The white hot IPO of Tesla (NASDAQ: TSLA) recently ties in very nicely with this theme of theme vehicle electrification and speaks to the enormous investor interest behind new technologies that reduce our reliance on fossil fuels. Lithium, in the form of Li-ion batteries, is one uncommon "electric" metal that is likely to be a beneficiary of growth in electric vehicle demand as the need for higher energy density to extend the range for plug-in hybrid electric vehicles and full battery electric vehicles necessitates the switch away from NiMH batteries which are used almost exclusively in today’s hybrid electric vehicles.
Vanadium, Dr. Hykawy’s other area of expertise, is a relatively rare metal that has one predominant use a strengthening additive in steel and some forms of iron. One of the several drivers that could have a significant impact on vanadium demand in coming years is the use of lithium vanadium phosphate or fluorophosphate cathodes and lithium vanadium oxide anodes in rechargeable lithium batteries. These batteries exhibit greatly improved safety compared to the more generic lithium cobalt oxide-type cathodes seen in cellular telephone or laptop batteries, as well as providing higher operating voltages and higher rates of energy storage. To learn more about lithium and vanadium, we engaged Dr. Hykawy in the following interview.
Dr. Jon Hykawy is currently with the Research team at Byron Capital Markets
Biography: Dr. Jon Hykawy is currently an analyst with the Research team at Byron Capital Markets, with a specialized focus in the Clean Technology/Alternative Energy industries. His current area of focus is the Lithium sector, ranging from availability and production to Lithium battery technology. He has extensive experience in the solar, wind, and battery industries, conducting significant research in the areas of rechargeable batteries, ranging from rechargeable alkaline to Lithium-ion to flow batteries.
Jon holds both a PhD in physics (1991, Manitoba) and an MBA (1997, Queen’s) and has been working in capital markets as a clean technologies/alternative energy analyst for the last four years.
Q: Dr. Hykawy, South American brine producers SQM, SCL and FMC contribute 90% of brine production and 60% of the total lithium market while Talison Minerals out of Australia enjoys control of 70% of mineral production. All have abundant lithium resources and have committed to expansion projects to satisfy anticipated growth, so my questions is why should investors be excited or looking at lithium companies right now?
A: You’re completely correct in your assessment of the current market. But not all the incumbent lithium companies are created equal. SQM (NYSE: SQM) is widely regarded as having the lowest costs in the industry at present, and we concur with that consensus. However, FMC has relatively high costs associated with its production from Salar de Hombre Muerto, and SQM has had requests to its government to increase production levels refused. Given the growth we believe that can take place in lithium demand, there is room for additional low-cost producers to find a place in the market, and even to displace the incumbents if the cash cost of production from these juniors is low enough.
Q: What is the main driver of lithium demand? What does the supply/demand balance look like at the moment and going forward?
A: There is only one driver that matters, and it is batteries. Battery demand was essentially zero in the mid-90’s and reached nearly 30,000 tonnes of lithium carbonate (one tonne of lithium metal is equivalent to 5.3 tonnes of lithium carbonate) in 2008. Note that this battery growth is strictly growth due to battery use in small consumer electronics, like cell phones and laptops. The pace of growth continues, driven by decreasing price points for lithium-ion batteries and use in new devices. For example, the Game Boy Advance, released by Nintendo in 2001, was a "batteries not included" device. Now, every version of the DS comes with a lithium-ion battery built-in.
This is a function of both the decreasing price point of lithium-ion cells and the decreasing power and energy requirements of modern electronics. But there is now a new driver coming into the market, and that is large-scale lithium ion batteries used in hybrid and electric vehicles. A large battery in a laptop may store up to 70 Wh (watt-hours) of energy, but the battery in the Nissan Leaf is 24,000 Wh. A few million electric cars a year can suck back more than a little lithium.
The Chevrolet Volt likely uses about 14 kg of lithium carbonate per car, and the Nissan Leaf about 21 kg of lithium carbonate per car. Our projections are that electric and hybrid motor vehicles in 2015 could use as much as an additional 29,000 tonnes of lithum carbonate. While we were in an oversupply situation in 2009, due to the recession, demand was still more than 100,000 tonnes while supply capacity was probably still about 120,000 tonnes. But we believe that demand will continue to grow, due to consumer electronics and vehicular battery growth, and that by 2013 demand will outstrip the ability of the incumbents to supply lithium.
