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 $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 realized
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 '80s and commercially since about
the late '90s. 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 (TSX.V:WLC), Rodinia
Minerals Inc (TSX.V:RM) and Salares
Lithium Inc. (TSX.V:LIT).
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 greatest 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
(NYSE: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 $13 per kilogram. Vanadium has never gone below about $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 $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 $25 or $30 and as
high as $80 or $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
$5,000 a ton. So you're looking at about $100 to about $125 worth of raw lithium
going into that battery. The battery will sell for $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 $2,000 worth
of vanadium to $6,000 or $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 (TSX.V:SVX) as
well as Energizer
Resources (OTCBB:URST;FWB:YES) (formerly Uranium Star) that has a project in
Madagascar. There is also a company called Apella
Resources Inc (TSX.V:APA;FWB:NWN). 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.
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 technologies/alternative 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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Source: By Ellis
Martin and Karen Roche of The Gold Report