a commercially viable project on your hands as well. Literally they are right across the salar from one another, so this is not a proximity play. This is a direct neighbor on the same producing salar. That's good in some ways having that proximity. It's bad in other ways in that they are sharing the same water.
TGR: Cobalt is a more prominent component of the lithium-ion battery. Is there a basket of cobalt companies we should be looking at?
JH: I'm going to have to say definitively no and there's a good reason for it. You're right. In current lithium ion batteries cobalt is a significant component. I know a number of institutional clients that have been approached and told that you have to own cobalt and lots of it because there will be huge demands on this as electric cars roll out. But we're also all familiar with what we've seen on YouTube and television regarding battery failure. The fact is that very occasionally these batteries do explode, and at the very least burst into flames. That's actually a function specifically of the cobalt that's in these less than modern lithium-ion batteries.
The cathode material that's in the battery you have in your laptop computer actually contains a material called lithium cobalt oxide. It has the unfortunate property that at the same temperature that it reaches when it's operating and/or being charged it can start to give off oxygen gas. That liberation of oxygen gas is exothermic.
That means that the battery heats up even more. So you get into this vicious spiral where the battery heats up and even more so it gives off more oxygen. Before you know it, the battery is very hot and the pressure's built up inside the cell. What's supposed to protect that battery is a small device called a thermistor. That senses the temperature in the battery and if necessary either cuts off charging or cuts off function of the battery entirely until it cools down. Sometimes the thermistors don't work. When the thermistors and other safety systems fail, the battery bursts open and you have a hot battery exposed to oxygen and everything catches fire.
The auto manufacturers decided a long time ago that they would not risk the small likelihood or probability of one of these battery cells catching fire. So they've come up with a number of battery chemistries for the cathode that don't include cobalt.
This would include the lithium manganese oxide that's intended to be used in the Chevy Volt. It would also include a number of the lithium polymer designs that the Japanese are working on as well as the lithium iron phosphate that A123 Batteries out of the United States has. The lithium vanadium phosphate that BYD Company Ltd. (OTCBB:BYDDF) in China is researching is also relevant. All of these chemistries are inherently safe. None of them have that same potential of popping the battery and causing a fire that lithium cobalt oxide does and none of them contain cobalt.
TGR: Isn't that devastating news for cobalt companies?
JH: I don't believe so. Cobalt companies by and large trade on the strength of the use of cobalt in various steel alloys. Steel is still a very high growth area with demand coming in out of China and other developing regions. If they're trying to trade on the potential of huge uses of cobalt in automotive batteries, I would say they're out of luck. You will probably see a pullback in the use of cobalt even in devices like cellular telephones and PCs with time. The analysis we've done indicates that on a raw material basis, because of the price of cobalt, other materials higher in phosphates, vanadium phosphates, magnesium dioxides which combine with lithium are significantly cheaper than cobalt oxide.
TGR: What is vanadium exactly?
JH: Vanadium is a metal that has some very interesting electrical as well as physical properties. One of the odd things it does is it dissolves in iron and steel creating an alloy. At relatively low levels it can produce extremely strong construction steels. It's used to significantly strengthen and bring up the quality of steels at a very reasonable price point. But at 4% or 5% alloy in steel, vanadium actually makes it strong enough to become high speed tool steels. So these would be the cutting bits in milling machines and that kind of thing.
There's not really another material that can do that. People are probably familiar with molybdenum as a steel alloying agent. You run out of the capacity to dissolve molybdenum in the steel long before you reach the strength point that you can achieve with even small levels of vanadium. Niobium is another material you can substitute but it's only about one-third as effective. Therefore, it usually trades about one-third the price of vanadium in the market. More than eighty percent of it goes into steel use like this but we believe there are significant other uses building.
One of those uses is lithium vanadium phosphate cathodes in lithium-ion batteries. There's been a significant amount of research in the last couple of years on which cathode materials make the best potential lithium battery. What you want in a lithium battery is a battery that produces relatively high voltage because voltage equates somewhat directly to power out of a battery.
But you also want to produce a battery that has significant energy content. It can hold more per charge than the standard lithium cobalt oxide battery that's out there.
Fortunately vanadium phosphate satisfies both criteria. It has a higher voltage—around 4.7 volts or 4.8 volts—compared to about the 3.7 that the standard battery produces today. It also has about 22% more energy content. If you factor that into a car, what you would get is a battery that is inherently safe. It can likely recharge faster because it won't matter if you heat it up a little bit more. It will accelerate and have the capability of accelerating faster because it can produce more power. It will take you 20% to 22% further down the road per charge all at a lower price than a lithium cobalt oxide battery. So we're fairly excited about that and the potential for these batteries to roll down into smaller electronics like laptop computers where operating life is important.
