Comparing cost curves can be deceiving
While industry onlookers’ focus has increasingly been on cost curves of the different lithium producers amid the bearish market conditions, a like for like comparison between companies can be hard to achieve, according to Rodney Hooper, lithium consultant at RK Equity.
For production assets, factors such as different geographic locations, the production of battery or non-battery grade products, the difference between carbonate or hydroxide, as well as the various industries that producers serve “are all issues determining the underlying cost curve of a producer,” Hooper said during a presentation on October 26.
Additionally, there are “moving targets” such as royalties, export taxes and sales commissions, variable feedstock, exchange rates and input costs, which will influence a company’s base line.
This crucially means that production costs and profitability of an asset are not so strictly linked: “There is no direct correlation between who is the lowest cost producer and what the operating Ebitda margin will be,” Hooper said.
“Where a project sits on the cost curve is less important than what its operating margin is. [In practice], you can go bankrupt sitting at the low end of the cost curve and producing a lower-value product.”
According to RK Equity’s analysis, companies’ cost curves and profitability levels evolve during the price cycle of the market, owing to variables that are specific to each company and weigh on final costs in different ways at different stages of the cycle.
“Each producer has a fluid cash cost curve depending on various factors – so investors need to analyze individual cost curves to property understand full cycle profitability,” Hooper said.
Countries are looking to secure supply chains
Securing resilient supply chains and reducing risk is a growing concern ahead of the increasing global demand for lithium and other minerals in the coming years.
“As there is increased awareness on the link between clean energy and the growing demand for minerals, we want to be prepared for any supply challenge ahead of us,” Mark Pituch, senior energy officer at the Bureau of Energy Resources at the US Department of State said in a keynote presentation.
His comments echo the recent US federal strategy to ensure secure and reliable supplies of critical minerals which aims “to reduce the nation’s vulnerability to disruptions in the supply of critical minerals.”
The United States has launched an international initiative to encourage responsible development, support capacity building among countries, explore mining extraction opportunities and attract private investment, Pituch said. Australia and Canada, and more recently Botswana and Peru, have reached cooperation agreements with the country.
The Australian government sent a similar message, saying it is also taking extra steps in this regard, with a special emphasis in moving further down the supply chain on lithium hydroxide.
On October 20, the federal government released the Australian Critical Minerals Prospectus 2020 which outlines more than 200 potential investments in 24 critical minerals and rare elements, including lithium, cobalt, manganese, antimony, tantalum, tungsten, vanadium and niobium.
Australia has finalized agreements so far with the US, India, South Korea, Japan and Canada to support projects and to develop critical minerals and rare earths. “We are committed with a range of countries to helping to diversify and secure global supply chains,” its government said.
Europe targets self-sufficiency
Europe aims to build a strategic autonomy in the battery supply chain which is deemed pivotal to its competitiveness and a low-carbon future.
Against this backdrop, global mining and metals company Rio Tinto is developing the Jadar mining project in Serbia.
The Jadar project, currently into the feasibility study phase, is a lithium borate deposit discovered by Rio Tinto in 2004.
The company would extract lithium from jaradite - a lithium sodium borosilicate mineral, the company said.
"Our estimate is that the European automotive industry and cell production will require something like 250,000 tonnes of lithium chemicals annually,” Finnish Minerals Group chief Matti Hietanen said during a panel discussion on October 27.
Lithium is garnering investor interest (again)
Investors are taking interest in lithium assets again, after a two-and-a-half-year near continuous decline in lithium prices, which are showing early signs of finding a floor.
Fastmarkets’ assessment for lithium carbonate 99.5% Li2CO3 min, battery grade, spot price range exw domestic China stands at 40,000-41,000 yuan ($5,957-6,106) per tonne as of October 29, compared with 37,000-41,000 yuan per tonne at the beginning of the month.
Furthermore, shares in lithium miner Albemarle are trading at about $94 on the New York Stock Exchange, up from lows of $50.90 on March 23.
“Albemarle is the lithium proxy…it looks like we may have bottomed and lithium 3.0 is under way,” Howard Klein, partner at RK Equity, said.
But investors will be paying attention to sustainability concerns beyond the initial draw of electric vehicle growth forecasts.
“Sustainable and low-cost - these elements are now part of the conversation in a way that they weren’t before,” Ana Cabral, managing partner and co-founder of A10 Investmentos, said.
“Geographic proximity to end markets matters. [Tesla CEO] Elon Musk has basically said so with an 80% reduction in kg [CO2 emissions] per km,” Klein added.
Fastmarkets reporters present the key themes and discussion points from the Lithium Supply and Markets online conference, which was held online on October 26-28.