Greenbushes to double spodumene concentrate production: Implications for other producers and would be entrants
Talison Lithium, the 49/51 joint venture between Albermarle (ALB-US) and Tianqi Lithium Corporation (002466-SH), has announced its intention to double production at its world class lithium mine at Greenbushes, WA. The JV envisages commissioning a new spodumene concentrator by Q2, 2019. Annual production will increase from the current 80,000 tonnes to 160,000 tonnes of lithium carbonate equivalent (LCE).
This should come as no surprise. In September 2016, Tianqi announced they were moving towards a doubling of production to feed their newly approved chemical grade lithium plant at Kwinana, WA. Earthworks has just begun on the site which has a capital build estimate of $400m. ALB has also suggested that they may build their own chemical processing plant.
What does this mean for the lithium industry globally and here in Australia?
Consensus data estimates that between now and 2020, an additional 130,000 tonnes of LCE will be required to meet demand. Most of that will likely be supplied by the new breed of hard-rock miners including Galaxy (GXY-AU) at Mt Cattlin, Neometals/Mineral Resources (NMT/MIN-AU) at Mt Marion and, going forward, Altura Mining (AJM-AU) and Pilbara Minerals (PLS-AU) at their respective Pilgangoora projects. Research from Deutsche Bank suggests that the lithium market will return to balance, or be in a slight over-supply, by the end of 2017.
However, the Greenbushes mine is arguably the world’s best hard-rock lithium deposit, with superior grade (2.4% Li2O) and latent capacity to increase production. Greenbushes already provides c. 30% of the world’s (2016) lithium requirement (70Kt LCE on a world demand of c. 210Kt LCE).
This gives the JV a unit cost advantage over peers. ALB has long touted their intention to capture as much as c. 50% of the growth in LCE supply going forward. The Greenbushes mine has been an integral part of that strategy since ALB bought its share of the project for almost $1 billion in total.
It must be remembered too that ALB is already a low-cost lithium brine producer. So why the hard-rock strategy? Brine-based operations can suffer from very high initial capital costs, long ramp up times (refer Orocobre – ORE-AU) and tricky environmental approvals. In our view, ALB’s big hard-rock play is designed to circumvent some of those issues and means the company has more certainty over being able to supply when the need is greatest.
We note that on Monday 20 March the West Australian newspaper ran a story suggesting that ALB was in the dataroom of Kidman Resources (KDR-AU). KDR’s Earl Grey Lithium pegmatite deposit, located in the Forrestania Greenstone Belt, is one of the largest discoveries of pegmatite in the southern region of WA. KDR has signed an exclusive option deed with Poseidon Nickel (POS-AU) to have the right to process its spodumene ore through POS’s existing Lake Johnston nickel processing plant, modified to treat pegmatite. This will shorten the lead time for project development and drastically reduce capital expenditure requirements. Neither ALB or KDR would comment on the article.
As an example of the effect that Greenbushes can have on the lithium market, Deutsche Bank noted that a surprise 20% year-on-year (y-o-y) increase in production from the mine in 2016, sent the lithium market much closer towards balance than previously estimated, resulting in a 31% fall in the price of Chinese battery-grade lithium by year end. However, the seaborne lithium price continued to increase, reducing the gap between Chinese and international prices.
By 2019, Australia is likely to produce close to 50% of the world’s lithium supply. Post 2019, the Talison JV will be set to soak up much of the additional requirement for the following few years, assuming a smooth ramp up in production from the plant. We believe this will leave the lithium market with excess supply through the early 2020’s, which would depress spodumene concentrate pricing and potentially significantly reduce margins for the highest cost concentrate producers.
In other words, the supply response, which has already started, will likely be enough to meet the demand in the medium term. Until 2019, lithium (spodumene) concentrate pricing is likely to remain relatively robust and existing producers and new entrants through 2017/2018 are best placed to take advantage of the current pricing to quickly reduce project debt.
Thereafter, the picture becomes less clear as further new spodumene entrants, brine project expansions and the potential for the new hydro-metallurgical processing techniques (L-Max®, Si-leach®, and others) that have the potential to produce battery grade chemical product at a fraction of the price of the established processing route, start to take effect.
Prices for spodumene concentrate are predicted to fall from the current price of c. $950 per tonne to as low as $450 per tonne by 2019.
The corollary of this argument is that lower raw material input costs and higher battery manufacturing capacity will drive down battery prices thereby opening up larger markets as battery technology gets more affordable. This in turn, will drive higher demand. Much of this argument rests with the Electric Vehicle (EV) market.