The other place where we see it being important is in the manufacture of grid storage technologies like vanadium redox batteries. These redox batteries are very, very large scale storage systems. They last from years to decades before they fail. They can store megawatt-hours worth of energy which is grid level storage and can produce megawatt levels of power.
They are not small batteries by any means and are about the size of the building that would contain a big-box store. They can do some very interesting things in terms of backing up intermittent or less reliable forms of alternative energy generation during winter months.
TGR: With all the variations of uses for vanadium would you expect it to see a basket of vanadium companies?
JH: Well we think the potential is certainly there. One of the things that you have to be aware of is that the battery side of the business hasn't hit yet. You don't know with technology. It may or may not work out. We believe it will. We built that into our projects but even the basis of increasing steel demand you need more junior vanadium companies. You need more vanadium in the world.
TGR: Do you see that happening anytime in the near future?
JH: We do. One company that we have under coverage is Largo Resources Ltd (TSX.V:LGO). They have an excellent deposit in Brazil outside a small town called Maracas. It's in fact the highest grade deposit that we've seen. It's not the largest resource that we've seen, but the important thing is getting it out of the ground economically. They have what we believe is one of the lower cost potential vanadium projects in the world.
Their likely cost for production is around US$13 per kilogram. Vanadium has never gone below about US$20 per kilogram in selling price. In the last economic downturn that we've just come out of, a large number of vanadium producers shut their doors because vanadium had dropped to around US$30.
This company could've easily weathered that and taken a significant market share away from others. They'll be in production we believe relatively soon and are in the process of finalizing project financing for the Maracas project.
TGR: Do you see the demand for this metal increasing since its only use is in steel at this point?
JH: No doubt about it. You're getting significantly higher demands out of China on the basis of Chinese growth alone simply because the Chinese are mandating better and better grades of construction.
So your choices in construction are: use twice as much conventional steel at a much higher cost or use vanadium dope steels. Use significantly less steel build buildings that are just as strong but have more workable room inside of them that you can actually lease to people. It comes down to a much easier choice.
Stronger grades of vanadium dope steels are used and that's the best choice for any sort of construction today.
TGR: Are there any supply issues related to this metal?
JH: Sadly there are and that's been an unfortunate aspect that may well contribute to curtailing its use in batteries. We've seen the price of vanadium over the last two years fluctuate between currents level of US$25 or US$30 and as high as US$80 or US$85 per kilogram.
You can't have a material that you're using in significant quantities in a battery vary by that kind of amount and expect to build a business off of it. I can give you some concrete numbers in that regard. If you look at something like the Nissan Leaf and the battery that would go into driving a Leaf, that's a 24 kilowatt hour battery.
This is very significant capacity in terms of energy storage. It would use roughly 20 to 25 kilograms worth of lithium carbonate equivalent. Lithium carbonate today sells for about US$5,000 a ton. So you're looking at about US$100 to about US$125 worth of raw lithium going into that battery.
The battery will sell for US$10,000, a fairly insignificant amount. Were that battery to be constructed using lithium vanadium phosphate chemistry, it would contain several thousand dollars worth of vanadium. If it were to suddenly triple in price it might go from US$2,000 worth of vanadium toUS$6,000 or US$7,000 worth of vanadium. Suddenly the manufacturer of that battery doesn't see any margin on any sale.
In fact they might be selling those batteries at a loss. No one's going to risk a long-term contract on those batteries. If there's no long-term contract the automotive manufacturers certainly aren't going to use it. What you need to really satisfy the requirement for stable pricing is additional supplies in the market.
TGR: Are there potential projects out there where we'll find more vanadium or is it just truly a supply issue in the world?
JH: I know of four listed companies in Toronto. As well as Largo, there's a Chinese play called Sino Vanadium as well as Energizer Resources (formerly Uranium Star) that has a project in Madagascar. There is also a company called Apella Resources Inc. There are absolutely projects, but here again it's a matter of finding economic deposits. They're tougher to come by in the vanadium space than many because it is a relatively scarce material.
TGR: This has been very informative. Thank you for your time.
Note: Toronto-based Jon Hykawy, who earned his PhD in physics (University of Manitoba, 1991) and an MBA (Queen's University, 1997), spent four years in capital markets as a clean tech/alt energy analyst before being named lithium analyst at Byron Capital Markets in August. Jon began his career in the investment industry in 2000, originally working as a technology analyst concentrating on the lithium space. Jon has become a valuable resource on everything about the light, silver-white metal—from supply and demand to exploration and production.
He has extensive experience in the solar, wind and battery industries, conducting significant research in the areas of rechargeable batteries, from alkaline to lithium-ion to flow batteries.
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