Q: How large is the market for lithium ion batteries in automotive battery applications (in terms of demand growth for lithium carbonate at the margin over the coming years)? Can lithium ion batteries in cars applications be considered disruptive technology (why or why not)? Have there been any indications as to the rate of uptake of lithium batteries in cars? What are the costs associated with replacing NiMH batteries with Li-ion ones?
A: As we mentioned above, a strong hybrid like the Volt uses perhaps 14 kg of lithium carbonate or its equivalent per vehicle, and the Nissan Leaf is more like 21 kg. A few million electric vehicles can consume almost 25% of peak historical production, as much as 29,000 tonnes. But it is also important to note that consumer batteries are currently using perhaps 26,000 tonnes of lithium carbonate annually, and this could grow to 38,000 tonnes by 2015 simply due to growth in the sale of cellular telephones, laptops, small electronics and the encroachment of lithium-ion batteries into new types of devices and, as their price continues to drop, the replacement by lithium-ion batteries of nickel metal hydride cells. The strict definition, to me, of a disruptive technology is one that, initially, has niche application and appeal, but through the rapid technical improvements and cost decreases driven by research and development, the improved technology is now able to replace others.
This is precisely what has happened with lithium ion batteries, as they have decreased in cost and improved in performance sufficiently to replace disposables and NiMH batteries in cell phones, and now even challenge internal combustion engines for use in vehicles. A disruptive technology must do something markedly better than an incumbent technology within a niche, and electric drive trains in vehicles, compared to internal combustion engines, should be much less expensive to live with, as electricity is much less expensive to use than gasoline, and an electric drive train is much less expensive to maintain.
If the last Geneva International Motor Show was any indication, we saw one instance of a fuel-cell powered concept car, and one instance of a car with a vanadium flow battery, which in theory can provide mechanical recharge, but everything else, hybrid or otherwise, used lithium ion. Nissan senior management has noted in May that the 24 kWh battery in their Leaf currently costs them some $18,000 to build, a cost of $750 per kWh of energy storage. While this is still above the cost for the same size NiMH battery pack, it is already below the $1,000 per kWh threshold that many have previously held out as a limitation for Li-ion cells. Of course, lithium ion batteries are lighter and smaller and can drive a car much farther for given size and weight, and that reduces the cost of the overall automotive solution. So, frankly, there really isn’t any additional cost associated with a new design using lithium ion instead of NiMH, not anymore.
Q: The massive brine deposits in Bolivia’s Salar de Uyuni hold promise but there is currently no timeframe for production. Pilot plants have been constructed at the Salar de Rincon in Argentina but meaningful production is likely a decade away. Operations in China and Tibet have been slow to start, suffering from poor weather and impurities in the brines. Existing producers are expanding, but at a limited rate. So where is the growth in supply going to come from and how long might it take for meaningful production to come onstream? Do you cover any companies, Dr. Hykawy that are showing promise in this regard and can you tell us a little bit about them in terms of where they are exploring, the geological aspects of their deposit, when they might bring the deposit into production and a little bit about their valuation metrics?
A: Do not hold your breath for Uyuni. The brines there are chemically difficult, having high levels of magnesium. Ditto the brines in China and Tibet. The weather at both Uyuni and the brine locations in China and Tibet tends to be cool, and have more precipitation annually than is desired (frankly, anything more than zero is more than desired). I would argue that Rincon is probably not decades away from production, it may only be a few quarters away from production, but it is also not likely to be the cheapest source of lithium, and information on the project is hard to come by. We believe that juniors, supported by partnering agreements and off-takes with major firms, will supply what is required, and at very competitive prices. And yes, there are some firms we cover that can participate in this process.
We like Rodinia Minerals (RM:TSX-V) and its Diablillos property in Argentina, and we like Salares Lithium (LIT:TSX-V) and its properties in Chile.
Both have, based on testing to date, high levels of lithium and very tractable levels of magnesium and sulphates. Orocobre (ORL:TSX) and Lithium One (LI:TSX-V), both in Argentina, have already signed partnering agreements with, respectively, Toyota Tsusho and KORES. Orocobre is already at pilot-stage production. And Western Lithium (WLC:TSX-V) is our dark-horse. If Western Lithium succeeds in pushing down its cost of manufacturing a tonne of lithium carbonate or hydroxide from clay as much as we believe it can due to its combined production of potash, hydrofluoric acid and lithium carbonate, then it will be the low-cost producer in the industry. Western Lithium is also at the pilot-plant stage, as well. For us, valuation is dependent on cash cost of production, and net present value (NPV). Low cost is achieved through good chemistry for the brine projects, and good yields on co-products for Western Lithium.