The rise of EV’s is the big kicker
Electric Vehicles (EV) will have an enormous impact on the lithium demand side, with an inflection point in this demand occurring around 2020 based on published data from auto-manufacturers. Having recently been lucky enough to get a ride in the only Tesla X P100D in Western Australia last weekend, your author is in no doubt as to the impact EV’s will have in the future. The word “breath-taking” fails to convey accurately how impressive this machine is. “Disorientating” may be a better description. 0-100kmph in just 2.7 seconds. Silent, raw power. Even the much more modest BMW i3 was impressive at 0 to 100Kmh in 7 seconds.
The new 100KWh battery-pack in the Tesla X P100D provides a range of 542km under optimum conditions. With charging stations already established throughout the south-west of WA and canny business owners starting to realise the benefit of providing a wall socket in return for a meal or accommodation booking, it is now possible to travel from Albany to Karratha for essentially no cost (pers. comm).
You can easily see where this technology is taking the EV market. The Tesla Model 3, at c. US$35,000, is being aimed at the mid-range vehicle market and further reductions in battery costs per KWh will facilitate mid-range manufacturers to offer full EV’s to the man and woman in the street.
With battery technology getting better all the time, particularly in regard to energy density and charge rates, EV’s will have a huge impact next decade and will be a significant factor in the demand for lithium.
Behind the rise of EV’s is government policy and customer preferences, especially from Europe and China. Other jurisdictions will surely follow.
More uncertainty around energy storage
We believe Lithium-ion battery technology will dominate the auto and personal device sectors for some time to come. At least another 10 years. Energy storage battery technology may take different forms and it is perhaps too early to tell what type of battery will ultimately be the most successful in the power storage market.
Where on the cost curve?
Lithium producers are no different to any other mining company. As the industry matures and the supply response becomes saturated, together with the new processing technologies, a company’s position on the cost curve will largely determine its longevity.
Once the new lithium processing plant is built in Kwinana, Tianqi Lithium will have a vertically integrated local operation from ROM spodumene to chemical grade lithium hydroxide, which by the way, should maintain a price premium to lithium carbonate. The brine producers, at the lowest end of the cost curve produce lithium salts with operating costs off-set by significant by-product credits, mostly in the form of potash. In fact, as much as 40% of the revenues from some brine operations come from this by-product, driving down the C1 cash costs for lithium.
The vertical integration strategy has not been lost on would-be entrants. A number of new hard-rock entrants have signed agreements with companies such as Lithium Australia (LIT-AU) and Lepidico (LPD-AU) to test their mineralised material against these propriety hydrometallurgical techniques. The processes aim to liberate lithium from silicates and micas (micas deemed a lithium waste mineral everywhere except China) to produce battery grade lithium carbonate or lithium hydroxide without the energy intensive, and therefore expensive, roasting stage. Companies successfully applying this technology will capture the downstream value by producing chemical grade product rather than just selling a concentrate. It also by-passes a potential bottleneck in the lithium sector. The Chinese chemical factory.
The LIT and LPD business strategy is to licence their technology to enable lithium miners to capture the downstream value-add, as well as being vertically integrated players themselves using their own lithium deposits. Strategically placed chemical plants that can take advantage of favourable logistics for by-product sales, will then be used to process material from multiple lithium miners.
In an interesting development, LIT has made a conditional take-over offer for LPD, which if successful, would combine both technologies under one-roof.
Miners without access to this, or other processing technology, may find themselves at the wrong end of the cost curve with anticipated lowest cash costs for brines and hydrometallurgical processes estimated at c. US$2,500-US$3000 per tonne of LCE, as opposed to the current lowest hard-rock cost for Talison at around US$4,500 per tonne of LCE. Costs to produce battery grade chemicals from Tianqi’s own plant will drive down the cost of hard-rock LCE still further for a significant proportion of new supply post 2019 until the lithium demand expands another notch.
The analogies with the seaborne iron ore market are there for all to see. The largest companies with the highest grade and lowest unit costs will ultimately set the price. However smaller players with access to new processing technologies will also be insulated through the price cycle.
Where is the weakest link?
Although lithium (and carbon, in the form of graphite) form a significant raw material input into battery manufacture, it is not the only requirement. Depending on the type of battery, additional raw material inputs come from nickel, aluminium, iron, phosphate, manganese and cobalt.
Of these cobalt may represent the weakest link in the battery manufacturing chain. Much of the focus on battery energy density and better charge rates requires batteries containing cobalt but most of the world’s cobalt supply comes from the Democratic Republic of Congo (DRC). Jurisdictional risk and potential for tougher guidelines for purchasers to help reduce worker exploitation has fuelled a significant rise in the cobalt price, which has now reached US$53,000 per tonne.
Supply shock from the DRC could be a significant risk to the battery manufacturing industry. As a result there has been a sudden increase in the number of ASX-listed companies that have turned their attention to cobalt exploration as the window opened for raising capital.
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