Battery Metals OvervIew by Gavin Wendt, MineLife

bAttery metAlS overview

We are at an interesting point with respect to battery materials, especially with regards to demand-supply dynamics – and most importantly pricing. There are opposing views on where prices are headed, but irrespective of one’s position, it’s a discussion that’s certainly worth having.

Front and centre in the battery materials space has been lithium – which has been far and away the best-performing battery sector commodity. This positive momentum has flowed through into the share price performances of lithium equities around the world – whether it be established producers or junior companies.

Source: international energy Agency

Russia’s war on Ukraine, combined with a surge in demand from car companies looking to secure supply for ever more ambitious EV growth plans, pushed the prices of raw materials such as nickel, lithium and cobalt to record levels during March. The major battery commodities can be summarised as follows:

LITHIUM: Australia’s hard rock mines account for about half the world’s supply. Chile, where it’s harvested by pumping salt-rich brines from underground into vast evaporation ponds, is the No. 2 producer - and holds more than 40% of the world’s known reserves. China has more than half of all capacity for refining it into specialist battery chemicals. Almost $14 billion is needed to develop planned lithium production capacity by 2025, according to BloombergNEF. And money isn’t the only hurdle: Serbia in January blocked Rio Tinto Group’s plans to build Europe’s biggest lithium mine after running into public opposition over environmental concerns.

NICKEL: The U.S. warned in a 2021 report of the prospect of large shortages of the highly purified, battery-grade type, known as class one nickel, in three to seven years because of a lack of enough specialized processing. Any trade curbs on Russia, which accounts for about 17% of production capacity, would add to pressure on prices. Indonesia, which holds almost a quarter of global nickel reserves, limited some exports a couple years ago and is now luring investments into higher-value processing, mainly from China.

COBALT: More than two-thirds of the mined metal comes from the Democratic Republic of Congo (DRC), though Australia, Cuba and Canada are expanding capacity. The DRC has long faced allegations of corruption, human rights abuses and the use of child labour. Small-scale “artisanal” producers accounted for about 12% of the country’s output in 2020. China has little of the raw material but refining is concentrated there, with about 80% of global capacity. Capacity is growing elsewhere, though, including at Finland’s giant Kokkola refinery.

GRAPHITE: Battery makers can use either a natural graphite extracted from mines to make anodes or a synthetic material that is typically more expensive but lasts longer, charges faster and improves safety. China accounts for about 60% of natural graphite production capacity and 90% for the synthetic. It also is a big source of the raw material, but new supplies are being developed in places including

Tanzania, Madagascar and Canada. South Korea and Japan are alternative sources of processed materials. Tesla last year struck a deal with Syrah Resources, a supplier with a mine in Mozambique and a plant in Louisiana.

Over recent weeks there has been an emergence of dissenting voices when it comes to the immediate price prospects of lithium in particular. Some banking analysts including UBS believe that the peak of the price craziness may be over. The price per kWh for a high-nickel NMC811 lithium-ion battery had fallen from $150 in March to $135 by the end of May. It is also estimated that the increase in raw material prices has now added $1,200, or roughly 3%, to the materials cost for a batteryelectric car compared with the price at end of last year.

For as long as the car market remains undersupplied, manufacturers will likely be able to pass on the lion’s share of the cost burden. That means customers, for now anyway, are willing to pay the higher prices to get into a new car, which in turn means the car makers can progress with their electrification plans without worrying too much whether they will get a return on their investment.

Elsewhere amongst the sceptics, US investment bank, Goldman Sachs, has gone even further – “calling the end of the bull market” on lithium. A recent Goldman Sachs report has referenced new investment, particularly in respect of Chinese breakthroughs in extraction of lithium from an alternative mineral called lepidolite. Also pushing the theme of lower pricing was news that Chinese battery and vehicle maker, BYD, was in talks to buy six lithium mines in Africa with the potential to provide the raw materials to eventually refine enough lithium to make 28 million EVs with a battery size of around 60kWh.

In my view, Goldman’s prognosis is misplaced. Lithium sector fundamentals are far more positive that the sceptics are describing. For starters, lepidolite production is complicated and yet to be commercially proven on the scale necessary to make a meaningful impact in the battery sector. Furthermore, acquiring an undeveloped resource in Africa is very much a different story to actually pushing the button on a mining development. There are a

lot of hurdles to be jumped through before African resource projects are commercialised.

Just look at the iron ore space, where China has been trying for a couple of decades to break the market dominance of Australian and Brazilian iron ore suppliers, by developing projects in Africa. Quite simply, China’s African iron ore ambitions have been frustrated by uncertainty and massive capex requirements.

