The Energy Report: The big news of last week was the announcement that Tesla Motors Inc. (TSLA:NASDAQ) will manufacture lithium batteries in Nevada. What impact will the gigafactory have on lithium?
Thibaut Lepouttre: By 2020, the gigafactory will be producing 500,000 (500K) lithium-ion batteries a year. That is more lithium-ion batteries than are currently produced in the entire world. If the other lithium battery producers keep production at the same level, the demand for lithium will double over the next six years. This will hugely impact its price.
Right now, most lithium batteries are made in Asia. Because of Tesla's economies of scale, the gigafactory will be a low-cost producer of lithium batteries. From a management point of view, it would be wise for Tesla to vertically integrate and acquire a secure source of lithium to cushion supply shocks.
TER: Where would Tesla acquire a secure lithium supply?
TL: Note that Tesla is building its gigafactory in Nevada. Western Lithium USA Corp. (WLC:TSX; WLCDF:OTCQX) operates the Kings Valley lithium project in that state. Western Lithium has about 500,000 tons (500K tons) of lithium in reserves. It is planning to output 2526K tons/year, which is exactly the amount of lithium the gigafactory will need. Importantly, Western Lithium has already started up a demonstration plant, which will confirm the flow sheet planned for the Kings Valley project. Western Lithium is located in a very safe region and should easily generate robust profit margins.
TER: Can lithium be produced artificially in commercial quantities?
TL: Today, 9095% of all lithium is mined. Secondary production comes from recycling old lithium-ion batteries. But the supply contribution from recycled batteries is marginal at the world level.
TER: What other companies are major lithium producers?
TL: We are looking at Orocobre Ltd. (ORL:TSX; ORE:ASX), which is in the final stages of construction for its Olaroz project in Argentina's Jujuy province. This a joint venture with Toyota Tsusho Group (TYHOF:OTCPK), which is partially owned by Toyota Motor Corp. (TM:NYSE). The mine is 8.5% owned by the province of Jujuy, which means that the local government has a vested interest in supporting it. Toyota Tsusho has provided the debt facility for Orocobre's plants, which covered the majority of the capital expenditures.
"Focus Ventures Inc.'s Bayovar 12 project is in a strong phosphate region; this is a dream situation for any mining company."
We expect to see the first lithium production in October. Orocobre will steadily ramp up the production rate to 17,500 tons per year (17.5 Ktpa). That is quite large on a world scale. A big geological advantage of this project is that it's a salar [salt lake]: The lithium-containing brine is pumped out of the salar and allowed to evaporate in the sun. Producing by that method is a low-cash-cost operation. Orocobre expects the cash costs to be $2K per ton. Current lithium prices are trading at $57K per ton. That is a very good operating margin.
The Orocobre project has a mine life of 40 years. If there is a huge supply shock on the lithium market, or a sudden boost in demand, Orocobre will easily be able to increase production to 25K, or even 35K tons of lithium per year. The mine has been approved by all the relevant provinces and communities. Only 20 kilometers (20 km) south of the Olaroz salar, there's another salar also owned by Orocobre, which can deliver additional brine to the processing plant at Olaroz. Orocobre is in an excellent position to benefit from an unexpected increase in demand for lithium, because its projects are low cost and scalable.
TER: If Orocobre's cost of production is so low relative to the market price, will that pull the price down on a global level?
TL: Even though Orocobre is a large producer, the demand for lithium is on a nice growth curve, so I do not expect the company to be price disruptive. However, as its product will fill in an existing gap in global supply, Orocobre could cause some hard-rock lithium projects in Canada to become less attractive. But I do not think that we will see a big move in the lithium price, overall.
TER: Orocobre also focuses on potash and boron. Do these minerals occur alongside lithium?
TL: In the salars, it is common to find a combination of lithium, potassium and boron, and even magnesium. The lithium is extracted from brine deposits, and the lithium and potash are separated from each other through an electrolyte process. Orocobre's project has some boron content, but the company is straightening out technical issues to make sure that the boron can easily be recovered and sold.
