Nemaska Lithium: Well-Positioned To Benefit From Global Investment Interest – Nemaska Lithium, Inc. (OTCMKTS:NMKEF)
Argentina and Australia have been at the top of the list of regions that are focused on bringing to market meaningful volumes of high-quality lithium chemicals to meet the demands of the automotive and stationary energy storage markets. With new production being allocated to dedicated partners through the implementation of offtake agreements between producers and end users, this has limited the amount of new lithium supply that is widely available in the open market. Although some new supply has been brought into the market through greenfield project development or the expansion of production at currently producing facilities, there is still significant room for new production to enter the market over the next five years.
Although the Canadian lithium industry is still in the developmental stage, it is well-positioned to benefit from rising lithium demand over the coming decade. At present, there are two near-term producers, North American Lithium and Nemaska Lithium (OTCQX:NMKEF), that will play an instrumental role in the development of the industry. It is my opinion that the Canadian lithium mining and exploration industry presents opportunities for investors looking for exposure to the hard-rock and exploration aspects of the business. Specifically, Nemaska Lithium is an advanced-stage lithium company that is preparing to bring meaningful supply of various lithium chemicals to market over the next few years. The company’s ongoing success in developing its flagship asset will continue to draw investment into the growing Canadian lithium industry, which will benefit other players in the market. Therefore, there is a growing case to remain opportunistic around lithium investment in Quebec.
It is expected that in 2018 Nemaska Lithium will further advance the development efforts at its mine, concentrator, and hydromet plant, which are all located in Quebec. Based on the recently filed 2018 Feasibility Study, the company requires a total CAPEX of $801 million to finance the construction that will allow it to be an integrated lithium chemicals company delivering lithium carbonate and lithium hydroxide chemicals to the global market. Today, it is a common business transaction for Canadian and Australian lithium hard-rock miners to ship spodumene concentrate directly to Chinese processors. Due to the tight supply-demand factors in the lithium markets, this business practice has been well-received, as it expedites the availability of lithium supply in the market. In the mid-term, as new lithium supply comes to market, especially from lithium brine projects located in the Argentine region of the Lithium Triangle, the shipment of spodumene directly to Chinese processors will decrease due to the lack of technical expertise and processing capacity, amongst other reasons. Hard-rock producers who want to be a viable contender in the global lithium supply chain will need to be able to bring additional value-add to the market.
Nemaska Lithium and North American Lithium lead the pack in Quebec
This is partially why I believe that Nemaska Lithium will be one of the few new Greenfield lithium projects that will successfully enter the market over the next several years. It is in my opinion that, in 2018, the company will announce a major financing partner to support the construction of its facilities and become an offtake partner for lithium chemicals produced at its facilities. The $800 million capital investment will allow the company to deliver up to 16,000 tonne LCE on an annual basis. The updated drilling activity defined a total of 7 million tonnes of spodumene concentrate, which converts into approximately 770,000 tonnes of battery-grade lithium hydroxide and 361,000 tonnes of battery-grade lithium carbonate. As market demands shift between hydroxide and carbonate, the company will be able to modify its product offerings to reflect current market conditions.
In the near term, Canadian mined spodumene concentrate continues to be exported into the global market. Although this business practice is considered low-value, it allows Canadian producers to establish a global network of partners and continue to attract capital in the Quebec market. Traditional users of lithium are likely finding it difficult to source smaller amounts of the white metal as supply moves to satisfy the emerging opportunities in the battery space. Supplying chemicals to the traditional users of lithium could be viewed as an opportunity for Canadian lithium firms to meet, specifically those looking for secure supply in North America.
On June 2, 2017, North American Lithium in La Corne officially opened its operations, which allows the company to produce spodumene concentrator. Material produced at the facility is then shipped to China for final processing, which then becomes integrated into various applications, including glass, ceramics, and batteries. The company announced that its spodumene concentrate is converted into carbonate that is used in the lithium battery supply chain. The former Quebec Lithium site, operated by Canada Lithium, was purchased by strategic Chinese investor Jien Nickel Industry and Investment Quebec. Jien Nickel Industry is a Chinese investment company focused on the reorganization of quality assets in the mining, processing, smelting, refining, and chemical markets. With Chinese demand for lithium chemicals on the rise, it is in my opinion that both Chinese investment firms and material manufacturers will continue to look to the global markets to secure new supply. New supply will feed the needs of new battery-based energy applications, including the electrification of all forms of transportation and stationary energy storage systems.