And the anecdotal evidence from lithium producers tells a positive story on pricing and demand, not a negative one like the sceptics are suggesting. Producers are seeing end-users that are desperate to secure supply – shooting down the argument that there is a situation of oversupply in the market. For example, Pilbara Minerals (ASX: PLS) at a recent conference in Queensland, Australia pointed to ongoing strength in the auction prices that it is receiving via its website for spodumene concentrate. Quite simply, it cannot satisfy the demand from end-users that are clamouring for supply.

In actual fact, most industry groups are modelling a significant lithium supply deficit of around 20% for the period 2023-2030. While the spot market might see some sort of easing in price, it’s important to note that the spot market reflects a very small amount of product that’s actually traded - most lithium is sold via contracts. Another Australian producer, Allkem (ASX: AKE), has just announced that the average price it would receive during the June quarter would be 14% above previous guidance at US$40,000/t on sales of ~3,500 tonnes.

At current lithium prices, all producers are generating peak cycle returns, yet a recent retreat in share prices has resulted in implied pricing of $US18,435- $US23,716/t LCE.

Benchmark Minerals has pulled no punches when it comes to its analysis of the current view of lithium sector sceptics, commenting: “We’ve seen this before, we will see it again. Goldman Sachs: you can’t just add up all the lithium mine level potential and make an oversupply call. The speciality chemicals world is more nuanced than iron ore. It’s why the world doesn’t rely on investment banks for research anymore!”

It’s important to bear in mind that the consequences of failure to produce enough lithium are potentially devastating. Global investment in EVs has grown faster than any other new-energy sector over the past few years, outstripping even wind and solar power. Along with higher prices of other raw materials, it is a reversal of years of falling prices as EVs race to become cost-competitive with gasoline-powered vehicles. If battery makers can’t get access to enough lithium, it would curb the expansion of cleanenergy vehicles, making it harder to meet global emissions targets. As is often the case in the resource sector, today’s price surge had its origins back in the period 20182020, when there was a substantial price slump. Back then, lithium prices halved in value, which in turn led to chronic underinvestment in new sources of supply. This all took place just as EV demand was taking off, amplified by the post-covid move towards EVs as part of mandated climate goals. For battery makers, these supply woes have been compounded by the covid pandemic and Russia’s war in Ukraine - impacting supplies of not only lithium but other ingredients they need - including nickel, graphite and cobalt.

Tightening supply and higher prices have prompted a flurry of acquisitions and joint ventures as battery makers and automakers try to secure supplies, which has also unleashed a wave of resource nationalism among governments. As early as June last year, Fitch Solutions said lithium had become a “strategic mineral,” and warned of “rising government intervention.”

To provide some sort of perspective on the scale of the industry, EVs and batteries drew $271 billion and $7.9 billion of investment respectively during 2021, according to BloombergNEF. The upstream part of the value chain has, on the other hand, attracted relatively low investment over the last five years, adding to supply problems.

More than half of the global resources of lithium are located in what is known as the ‘lithium triangle’ between Argentina, Bolivia and Chile, where producers pump lithium-rich brine from underground lakes and allow the liquid to evaporate for 12-28 months to yield a slurry that can be profitably processed. Current technology recovers only about 50% of the lithium in the brine. Much of the remaining supply comes from deposits of an igneous rock called spodumene, with Australia as the biggest miner. The ore is roasted and leached with sulfuric acid and the silvery-gray residue is typically shipped to China to be made into lithium hydroxide and lithium carbonate – compounds that can be combined with nickel or cobalt to make battery electrodes, or with solvents to make electrolytes.

The quickest way to increase supply is to ramp up output from these existing sources. Australia’s Pilbara aims to raise production capacity more than 50% by the September quarter by expanding its Pilgangoora mine in Western Australia, a project that includes Chinese partners Great Wall Motor Co. and CATL.

For many brine-lithium producers however, increasing output quickly is constrained by their permits and the time taken to let the liquid evaporate. Joe Lowry, founder of advisory firm Global Lithium, says it best: “There is plenty of lithium in the ground, but timely investment is the issue. “Tesla can build a gigafactory in about two years, cathode plants can be built in less time, but it can take up to 10 years to build a greenfield lithium brine project.”

But lithium producers face an even bigger problem. Part of the reason consumers are prepared to pay a premium for an electric vehicle is that it’s better for the environment. But the lithium supply chain is far from green.