TER: Are there any phosphate-specific firms on your radar?
TL: In Peru, I have been examining Focus Ventures Ltd. (FCV:TSX.V), a very small company that has just released a major resource estimate on its Bayovar 12 project. The Bayovar 12 project is located next door to Vale S.A.'s (VALE:NYSE) gigantic phosphate mine, which has about 400 million tons (400 Mt) in resources. The Bayovar is a strong phosphate region, and Focus' land package is surrounded by phosphate mines. It is a very straightforward project. Twenty drill holes were sufficient to outline a deposit with 215 Mt in resources at an average grade of 12.5% P2O5. The company has revised the exploration target upward of 300400 Mt, which is as big as Vale's Bayovar mine. The mineralized layers are very horizontal, which makes the project easy pickings for a shovel-and-truck operation. There are more than a dozen mineralized beds. For the top four beds, the grade increases to 14.4% P2O5 for 5051 Mt. That bodes well for the economics, because the project has excellent infrastructure. It is located near several ports in a phosphate region with two big mines already in production. This is a dream situation for any mining company.
TER: How has the stock market been treating Focus' shares?
TL: Focus' share price has increased a bit during the past 12 months, because investors were anticipating a decent resource estimate. When the good news came out, the share price did not move much. This is a good opportunity for people to load up on Focus stock. In this region in 2011, Mitsubishi Corporation (MSBSHY:OTCPK) acquired a stake in a neighbor at about $1.10/ton in the ground. Translating that and taking the current market circumstances into account, we see a fair value of $0.50 or $0.60/ton in the ground, and that makes Focus worth as much as $90M. Of course, this is still an exploration project, but the company has engaged consultants to complete a preliminary economic analysis (PEA). After the PEA, Focus could link up with strategic partners. All of the big phosphate companies are in the region already: The Mosaic Co. (MOS:NYSE), Vale, Mitsubishi.
"The demand for lithium is on a nice growth curve."
Everybody is there except Agrium Inc. (AGU:NYSE; AGU:TSX). That is important because Agrium is running a phosphate processing facility in Saskatchewan. It recently ran out of its own phosphate supply, so it is importing phosphate from Morocco. From Agrium's point of view, it would save a lot of money to buy from Focus. It is $1517/ton cheaper to import phosphate from Peru to Vancouver than to keep importing it from Morocco. With a production rate of 2 Mt/year over a 10-year mine life, the cost savings is $350 million ($350M) on transportation alone. It makes sense for a big company like Agrium to obtain a stake in a Peruvian project. After the most recent resource estimate, Agrium will have Focus Ventures on its speed dial.
TER: Are there any other phosphate firms operating in South America that you like?
TL: DuSolo Fertilizers (DSF:TSX.V), in the Cerrado region of Brazil, is focusing on developing a fully integrated process to produce phosphate-based fertilizers as part of a nationwide effort that is incentivized by the government. DuSolo Fertilizer has recently secured 100% ownership of the property. The company's Bomfim project is adjacent to MBAC Fertilizer Corp.'s (MBC:TSX; MBCFF:OTCQX) Itafσs project. There is a big demand for fertilizer in the region because the soil is very old and the climate is very hot. The soil needs encouragement to grow fruits and vegetables.
DuSolo's plan is to produce direct application natural fertilizers (DANFs). The average grade will be between 1218% of P2O5, which is in the ballpark of what a fertilizing agent needs to be to properly cultivate the soil. DuSolo has secured a processing facility, which is about 30 km from the proposed mine site. This facility has an output of 80K tons/year. That is not a tremendous output rate, but for a total cost of less than $5M the company will be able to increase its throughput and output to 350K tons/year. That is 30% of the total demand in the 400500 km radius.
"We expect a global uranium supply shock in 2015."