China mandates transition to new energy vehicles
In late Q3 2017, China announced that it would delay the new regulations around the introduction of new energy vehicles, but would increase the mandates for 2019. The original mandate was for automakers to produce an 8% quota in 2018, which has been delayed by one year. The Chinese auto industry pushed back knowing that they would not be able to meet the 2018 requirements, as the lithium supply chain was not fully activated and required more capital and time to meet the desired production outputs. Under the revised mandates, in 2019, automakers that produce more than 30,000 vehicles per year will need to comply with a new energy vehicle mandate that could represent up to 10% of their sales in the form of new energy vehicles, followed by a step-up to 12% by 2020. Automakers that are not able to meet the quota will have to acquire credits from other companies.
As a direct response to rising global sales figures for electric vehicles, the price of lithium carbonate in China has risen from $5,000 / T LCE in 2016 to $18,000 / T during Q4 2017, as illustrated in the graph below. In Q1 2018, Argentine-produced lithium carbonate soared over $15,000 / T, closing the pricing gap between China and the rest of the world. It is my opinion that the current trends in the Chinese domestic automotive business are going to continue to be a driver for increasing demand for lithium carbonate, which remains in tight supply. The strong emerging demand from China will ensure that prices stay exceptionally strong until new supply enters the market in 2020-2024.
Therefore, based on strong underlying policies in the Chinese automobile industry, I believe that demand for lithium carbonate will be in a short position until new, meaningful supply arrives into the market, which will likely not occur until after the end of the decade. Until then, battery manufacturers will expand production capacity, requiring a buildup of activity throughout the supply chain, including stockpiling of lithium carbonate, to ensure the material manufacturers have sufficient levels of supply to keep production lines operational. Inherently, this will put pressure on non-Chinese battery manufacturers to move to secure lithium supply and will drive outside China sales contracts to match inside China sales contracts, meaning that lithium carbonate prices will likely continue to climb to $18,000 / T LCE.
To support these statements, the graph below shows that lithium carbonate pricing from Salar de Jujuy, which is owned and operated by Orocobre (OTCPK:OROCF) and Toyota Tsusho (OTCPK:TYHOF), continues to see increases in the selling price. Prices have risen from $10,000 / T LCE to $15,000 / T LCE between Q1 2017 and Q1 2018.
2018 outlook for the Canadian lithium market
Until now, the Canadian lithium industry has not delivered meaningful volumes of either lithium carbonate or spodumene concentrates. North American Lithium has been delivering spodumene into the Asian market, but this has less than a one-year track record, which is very limited for the mature lithium chemicals industry. Going forward, Nemaska Lithium will continue to shift towards becoming a high-value added provider of lithium chemicals that will change the landscape of the Canadian lithium market. The company’s vision to become an integrated lithium chemicals organization is shared by Australia-based lithium producer, Orocobre.
Orocobre is best known as the only greenfield lithium producer to bring new, meaningful production to market in 20 years. The company continues to ramp up its lithium carbonate production to 17,000 T / year at its Olaroz facility located in the Northwestern region of Argentina. In January 2018, the company announced that it had finalized details around Phase 2 at Olaroz, which will see an increase in annual production to 34,000 tonnes. In addition, Orocobre, along with its joint venture partner Toyota Tsusho, is arranging for the construction of a 10,000 T / year lithium hydroxide facility located in Japan to support the requirements of Japanese automakers. It is clear that should both Orocobre and Nemaska be successful in executing their strategies, they will be well-positioned to deliver meaningful volumes of various lithium chemicals to market.
The Canadian lithium industry does not have a strong track record of producing value-added lithium chemicals. However, since the failure of Canada Lithium, several fundamental market factors have changed. As noted above, lithium prices continue to remain strong on the back of a global shift to new energy vehicles. Over the next few years, new supply of lithium will easily be absorbed into the market, but the real question remains around the uptake rate in electric vehicle sales, as this will play a great role in determining what the market requirements are. The second key factor is that financing is more widely available. Expensive lithium has placed pressure on end users of the white metal to become further involved in the supply chain. For example, a notable investment was made by Ganfeng Lithium into Lithium Americas (OTCQX:LACDD) to assist with financing the construction of a lithium brine project in Northwestern Argentina.
Ganfeng Group was established in 2000, and has since grown to become the largest integrated lithium producer in China. Today, it has a total capacity of around 30,000 tonnes per annum of LCE. Ganfeng’s products include lithium metal, lithium hydroxide, lithium carbonate, lithium fluoride, and lithium chloride. The company recently announced plans to invest $30 million into the construction of a next-generation, solid-state, lithium battery facility in China. In 2017, Ganfeng and Lithium Americas reached a financial agreement that will see Ganfeng invest over $190 million into the Cauchari basin to build out the necessary plant and property in exchange for around 19% of the outstanding shares of Lithium Americas. The funds were made available through two financial vehicles – the first was a private placement for around $50 million, and the second was a $125 million project debt facility – which will allow Lithium Americas to quickly move into construction in 2019.
