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Friday, January 28, 2011

Lithium investors will prosper in 2011 as EV and energy storage market heats up!

Lithium is one of the most dynamic, useful, and least understood metals. "Metal" as most people know the word, may be a bit of a misconception to investors as this metal, the lightest in the periodic table, can literally be cut with a knife!

Thousands of labs all over the world are working with and studying the properties of lithium at this writing, and the discoveries are lifting this element into a category all its own.  On Jan 11th the folks at Argone National Labratory released parts of their study into this wonderous element, and their findings will most likely increase the value of lithium for a number of uses, not the least of which is in the electric vehicle market. See: Lithium surprises!

Here is a brief description of lithium, from Webelements.com 

"lithium is a Group 1 (IA) element containing just a single valence electron (1s22s1). Group 1 elements are called "alkali metals". Lithium is a solid only about half as dense as water and lithium metal is the least dense metal. A freshly cut chunk of lithium is silvery, but tarnishes in a minute or so in air to give a grey surface. Its chemistry is dominated by its tendency to lose an electron to form Li+. It is the first element within the second period. Lithium is mixed (alloyed) with aluminium and magnesium for light-weight alloys, and is also used in batteries, some greases, some glasses, and in medicine.
Table: basic information about and classifications of lithium.

While lithium is being used in medicine, greases, glass making etc, it is the electric vehicles market for batteries that makes lithium the subject of this report. Lithium carbonate sells between $5400 and $6500 per ton and is mined in China, Australia, Canada, the U.S. and South America.  Chile now produces the majority of lithium carbonate on the market today, over 60%.

Companies such as SQM of Chile (the largest producer in the world) produce lithium as a by product of their large deposits of Potash. 

SQM along with Chematall, FMC and Talison Lithium of Australia, form what should be considered the BIG FOUR of the current lithium mining industry.  Outside of their current production, only 15% is spread among more minor players.

However, because of the the ramping up of major auto companies into the EV market, and because of their preference for batteries constructed of some form of lithium derivative (Lithium ion or Li-ion, Lithium air etc)
there are a number of junior miners who have jumped into the fray over the past two years, and some of those may well be poised to become much larger players, as consolidation in this new born industry continues into 2011.  In essence, consolidation will encompass those who have staked the most promising claims, especially in the premium lithium brine region of Chile, and Argentina which share the Atacama desert on the Puna plateau, which is the driest place on earth.

LIthium brine deposits will be, in no uncertain terms, the least expensive way to mine lithium.  Mother nature will do most of the work as the brine is pumped to the surface of dry salt lakes, and the natural drying exposes the lithium, to be merely scooped up and brought to processing, to be turned into lithium carbonate.

Investors should note that, hard rock lithium miners (lithium mined from spodumen) will be at a disatvantage as mining from such sources is much more expensive.  Having said that, Auto companies will be needing an uninterrupted supply in the coming years, and hard rock miners will have an upper hand in this aspect (only) as their production can be uninterrupted by a drying process worked by mother nature, as is the case of brine deposits.  In other words, if the miner is interrupted by weather (a slower drying time for instance) and cannot deliver a consistant supply, then the auto manufacturer would be put in the impossible position of having to shut down production while awaiting sypply. 

Three of the BIG FOUR suppliers have already indicated an unwillingless to sign agreements with the auto companies, basically telling them to buy on the spot market (there is currently no futures market for lithium)
That, of course, is unacceptable to a manufacturer who depends on a steady stream of product to keep the plants running.

This is the reason why some auto cos, such as Toyota, and parts manufacturers such as Magna International,  as well as battery manufacturers, have invested in some of the most promising juniors over the past two years.
They will need an uninterupted supply of lithium in the future. Also, large energy storage facilities will be needed to maintain the integrity and uninterrupted flow of electricity to national grids.

The Obama Administration in the United States is a huge backer of this new Lithium Economy. For more on the governments role visit Argone National Labratory. 

My top pick in this booming sector is Talison Lithium (TLH) of Western Australia.  Talison is a very unique hard rock miner, having produced lithium from spodumen at its Greenbushes plants for the past 25 years.  It currently has over 300 customers, and is the largest outside supplier to the booming market in mainland China, because of its proximity to this, the largest market in the world.

Talison is the largest PURE lithium producer, as it is not in any other business.  Last August, it swallowed up a promising junior, Salares Lithium Ltd, and its giant Salares 7 project of 7 salt lakes in Chile, thereby making it unique in the industry with both hard rock and brine properties. Their foresight in this regard, is way ahead of competitors in my humble opinion.
Talison is ramping up production in Australia by 100% this year to meet an ever increasing demand. Talisons uniqueness doesnt stop there.  Dr. Jon Hykaway of Byron Capital Markets (If you are a lithium investor, this man should be on your reading list immediately) points out, in his own words, that Talison is a "Mutant in the hard rock mining space" as its deposits are so rich in lithium, they are unmatched anywhere else on the planet and they have at least 40 years left in their massive deposit at Greenbushes. Talison is also currently flying under the radar of U.S. investors as it is listed on the Canadian Venture Exchange (as a result of swallowing Salares) It was, up until Sept 2010, a private company.
My second pick in this booming sector is a junior which reminds me somewhat of Salares Lithium, before it was swallowed by Talison. Rodinia Lithium (RM.v or RDNAF.PK) has similiar deposits in South America as Salares had, and three of these deposits are listed very high on analysts estimates of quality of deposit.They also have a very promising deposit in Clayton Valley, Nevada, which may provide an unlimited supply of lithium from clay deposits. This is in the same area as Western Lithiums (WLC.V) deposits which I also like.

Engineers are currently developing promising (but as yet untested) ways to mine the lithium from the clay.

There are certainly other players in this market, and for a comprehensive list, you should visit the lithium index at Byron Capital Markets. 

Disclosure: long TLH.v, RM.v, TNR.v,

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David said...

excellent article HP.

Curious, do you which of the big 3 have been reluctant to sign deals with auto companies? Where does Talison sit on this?

H. Pelham said...

I believe (and stand to be corrected on this) that Talison supplies several battery companies in China at present, but has no deals signed as yet with any auto companies.

The others, SQM, FMC and Chematal, have not signed any agreements that I am aware of, and in fact I believe, they prefer to have their product sold on spot markets.

David said...

WLC just graduated to TSX. Did you get in on it? I just put in an order for 12000 shares, definitely great to have a potential producer with the lowest cost in the industry.

H. Pelham said...

I was aware and I posted on it in the news section this week.

I didn't pick up any shares preferring RM as it is much cheaper and owns much of the same type of property in Clayton Valley, as well as properties in Argentina.

I will look at WLC on pullbacks.

Thanks David

David said...

Talison was featured today on www.stockhouse.com

Great exposure on this pure lithium play. I now own more shares than ever, over 5400!