Stock Gumshoe...Lithium has been in use for a long time, of course, and holds price of place as the lightest metal on the periodic table (the lightest solid, really), and it’s very reactive and has great energy density, which makes it appealing for batteries — which is why lithium ion batteries have taken over in most portable electronics and in most electric vehicles. That has led to the idea that lithium should become far more expensive, because demand for electric vehicles is ramping up. Consumer electronics are one thing — the lithium producing world has pretty well met the required demand for millions of laptops and billions of cellphones, essentially all of which have lithium ion batteries, but millions of electric vehicles is another thing entirely because of the massively different size of the batteries required.
A Tesla, Goldman Sachs estimates, uses as much lithium carbonate as about 10,000 iPhones…. so if that’s true and 1.5 billion iphones (or similarly sized smartphones) are sold a year, which is roughly true, then adding 150,000 electric vehicles to the annual sales mix would effectively double the demand for lithium carbonate and/or lithium hydroxide for batteries.
Tesla is talking up 500,000 electric vehicles as its goal, and says they’ll be close to a 250,000/year run rate by the end of this year (that’s their 5,000 vehicles/week production goal by the end of 2017)… and, of course, though Tesla is the biggest producer of electric vehicles in the US, it’s far from being the only EV maker — just going by the US market, which is expected to grow much more slowly than China and Europe, there were about 85,000 battery-only electric vehicles sold in the US in 2016 (not including plug-in hybrids), and just over half of them were Teslas.
So yes, the demand for lithium ion batteries is expected to explode. Tesla’s Gigafactory has been the poster child of this as it scales up to make batteries and drivetrains for the new lower-cost Model S, which is supposed to see its first deliveries in a ceremony hosted by Elon Musk on Friday.
If you’d like a great overview of the lithium market, including some analysis of why Chile’s production has not kept up with demand (and a good reminder that lithium production could be increased dramatically), I highly recommend this FT article from about a year ago. Chile has changed a little bit in the past year, but remains the potential “Saudi Arabia of Lithium” even as political disputes and quotas hamper their largest producer, SQM (to the benefit, currently, of Albemarle (ALB), which recently boosted its production quota.
... this company David Fessler of Oxford Resource Explorer newsletter is teasing is Orocobre (ORE in Australia, ORL in Toronto, OROCF OTC in the US).
Orocobre went on my watchlist earlier this year because the shares had a huge drop — they fell roughly 40% in the late Spring when investors started to panic about the cost of their expansion plans — but I haven’t actually bought shares to this point, and haven’t seen a real rush to get in… I’m hoping for a bit more of a washout in the share price, but we’ll see where things go.
What makes Orocobre particularly interesting is that it’s probably the largest operating company that’s close to being a “pure play” on lithium — they produce phosphate and magnesium from their Salar de Olaroz in Argentina as well as lithium, and they have a smaller Borax business, but they do not have the large global chemicals industry presence that the biggest players have… and, unlike all the heavily touted junior explorers who are trying to develop projects, Orocobre is an actual producer, so they’ve got that little “emerging power” niche to themselves at the moment. (Galaxy Resources might argue that point). Albemarle, FMC, SQM are the old “big three” who used to completely dominate the market, despite mostly getting less than 20% of their revenues from lithium… lately Chinese players who do most of the refining have much more influence, like Tianqi and Ganfeng, though Albemarle has grown its lithium business dramatically faster than FMC and SQM and sold off some of its lithium businesses, and is now really the global superpower.
That doesn’t mean Orocobre is a dominant producer, though, not by any means — just that moves in the lithium price will probably have a more immediate impact on their bottom line than would be the case of the larger and diversified players like Albemarle or SQM… though it could be close when it comes to industry leader Albemarle — ALB as of the end of 2016 was getting 40% of its sales from their Lithium and Advanced Materials division, which was also growing more quickly than the rest of the company (about a 30% pace in both earnings and sales growth). And, unlike a lot of the junior hopefuls, Orocobre is ready to catch at least some of the expected supply imbalance and hopefully higher prices over the next three or four years, before more capacity is expected to come online from lots of different players (anyone starting up a project to create a new lithium brine extraction and evaporation facility today would likely have at least five years of work ahead of them, maybe 10, before production).
So that’s the positive — Orocobre is producing, and if prices start spiking they’ll enjoy substantial revenue increases. What are the negatives?
Well, despite the seeming simplicity of the process of producing lithium salts from brine (pump the brine out from underground into large evaporation pools in the Andes Mountains, wait for water to evaporate, dig up the salt and sell it), there’s plenty of complexity to be had — all you have to do is look at the challenges Orocobre has had in building and commissioning their plant, which was supposed to be producing 17,500 tonnes/year by the end of 2015 but is still down around 10,000 tonnes in the second year since the initial production started.
