Updated: Aug 4, 2022
M&A activity in the lithium space continues to be hot with the latest takeover (announced on July 11) coming by way of China’s Ganfeng Lithium making a bid to buy privately owned Lithea Inc., for up to $962M. Lithea owns rights to two lithium salt lakes located in Argentina’s Salta province. This deal would help Ganfeng, a Chinese supplier of battery-grade lithium for electric vehicles, strengthen its positioning in upstream resources and self-sufficiency. This comes as global lithium production jumped by over 20% last year, driven by demand for lithium-ion batteries powering the EV revolution. Argentina makes up part of the so-called lithium triangle and has been specifically trying to attract more investors with new mining infrastructure and newly implemented tax cuts.
Note that lithium carbonate pricing continues to be resilient amid all the YTD market turmoil. At just under CNY 480,000/T, the spot price is up 70% YTD and nearly 400% on the year. That said, in line with the equity market selloff, lithium producers and developers have all suffered YTD with Livent Corp. (LTHM) declining -14.6%, Albemarle Corp. (ALB) declining -16.1%, Lithium Americas (LAC) declining -28.0%, Piedmont Lithium (PLL) declining -34.8% and Cypress Development (CYP) declining -50.5%.
On the M&A front, recall that Rio Tinto (RIO) announced this past December that it would buy the Rincon lithium project in Argentina's Salta province for $825M. In late April, China’s second largest mining company, Zijin Mining Group announced the acquisition of the Lakkor Tso lithium project located in Tibet for the equivalent of $1.15B. Four months before that transaction, Zijin announced the $720M all-cash acquisition of Neo Lithium and its flagship 3Q lithium project located in Argentina’s Catamarca province. Much of the M&A frenzy this year has been from China with companies such as Suzhou GCL Hengneng Energy, Jinzhou Jixiang Molybdenum and Nianyang Fulin Precision Ltd. all inking deals worth hundreds of $millions, snapping up domestic targets. Clearly the new attitude is to pay up in an effort to protect and insulate oneself from potential geopolitical instability. In light of the tensions between China and Australia (China having imposed a ban on Australian coal in 2020 but is still importing plenty of Australian spodumene), the Chinese have been making more acquisitions targeting South America instead of Australia. Though China controls nearly two thirds of the global lithium processing and refining market, it still relies on importing two thirds of its lithium resources. Just as the Chinese will be looking to support and supply their burgeoning EV industry, we expect the exact same from the U.S. For these reasons, our preferred lithium jurisdictions remain Argentina and Nevada.
Given the upcoming Q2/2022 earnings releases we note that producers such as Albemarle (ALB) and Livent (LTHM) may surprise once again to the upside (as they both did in Q1/2022), on back of consistently strong pricing. We note that our preferred development name in the space, Lithium Americas (LAC) also has substantial acreage in Salta province, with both the Pastos Grandes lithium brine project along with the Cauchari-Olaroz project, which is currently under construction and due to begin lithium carbonate production later in 2H/2022. We estimate that construction by now is well over 90% complete (expect an update in early August in conjunction with the Q2/2022 results) with a targeted ramp up to 40,000 tpa and an additional stage 2 development plan for another 20,000 tpa. Note that in terms of pricing, 80% of planned stage 1 production has already been contracted for, at future prevailing market prices. Equally important in our view is the fact that earlier in the year, LAC submitted a draft loan application to the US Department of Energy for funding to be used at the company’s other asset, the wholly owned Thacker Pass Lithium Project, located in Nevada. To further extract value, management is evaluating the possibility to spin out its US project. We would view the prospect of separating the US and Argentinian projects as very positive on a single project basis. This type of spin-out would lead to additional interest from specific investors looking for stand-alone asset and risk profiles in certain geographic regions, which may be constrained to them at the moment.
Sticking with our Argentina or Nevada theme, in the more junior development space we also like Cypress Development Corp (CYP.V). The company is focused on developing the wholly owned Clayton Valley lithium project, located near Albemarle’s Silver Peak brine operation in Nevada. Metallurgical testing at Clayton Valley indicates that low-cost processing can be achieved by leaching with low acid consumption (126 kg/t) and high lithium recovery over 85%. Self-generated power from a 2,500 tpd sulfuric acid plant is included in the project’s Prefeasibility study costs. Pre-Feasibility Study highlights have illustrated a 15,000 tpd operation producing 27,400 lithium carbonate equivalent (LCE) annually, over a 40 year LOM. The capital estimate amounted to $493M with an operating cost estimate averaging $3,387 per tonne. That said, the project after-tax NPV8% was estimated at $1.03B with a 25.8% IRR. A full Feasibility Study is expected to be released in the months ahead. Note that a fully permitted pilot plant is already built on site with management and operators on site, thus far lithium leaching results have averaged 84%. The company currently has $22.9M in treasury.