Q: Dr. Hykawy, what are some of the metrics and specifics that investors should keep an eye out for when researching lithium companies?
A: As we have covered, above, an investor should look for high lithium concentrations in brines, and low magnesium. The correct sulphate level is dependent on the level of magnesium and other ions in the brine, so that has to be judged on a case-by-case basis. If the company in question is planning to produce solely from hard-rock, I believe they will be at a distinct disadvantage in terms of cost and this makes them vulnerable, so we tend to avoid all such names. The one exception in terms of mineral production is Western Lithium, but we acknowledge that there is still significant risk in this story.
Q: Now, let’s turn our attention to Vanadium. What is Vanadium used for, how closely is it tied to steel demand? Where is the macro demand increase or supply squeeze coming from in the Vanadium space? Can Vanadium be substituted?
A: 85% of demand for vanadium is as a steel hardener and strengthener. If you include the use of vanadium in all metallurgical applications, 92% of it is used in steel or in things like titanium alloys. While vanadium can be substituted by metals like molybdenum for hardening steel, the only real substitute as a steel strengthener is niobium, and niobium is only about 1/3 as effective as vanadium in use (and hence why niobium trades at about 1/3 the price of vanadium). Clearly, vanadium demand is tied tightly to steel demand, but actually outpaces it significantly as the growth in high-strength steels, such as for construction purposes in the form of reinforcing bars (rebar) makes vanadium more important. About 56% of vanadium is produced from steel slags, at a relatively high cost; many make the mistake of thinking slag-produced vanadium is free, and it is not. Given that steel growth can only support, at best, production of 56% of the vanadium it needs, the squeeze in the market is coming from enhanced demand for high-strength steel and the natural limitations in the amount of vanadium in the slag.
Q: The current annual production numbers for Vanadium seem fairly low at 59,100 tonnes in 2007, this coupled with price swings in the commodity from $11 per kg. to as high as $50 per kg, probably don’t make it very inviting for new suppliers to enter the market, what might change this?
A: We would have to disagree. With pricing in a wide band between $11 and $90 per kg of the metal, the market is only uninviting to those having cash costs too high to make money within this band. What wide swings in pricing tell you is that demand is too high relative to supply, and so the market is crying out for new low-cost producers. We would argue that low-cost producers, those who can produce vanadium for less than $10/kg, can reap profit from this market at a level that would make any mining company in any industry very proud.
Q: Lastly, Dr. Hykawy, are there any Canadian companies that are in the Vanadium space and can you tell us a little bit about them in terms of where they are exploring, the geological aspects of their deposit, when they might bring the deposit into production and a little bit about their valuation metrics?
A: There are five such companies that are listed. Largo Resources (LGO:TSX-V) has a strong project in Brazil, outside a place called Maracas. They have high grades of vanadium in magnetite, well over 1%, good iron content, environmental permitting and water rights, and even an off-take agreement from Glencore. Most importantly, Largo sees no evidence in their assays of any contamination by uranium or chromium.
Apella (APA:TSX-V) is a potentially very large vanadium-bearing hematite deposit in Quebec, but one with lower grades than Largo’s project, and a project that is at a very early stage. Energizer Resources (EGZ:TSX-V) has a sediment-hosted deposit in Madagascar, with decent grades but suffers somewhat from its physical location. Sino Vanadium (SVX:TSX-V) has a large deposit of sediment-hosted vanadium at good grades with little to no contaminant issues, and low overall operating costs due to its low labour costs. Sino Vanadium benefits from being in the center of the Chinese steel industry, and the Chinese like having indigenous supply rather than relying on importation. Last, but certainly not least, is Rocky Mountain Resources (RKY:TSX-V), with a sediment-hosted deposit in Nevada that has good grades, low contaminant levels and likely low operating costs due to the nature of the sediments; as an aside, these old sediments in Nevada seem to provide some interesting opportunities to inexpensively extract metals.
By Arjun Rudra, www.investingthesis.com/