And then there are political factors that can hamper the development pipeline. Rio Tinto’s proposed $2.4 billion Jadar mine in western Serbia, which would be Europe’s biggest, has stalled due to community opposition. Rio says the mine, originally scheduled to open in 2026, would create more than 2,000 jobs and meet the highest environmental standards, including using recycled water and electric trucks. Elsewhere, Savannah Resources’ Barroso project in Portugal and Lithium Americas’ proposed mine in Nevada are others that have to negotiate local opposition.

Chile’s Constitutional Convention recently approved an expansion of environmental governance that includes reshaping water rules and other environmental protections that could affect lithium producers if the charter is ratified in a September referendum. So, lithium producers don’t know what the rules will be.

But lithium producers face an even bigger problem. Part of the reason consumers are prepared to pay a premium for an electric vehicle is that it’s better for the environment. But the lithium supply chain is far from green.

The Atacama desert of northern Chile is one of the driest places on Earth, but extracting the mineral from salt flats 10 times the size of New York’s Central Park and processing it requires a lot of water. According to BloombergNEF, it can take about 70,000 litres of water to make one ton of lithium. Mining spodumene is energy intensive and together with shipping the concentrate to China for refining can emit 3.5 times more carbon

dioxide than lithium extracted from brine, according to Wood Mackenzie.

Companies are pursuing new technologies to lower expenses, cut water use and green their operations. Albemarle Corp, the world’s biggest lithium producer, is seeking responsible mining certification for its operations in Chile and said it will reduce the intensity of freshwater use by 25% by 2030 in areas of high water-risk. Many are pursuing direct lithium extraction, a term used to describe ways to chemically capture lithium compounds that would speed up production. Albemarle, which carries out its own research, said DLE so far has shown to be “typically less economic and less sustainable than conventional brine resources.” The company will continue to investigate DLE and other processes to meet sustainability goals.

Environmental and supply issues have prompted companies to look for alternatives to the lithium-ion battery, including hydrogen. But none have come close to supplanting lithium in the all-important passenger car market, and most are years away from commercial viability. Therefore, lithium-ion will likely remain the dominant battery technology at least up to 2035. Lithium-ion batteries fall into a sweet spot that balances high energy density and safety. The mineral is the least-dense solid element with the greatest electro-chemical potential and a very low melting point, producing an excellent energy-toweight performance.

Ulderico Ulissi, battery research lead at Londonbased Rho Motion Ltd., an energy transition researcher, predicts that solid-state and sodium-ion batteries could eventually challenge lithium-ion packs in some applications in the second half of the decade. “EV qualification, however, is a lengthy process and scaling up manufacturing of new technologies can bring several challenges.”

Another potential source of lithium is from recycling old batteries, a practice that could meet 16% of annual demand by 2035. But battery retirements are only set to surge after 2030. Basically, there’s just not enough batteries to be recycled right now, whilst recycling presents its own environmental problems.

There is little real-world evidence to support any sort of sustained pullback in lithium prices due to an oversupply situation. In fact, the anecdotal evidence from major producers is the opposite.

Gavin is based in Sydney, Australia and has followed the fortunes of international resource markets for the past 25 years, covering both equities and commodities, as a research analyst. He believes that the most interesting resource opportunities are typically found at the smaller end of the market, which these days is his exclusive area of focus.

The resource sector is on an inexorable growth path, driven by an ever-increasing world population and modernization of living standards in emerging economies, as well as a significant shift in how we generate energy. This will provide enormous growth in the demand for commodities of all types.

Gavin is the Head of Mining & Metals with research group Independent Investment Research (IIR) and he is the Founding Director and Senior Resource Analyst with MineLife.

For more information about MineLife, please visit: www.minelife.com.au

SUMMary

There is little real-world evidence to support any sort of sustained pullback in lithium prices due to an oversupply situation. In fact, the anecdotal evidence from major producers is the opposite. End-users are still scrambling to ensure enough supply, a situation that could well be exacerbated the with reopening of China’s major cities, Shanghai and Beijing. We could well see a resurgence in EV purchases now that Chinese citizens can move about with greater freedom, which will mean pressure on battery supplies and in turn commodity demand. China represents the world’s biggest EV market and purchases had slowed over recent months, due to lockdowns. The reality is that most industry groups are modelling a significant lithium supply deficit of around 20% for the period 2023-2030. Nevertheless, the recent pullback in equity and commodity prices is a healthy thing in any overheated market, as it typically provides the breather the market needs, allowing for price consolidation and the opportunity for industry fundamentals to be properly reassert themselves.

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