The current market price in that region is about $150200/ton, so DuSolo will be able to grab market share by marketing its phosphate below the current market price. The company should be a price setter, because its operating costs per ton are projected to be less than $50/ton. It should be easy for DuSolo to sell all of its output at $100/ton and keep a 50% operating margin. If DuSolo can generate 350K tons/year at a $50/ton margin, the earnings before interest, taxes, depreciation and amortization (EBITDA) will clock in at $1718M.
TER: Will the produce from this region be exported to North America?
TL: Increasing soil yield will mainly benefit the smaller farmers in Brazil. I doubt that the U.S. consumer will see any benefit, because export margins usually get lost in the pockets of distributors, importers and wholesale operations. But the increased supply of local fertilizer will enable local farms to source a cheaper product and to increase their operating margins.
TER: What about agricultural entities in California and in the American Southwest, which are undergoing a drought? Do they have an increased need for phosphates?
TL: The good thing about the U.S. is that domestic production of phosphate covers all its consumption. In 2013, only 2 or 3% of the phosphate needed was imported. The U.S. domestic market can easily shuffle phosphate from one side of the country to the other. An increased need for fertilizer in California or Arizona will be easy to source domestically and will not have a global impact on prices.
TER: What is your outlook for uranium?
TL: We expect the uranium price to pick up in 2015 for several reasons. Both Cameco Corp. (CCO:TSX; CCJ:NYSE) and Paladin Energy Ltd. (PDN:TSX; PDN:ASX) have reduced output at the McArthur River and Kayelekera mines, respectively. They have suspended production because of low uranium prices. Cameco has reached an agreement with the United Steelworkers union on a new labor contract, so the McArthur River mine might be back in operation relatively soon. Looking at the crisis in Ukraine and the increased international pressure on Russia, we assess it to be unlikely that Russia will continue to dismantle its nuclear warheads to sell recovered uranium to the U.S. for use in nuclear reactors. Nuclear power plants will not be going off-line around the world, and new nuclear power plants are being built every month. We expect a global uranium supply shock in 2015.
TER: What uranium juniors do you like?
TL: Azincourt Uranium Inc. (AAZ:TSX.V) just sold a project in Peru to Macusani Yellowcake (YEL:TSX.V). The combined entity in Macusani Yellowcake has almost 100 million pounds uranium, and the PEA is ready. Azincourt Uranium sold its Peruvian property to Macusani Yellowcake for about 68.3M shares. The majority of those shares will be distributed to the current Azincourt shareholders. Looking at the current share price of both companies right before the distribution was announced, that distribution will be worth more than the share price of Azincourt. That means Azincourt buyers were getting Azincourt's Patterson Lake North project essentially for free. The Azincourt share price has since increased, which unfortunately no longer results in getting Patterson Lake for free. The Patterson Lake North is a joint venture with Fission 3.0 Corp. (FUU:TSX-V). Azincourt is a very good uranium bet, with an early-stage exploration project in the Athabasca Basin and a PEA/preliminary feasibility study-stage project in Peru.
I'd also recommend Global X Uranium ETF (URA:NYSE) as an excellent way to get involved in the uranium sector. That tracker holds about 30 uranium-related companies. When the uranium sector picks up as a whole, the exchange-traded fund (ETF) is positioned to do well.
TER: Thanks for your time, Thibaut.
Thibaut Lepouttre is the editor of the Caesars Report, a newsletter and mining portal based in Belgium that covers several junior mining companies with a special focus on precious metals and base metals. Lepouttre has a Bachelor of Law degree and two economics masters' degrees that have forged his analytical approach to the mining sector. Considered a number cruncher, Lepouttre focuses on the valuations of companies and is consistently on the lookout for the next undervalued mining company.
Read what other experts are saying about:
Want to read more Energy Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.
1) Peter Byrne conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Focus Ventures Ltd. Streetwise Reports does not accept stock in exchange for its services. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector.
3) Thibaut Lepouttre: I own, or my family owns, shares of the following companies mentioned in this interview: Focus Ventures Ltd., Azincourt Uranium Inc., Global X Uranium ETF, DuSolo Fertilizers. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: Azincourt Uranium Inc. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.