And, as I noted, Orocobre is also being punished for the fact that they want to expand a bit more, to a hoped-for 35,000 tonnes of capacity, to provide revenue growth, establish them as a major producer, and make the economics of the site work better at current prices… and investors are worried about how they’re going to pay for that expansion and for their lithium hydroxide plant joint venture in Japan.
Orocobre is really sensitive to those concerns, or at least to the impact they’ve made on its share price, and you can see that in the comments included in their latest investor presentations — in the most recent one, to a mining conference last week, the emphasis is that they are strongly cash flow positive after debt service, are paying down project debt rapidly, are capable of “sustaining multiple internally funded expansions” and will only move to Phase 2 expansion if they can do it without raising more equity capital (they think they have access to lots of cheap money from Japan from project debt finance still, which is probably true, and their cashflow can service quite a bit of debt).
The other concern with Orocobre has simply been that it is taking forever for them to get even close to the 17,500 tonnes of production they have planned, to say nothing of expanding the project… so the stock did surge higher late last year as lithium prices continued to surge, but the bloom has come off the rose a bit as investors process the actual dirty and difficult work of starting and optimizing this lithium manufacturing process.
They have had production constrained by a number of things, from snow to the need to tweak the processing plant to speed up flow to I don’t know what else. They think that starts to look much better starting roughly now, with the second half of this year seeing substantial increases in production, so that would be good news — and the decision about their Phase 2 expansion and the start of construction at the planned Japanese lithium hydroxide plant are probably at least a couple quarters away, more likely a year or two, so I would imagine that lithium prices and Orocobre’s production numbers will be the primary driver of the stock for the second half of this year. (Orocobre has production “penciled in” for their expansion in 2020, but that’s certainly no promise.
Beyond that, I’m still on the fence about Orocobre — they’re the most appealing emerging producer that I’ve reviewed, mostly because we know the economics work pretty well and they are actually producing and have that “pure play” exposure to lithium prices, but they are not expected (by analysts, at least) to be growing revenue all that much faster than Albemarle, which seems to be just getting more dominant.
On a revenue basis, the Financial Times notes that Orocobre is expected to earn 8 cents this year and 16 cents in 2018 (Australian$), which would give them a forward PE of about 20 and an exciting-looking 100% earnings growth rate. Albemarle, by way of comparison, is expected to earn $4.27 this year and $5.04 next year, for a forward PE of about 23 and a still-very-impressive 18% earnings growth rate. It makes sense for ALB to be more expensive, they are far more stable and predictable and even pay a dividend (yield about 1%), but for the risk-takers and the small-cap lovers there is more growth potential in Orocobre because of its small size and possible substantial production increase over the next several years. If lithium rises as sharply as Fessler expects, certainly both of them will do really well.
Anything else jump out? Well, Orocobre spun out most of its exploratory properties to a junior player, Advantage Lithium (AAL.V), so they do have some exposure to way-in-the-future upside there (they own 35% of Advantage now). Orocobre’s last quarterly operations update indicated that their cash costs are now about $4,279 per tonne sold, higher than they were in the previous quarter (because production dropped, this is the weakest time of year and they had snow) and average sale price was about $10,700/tonne, so there’s still plenty of nice gross margin there, and things are indeed starting to turn a little bit… though it’s still quite early, the next “peak season” starting in the Fall will be a big test (evaporation rates are much stronger in the South American summer).
Oh, and that “Ultra-Lithium” stuff, as far as I can tell, is just nonsense. I think Fessler is just talking up their Lithium Hydroxide plans — it’s likely that we’ll see the cost projections and more detail about that possible plant, which would be in Japan, in the next quarterly update.
Poster Comment:
Jim... Scarcity and exploration & production are not easily forecast. He may have a winner here, but based on past over-hyped commodities (“peak oil” and uranium and rare earth elements) I am a bit skeptical. The company may bear watching to see what develops over time. Missing out on some possible up-front gains is better than losing big-time if the promises don’t pan out later.
ryan... The bulk capacity of high quality cells comes from Samsung in Korea and Panasonic in Japan. Tesla’s “Gigafactory ” is behind on production promises, but when fully operational will b poised to produce 100% of the cells for Tesla cars, and Powerwall units, as well as “Powerwall” type units for residential solar installs.
Cheaper, less pure/powerful cells are coming by the boatload out of China. The common denominator is that they all need Lithium salt.
The only patented Lithium chemistry that I am aware of is a non-flammable material patented by privately held Alavo.
Andrew... Good info Travis’ thanks, China has a lot to offer in Lithium plays, they are growing quickly in many specialized fields , mining, materials and finished products, http://eqibeat.com/top-10-chinese-lithium-stocks-by-market-cap/