Another example was the acquisition of Lithium X Energy Corp. (OTCPK:LIXXF) by Chinese investment group NextView for $265 million, or $2.61 / share. NextView is a large, resource-focused organization that has teamed up with Tibet Summit to establish a $1.5 billion investment fund to acquire overseas mining assets with a focus on the new energy resource sector. Lithium X is a junior lithium exploration company focused on its flagship project, Sal de los Angelese, in the Argentine region of the Lithium Triangle.
CATL announces $66 million investment into North American Lithium
Back in Quebec, I believe that 2018 will see Chinese and other Asian companies make strategic investments to bring new, meaningful supply to market. Further, it is my opinion that Jilin Jien will continue with its efforts to divest of the North American Lithium operations either through a public listing or strategic transaction. On March 2nd, the industry learned that CATL, the largest Chinese lithium battery production company, would invest a stunning $66 million into North American Lithium, which will allow the company to expand its product offering. As noted above, the company presently ships spodumene concentrate to China for integration into the battery supply chain. This investment will allow North American Lithium to upgrade its facility with the goal of producing lithium carbonate.
The market demand for advanced lithium assets and the availability of capital will remain very strong in the next several years, which will support the spin-off of the Jilin Jien lithium asset in Quebec. Nemaska Lithium is expected to make a financial decision in 2018 to bring on board additional lithium offtake partners. It is in my opinion that the investment and offtake partners will be Asian-based investment or battery material manufacturers looking for a secure supply of lithium chemicals to feed production plants in China. It is also possible for a North American lithium end user to participate in the developments at Nemaska. Chinese companies have already absorbed lithium companies, such as Lithium X, or secured new lithium output, such as was seen with Lithium Americas. North American- and European-based end users of the white metal could be searching for opportunities to become more involved in the supply chain, something that Nemaska Lithium offers to interested parties. Based on developments in 2017 and Jilin Jien’s activities in the region, I expect that the financing and offtake arrangements will be completed through Chinese partners.
As noted in the opening comments, Nemaska’s success in 2018 will drive investment appetite for other companies operating in the region. It will be beneficial for Quebec-focused lithium investors if Jilin Jien has success in publicly listing North American Lithium, as that would further illustrate the opportunity for explorers in the region.
Jourdan Resources a well-positioned land play
One company that I have made a speculative investment into is Jourdan Resources (OTC:JODRF), which trades on the TSXV under ticker symbol “JOR”. It is a lithium pure play junior exploration company that has been exploring its properties, which surround the North American Lithium mine. Recent and historical drilling activities on the company’s properties show that the mineralized spodumene pegmatite dykes, which North American Lithium is mining, continue directly onto Jourdan’s properties. Although Jourdan has not yet produced a resource estimate, the company is well-positioned to benefit from a growing level of interest in the region.
As of March 2018, Jourdan Resources was ranked as a microcap company with a market capitalization of only $2 million, but has completed much work at its Quebec properties. In addition to the exploration success that it achieved throughout 2017, the company has recently announced a capital raise of up to $2 million, which will be plenty to get drills back in the ground and move the exploration program forward. It is in my opinion that Jourdan Resources is well-positioned, as CATL has committed to invest $66 million in new capital into the company’s neighbour, North American Lithium.
Throughout 2017, the company continued to define its natural-resource asset. This activity delivered additional positive results into October. Throughout the summer of 2017, it relogged and sampled previously untested drill cores. The compilation and interpretation, relogging, sampling and surface investigation of the Vallee Lithium property resulted in the identification of significant lithium mineralization that is contiguous with and due east of the Quebec Lithium Mine owed by North American Lithium.
In addition, the company reported results from a 1500-metre drill program completed on the Preissac-Lacorne Lithium Portfolio, which has been optioned from Alix Resources, Inc. and one other claim that is owned by Jourdan. Once again, the focus was on expanding and further defining the continuous ore body that defines the North American Lithium deposit. The drill program was centered at 1.5 km northwest of the adjacent Quebec Lithium Mine, which is owned and operated by North American Lithium. The results were positive, with several holes reported to have multiple and widespread mineralized zones up to 140 metres apart within the same drill hole, indicating a broad zone of spodumene-bearing pegmatite dykes exists in the area. Drilling covered a strike length of 750 metres of spodumene-bearing pegmatite dykes.
It is in my opinion that if the company can successfully continue to drill its property in Quebec, its market capitalization can significantly rise from the $2 million range. As momentum builds at both North American Lithium and Nemaska, which recently achieved a market capitalization greater than $1 billion, Jourdan Resources could be well-positioned to benefit from the rising interest for lithium in Quebec.
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Disclosure: I am/we are long OROCF, JODRF.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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