The Energy Report: Thank you for joining us this afternoon, Jonathan. You have a technical background in engineering and manufacturing in addition to your experience as an analyst. This gives you a unique perspective in evaluating investment opportunities. What do you look for specifically in a lithium company?
Jonathan Lee: Numerous factors. Our strategy is to find low-cost producers within a sector. Then from a capital cost side, it’s always more beneficial to have a lower capital cost to get a better return on equity and make the project more feasible. We like to have low capital expenditures and operating expenditures. Beyond that, it really comes down to valuing the company and trying to make sure that the equity is purchased at the right price. The two major factors that contribute to a better return on equity are good assets and low costs.
TER: Are you looking across the broad spectrum of levels of development, from prospectors to companies that are already producers? Or do you narrow it down to more advanced companies?
JL: We look at everything from exploration to producing companies. When we look at producing companies, a lot of times there is less technological risk or execution risk involved. At the earlier stage, there’s a lot more risk entailed in proving out the deposit, proving up a resource and gathering more metallurgical information, etc. Earlier-stage companies usually are valued less and have the potential of higher returns but also entail more risk.
TER: Lithium has been a hot topic in the past several years. For those readers who are not all that familiar with it, can you give us a little background on the metal, its uses and what people should be looking at when considering lithium investments?
JL: Lithium is a metal that’s used in a slew of different products. Batteries are a big percentage of it, roughly 25%-30% of production. Glass and ceramics are also a big usage because it lowers the heating temperature, which saves energy. It’s also used in lubricants and castings. A variety of products utilize the element, but these end users make up the majority.
TER: Is battery usage growing faster than other applications?
JL: Yes. Although penetration into automobiles is not great as of yet, there is significant growth in consumer applications for lithium-ion batteries, and you’re seeing that growth year over year. We think that’s going to continue to grow as things get switched over from, say, nickel-metal hydride rechargeable batteries to lithium-ion batteries in consumer electronics.
TER: With all the market turmoil that we’ve had here since you last spoke with us back in April, can you bring us up to date on what’s been happening in the battery materials industry in the past six months? Have there been any major changes?
JL: There are only four major lithium producers. Two publicly stated in July that they were raising their prices, partly because of increased demand. That definitely helped out along with rising raw materials prices. Soda ash (sodium carbonate) has increased dramatically, thereby increasing the cost to produce lithium carbonate. Because demand is still strong, they’ve been able to raise prices and pass on those extra costs to customers. Other companies are also selling at capacity. So the overall strength of the market is definitely there in the short term. We believe producing companies will be able to take advantage of that market demand.
TER: Has anything happened recently on the technical front to affect the lithium market in either a positive or negative way?
JL: As kind of a leading indicator of where the market is going, you can look at the amount of money that a company is going to spend on new lithium-ion plants. More and more battery producers are increasing capacity, and that’s a clear signal of where we think the market is going.
TER: A number of companies are mining lithium deposits, mainly in South America, but also in Canada. Do you foresee a supply glut in the market?
JL: Most of the mining companies could come into production within the next year. Demand should increase in step with supply. The markets have a pretty good way of clearing out producers that aren’t able to compete. That is why locating potential low-cost producers is part of our investment strategy. Just like any other market or mining sector, not all exploration juniors make it to production. We try to find those companies that will be in the lower quartile of relative production costs.
TER: You mentioned that a couple of the major producers raised prices. Is lithium mainly a negotiated or supplier price-based market rather than one driven by investment demand?
JL: Yes, it’s mainly supplier-price based. It’s sold over the counter, and we doubt there is going to be any type of LME (London Metal Exchange). It’s not going to be an exchange-traded material because customers have specific criteria for batteries on the chemical side as well as the physical side. Determining the physical and chemical characteristics of lithium products will be based on customers’ needs. Because each customer has different needs, we think that it will remain a negotiated market, and people will pay different prices for different chemical and physical characteristics.
TER: Back in April, you told us about the four major companies that dominate the market. What are the prospects for smaller companies now entering the market?
JL: Recently, demand has been strong and the majors are expanding. But we believe there will be space for companies to enter the market because the four majors will, at some point, max out on capacity. We think there is space for some of the juniors. In the short or medium term, you may see companies that have strategic investors who may pay up for the security of having that supply in an offtake agreement. If one of those strategic investors makes a more substantial equity investment in the near future, we think that shows that the customers are more worried about the security of supply rather than price. And that could bode well for some of these juniors.
TER: How would you summarize your reading on the lithium business at this point?
JL: I think the lithium business is strong. I’m seeing strong growth in the near term. With the consumption of lithium in consumer batteries, you’ll see substantial growth, especially with the implementation of transportation vehicles. Companies are committing hundreds of millions of dollars in capital to build these plants. We think that’s a leading indicator of where demand is heading.
TER: It looks like lithium is here to stay for the foreseeable future.
JL: We believe so as well.
TER: Very good. We appreciate the update and your current thoughts. Thanks for talking with us today.
JL: Thank you.
Jonathan Lee is a battery materials and technologies analyst with Byron Capital Markets in Toronto. As a member of Byron’s research department, Lee’s primary focus is on the battery materials sectors, which includes lithium, vanadium and cobalt.
Article published courtesy of The Energy Report – www.theenergyreport.com