September 27, 2023

The lithium dilemma: bright horizons or dark clouds ahead?

 

A review of new sources of supply has heightened our skepticism that projects can deliver required production growth by the end of the decade. Whilst market speculation appears elevated among mature hard rock jurisdictions (Western Australia, Ontario), our analysis indicates value can be found in new emerging districts, particularly Brazil.

 

We see near term headwinds for lithium prices but remain long term bulls.

 

Short Term Outlook – Returning to Balance

In 2022, lithium demand grew 37% y/y to ~800kt, outstripping supply of 700kt (+32% y/y). For 2023 we expect a balanced market (slight deficit 30-50kt), driven by strong supply growth of some 47% to ~1,000kt. We see a steady stream of delayed greenfield projects coming online as well as brownfield expansion & restarts.

Demand forecasts for lithium are constantly upgraded

Demand forecasts for lithium are constantly upgraded

Medium to Longer Term Outlook – Mind the Gap

By 2030, we expect lithium demand will outstrip supply. We observe that demand expectations are rapidly being revised upwards, with forecast annual growth rates now greater than 20%, implying a market size between 2,800kt to 4,000kt (LCE). But supply forecasts over the same time appear stretched and imply market deficits compounding to greater than 300-700kt:

1. Conventional Growth Maxed Out: We observe that growth expectations from conventional supply source (brine/hard rock) do most of the heavy lifting. Combined forecasts range between 2,100kt and 2,500kt. However, we question how several early-stage projects can be brought online in <7 years, particularly without issue.

2. Reliance on New Technology: We also observe the supply gap recently being filled via unproven new technologies. For example, Industry Experts expect Direct Lithium Extraction (‘DLE’) plants generating >300ktpa by 2030. This is despite no plants operating at commercial scale. We note that some adsorption DLE is operating at Livent () Hombre Muertos operation, but it is unclear at what scale, recoveries and operating parameters. While it could be a potentially game changing technology (GS quote ‘Much like shale did for oil, DLE has the potential to increase the supply of lithium from brine’) we remain skeptical around its scalability, ESG credentials and ramp up risk.

Lithium Supply Growth Forecasts by Source

Lithium Supply Growth Forecasts by Source

3. Commissioning Delays: Building and commissioning a lithium chemical plant is fraught with risk. Broker research estimates that lithium projects are delayed on average by 3 years from their original announced timelines. Reasons attributed include permitting and approvals, lithium prices and technical challenged during commissioning.

 

We flag that delays appear to impact all projects regardless of deposit type (brine or hardrock) and development type (Brownfield or Greenfield).

 

Lithium Equity Markets – Shrugging off Commodity Weakness

In the past 12 months there has been a divergence between the performance of lithium equities and the underlying commodity price:

Lithium Prices: Since peaking in late 2022, the suite of lithium products declined 45-70%.

Producers: listed producers have broadly outperformed the commodity rout down 34%, with ASX names off 36% slightly ahead of US majors who are down 39%.

Developers: the risk appetite for explorers and developers varies considerably between jurisdictions:

       o    Australia +56%: investors demand for hard rock exploration exposure has accelerated in recent months driven by the discovery buzz at Azure Minerals () (+1423%) in the Pilbara and Winsome Resources () (+288%) in Ontario.

       o    North America -16%: conversely Canadian and US explorers have largely declined, seemingly due to few discoveries and limited capital market interest.

The number of listed lithium equities has tripled in 5 years. Combined market cap has increased 7 fold to US$170bn.

According to the RBICS classification there are now ~120 listed lithium equities globally, with a combined Market capitalisation of US$170bn. The bulk of these are listed in Canada and ASX. Over the past 5 years, the number of listed companies has tripled, along with the combined market capitalisation increasing 7-fold. We highlight that in the past six months, the total market capitalisation of Explorer/Developers has more than doubled to >US$50bn.

A clear premium exists for hard rock valuations over brine

A clear premium exists for hard rock valuations over brine

Among the listed developers with a defined Resource, we observe hard rock valuations of US$415/t on an EV/Resource basis. This is some 3 times that of Brine projects at US$125/t. We note the performance of brine projects has declined by 44% over the past 12 months, materially underperforming hard rock. We ponder if this is a reflection of recent market action in spodumene or a sign of investor confidence waning for DLE technology (, ).

Lithium EV/Resource (LCE) Comparison
Lithium EV/Resource (LCE) Comparison

Looking to Brazil ( LTH.TSXV )

One hard rock jurisdiction we find particularly interesting is the Araçuaí Pegmatite District in Brazil’s state of Minas Gerias. The region hosts several discoveries and greenfield projects. Poster child Sigma Lithium (SGML:TSX) is up 48% in the past 12 months and has a market capitalisation of C$5bn. Their Grota do Cirilo project boasts:

  • Resource: (M+I) of 77mt @1.43% Li2O
  • Reserve: 55mt @ 1.44% Li2O
  • Construction started in early 2023 at a capital cost of US$130m (Phase 1)
  • First production is expected in 2024 with an initial capacity of 270ktpa producing a 5.5% spodumene concentrate
  • Rapid expansion potential to 770ktpa via two additional phases at a low capital cost of US$155m.

We are particularly impressed with:

Rapid development: Maiden resource was defined in March 2018 at 519kt LCE by January 2019 it grew to 1,780kt.

Permitting: appears rapid, in part due to the use of dry stack tailings.

Low capital intensity: $2,600/t LCE relative to other hard rock jurisdictions such as WA at $7,000-10,000/t.

If SGML executes its growth plans, we believe it sets an important precedent that other developers can replicate.

This leads us to nearby nearby Lithium Ionic (LTH.TSXV) which has a market capitalisation of C$258m. LTH has three exploration projects across Minas Gerais. The business is rapidly expanding its resource with 13 drill rigs and plans to complete 50km of drilling by the end of 2023. We particularly like the high grade and scale potential at their ‘Itinga’ project:

  • Recent maiden resource of 19.4mt at 1.4% Li2O from three opencut and underground deposits.
  • Tenements sits adjacent to SGML Griota Do Cirilo opencut mine (80mt at 1.4%) as well as 500 meters from the underground Cachoeira mine (4mt @1.6% Li2O) owned by private CBL (5.7ktpa LCE).
  • In addition the group has an exploration target at the nearby Bandeira East (2km north of SGML) 1.5-3mt at 1.3-1.6% Li2O.

Lithium Ionic provides an attractive entry point into an emerging province with potential speed to market   

Some 100km to the north sits LTH’s Salinas project. This is adjacent to tenements of Latin Resources (, M’Cap A$684m) who’s recent maiden resource was 42mt at 1.34% Li2O. Key drill results from the project to date include 11.3m at 1.5% Li2O and 13m at 1.2% Li2O. By year end we expect a maiden resource estimate.

Dylan Kelly

Terra Capital