Argentina lithium industry to benefit from debt deal but uncertainty lingers

Lithium market experts welcomed news that Argentina has struck a deal with private investors to restructure a large chunk of its debt because it will help provide a steadier environment for investors in the country.

But miners of the key battery raw material continue to face short-term challenges due to low lithium prices.

Argentina, alongside Chile and Bolivia, is part of the so-called lithium triangle which holds over 70% of the world’s reserves of lithium beneath its salt flats.

Lithium is a key ingredient in the manufacturing of batteries that power consumer electronics including laptops and phones, electric vehicles (EVs) and energy storage systems (ESSs). Lithium demand for EVs and ESSs is expected to soar in the coming years while key regions transition to a greener economy.

Argentina financial uncertainty
On August 31, Argentinian President Alberto Fernandez announced that over 99% of the debt owed to foreign private investors had been restructured following a lengthy negotiation process.

The lithium-rich country is now negotiating with the International Monetary Fund (IMF) for a new deal with the lender as it faces the bulk of repayments on its current arrangement with the organization.

Argentina has a long history of financial instability. Sovereign debt crises, currency depreciation and hyperinflation have plagued the country for decades.

The previous Argentinian administration signed the latest financing deal with the IMF in 2018 to avoid another sovereign bond default. Before the new Argentinian government canceled the deal, $44 million had already been lent by the IMF.

The country is now seeking a new agreement for repaying the debt.

The Covid-19 global health crisis and its economic fallout further stressed the fragile Argentinian economy.

The announcement of the agreement to restructure the debt was welcomed by industry analysts.

“It is good news because Argentina has not defaulted which scares investors even more than what they are already. It should certainly be seen as positive and might facilitate approval of projects that will move the economy,” Daniel Jimenez, partner at Chile-based consultancy firm IliMarkets, said.

“While I think the [debt] deals are a good sign, the weakness of the currency is troubling,” Emily Hersh, partner at Buenos-Aires based mining consultancy DCDB, said.

The Argentinian peso stands at 74.95 against the dollar as of September 15, compared with 69.63 pesos to the dollar three months ago on June 17, according to currency exchange site Oanda.com.

“Fixing the sovereign default was a necessary condition to start normalizing funding alternatives, especially for large infrastructure projects.

“Getting Argentina back to performing status should allow many companies with local operations to tap on existing credit lines, revolve some maturities and unlock previous commitments,” Balanz Capital Valores analyst Ezequiel Fernandez in Buenos Aires said.

“However, the capital controls [currently implemented in Argentina] and overall concerns on dollar availability would make the landing of new money aimed at greenfield or even brownfield expansions improbable. Basically, international banks or foreign equity investors would be wary of sinking capital in Argentina without a clear view on how those dollars could make their way back home,” Fernandez added.

When asked specifically about the lithium sector in the debt-stricken country, the same analyst said that off-taker financing could be a way to deal with the current situation but for the sector to grow significantly in Argentina lower foreign exchange controls are paramount.

Lithium mining in Argentina
The economic fallout from the Covid-19 global health crisis has badly affected the lithium industry in Argentina, leaving producers and junior miners facing short-term challenges despite a positive long-term outlook due to the progressive shift to green mobility and demand for the metal expected to surge.

“Any positive impact and sentiment it does provide to those working or investing in Argentina and the lithium industry there is welcome… we haven’t had any real negative direct impact on our business and ability to work in Argentina [due to Covid-19]. Unfortunately, we feel the negative lithium market sentiment is of more concern to potential new investors into the lithium sector,” spokesperson for junior miner Argosy Minerals said.

The Australian miner is currently developing the Rincon lithium project in northwest Argentina. The project has already started industrial scale pilot operations and once commercially operational will produce 2,000 tonnes per year of lithium carbonate equivalent (LCE).

Other lithium producers have cited the pandemic for causing disruptions either to operations or earnings. French group Eramet postponed the development of a lithium mine project in Argentina in February this year, citing economic uncertainty.

United States lithium incumbent Livent, which extracts lithium from the Salar del Hombre Muerto in Argentina, reported a drop in revenues for the second quarter of 2020 because of market weakness and disruptions in the automotive sector supply chain, in its second-quarter results on August 6.

Canadian miner Lithium Americas said on August 14 operations at its Caucharí-Olaroz lithium project in Argentina would restart within a few weeks after being forced to temporarily halt onsite operations to limit the spread of Covid-19 among its workforce in early July.

Low lithium prices
Lithium prices have been under increasing downward pressure since the beginning of 2020, due to disruptions and the uncertainty caused by the pandemic in an already low-priced environment.

Fastmarkets’ most recent assessment of the lithium hydroxide monohydrate, 56.5% LiOH.H2O min, battery grade, spot price, cif China, Japan & Korea was $8.80-10.00 per kg on September 10, down around 22% from $11-13 on September 19 last year.

Lithium prices have broadly trended lower since the second quarter of 2018, in response to a modest uptake in EV usage relative to the scale of increased lithium supply.

The low lithium price environment has discouraged supply expansions in the upstream sector and prompted some miners to postpone near-term capacity expansions leading lithium experts to warn of a supply crunch in the years ahead.