An Investment in a Higher Power

by James Brumley | August 31, 2012 1:21 pm

With the advent of handheld electronics like smartphones and tablet PCs, the need for longer battery life has ballooned. Lithium has proven to be a much better battery material than traditional nickel-based metals or alkaline, solving the problem of low battery capacities.

The ensuing problem, though, is that battery-grade lithium is in limited supply compared to the large quantities that we now need. Ergo, miners who have access to a strong lithium deposit are in an enviable position.

I recently had a chance to dig deeper into the company set to be, as of the last look anyway, North America’s only producer of battery-grade lithium: Canada Lithium Corp. (PINK:CLQMF[1]).

Here’s what the Olav Svela, the company’s director of investor relations, had to say.

Q: What does Canada Lithium do, and why is lithium such a big deal now?

A: Canada Lithium is in the midst of building an open-pit mine and processing plant in the heart of mining country in Quebec. Commissioning of the operation will begin late this year and first production of lithium carbonate should occur by March 2013.

(Note to investors: A new lithium mine hasn’t been brought online in 25 years.)

The operation will begin to produce revenue later in the second or third quarter 2013. Annual production is anticipated to reach 20,000 tonnes of battery-grade lithium carbonate (current price of plus-$6,000 per tonne) for next 15 years. That’s roughly about $120 million in revenues per annum. Potential for a longer mine life does exist.

Lithium is such a “big deal” now because demand continues to grow in all three major markets for lithium carbonate: consumer electronics such as cellphones, laptops, iPads, etc.; electric and hybrid vehicles; and electrical-grid storage solutions.

Q: Who are your biggest competitors, and what makes you different?

A: Major competitors are brine producers in Chile and Argentina — Sociedad Quimica y Minera (NYSE:SQM[2]), FMC Corp. (NYSE:FMC[3]) and Chemetall, who together account for more than half the world’s lithium carbonate production. Talison is another producer, but it produces from a hard-rock deposit (as will Canada Lithium), and was recently acquired by Chemetall.

The only other mineral (hard-rock) source for lithium carbonate was Talison, but now that it’s been acquired by a brine-producer, Canada Lithium will be the world’s sole source of lithium carbonate from a hard-rock operation.

Q: Who’s buying the lithium? Obviously the establishment of a marketing team in China suggests that’s where the bulk of the growth is, but are there other customer elsewhere, and what kind of batteries — by purpose — are being made by your buyers?

A: The main consumers are large cathode battery material producers. These companies blend lithium carbonate with other metals to produce the active material in rechargeable batteries. Examples of such companies are Panasonic (NYSE:PC[4]) in Japan, LG (NYSE:LPL[5]) in Korea, Samsung and multiple companies in China. Most cathode producers are located in Asia. Anode producers and electrolyte producers also buy lithium, as do large companies outside the battery business.

The establishment of a marketing team by Canada Lithium in China confirms that the bulk of contract business is located there, and we have developed many relationships with large buyers in that territory. The main demand in Asia is for Li-ion rechargeable batteries, mainly used in consumer goods (PCs, iPads, mobile phones, etc.), HEV/EV and energy storage units.

Q: On a semi-related note, what’s the demand trend for lithium?

A: This graph, from Grupos de Estudios Minerios, gives some context for the demand trend:

083112 lithium consumption An Investment in a Higher Power[6]

Q: A recent acquisition deal put an Australian miner directly in the hands of a chemical company that makes lithium batteries — perhaps one of the most direct “supply ensurements” seen for any industry in a while. Lithium One Inc. is about to be acquired. What does that suggest is ahead for the industry, and what might it specifically mean for Canada Lithium?

A: First, it suggests that the industry has embraced the viability of hard-rock deposits, such as Talison’s and Canada Lithium’s. There was a time when brine producers and many analysts seemed to view hard-rock sources of lithium carbonate as “upstarts” with little chance of achieving commercial operation. It was purportedly too costly to compete against the brine-source producers.

However, Chemetall’s Talison acquisition torpedoed that idea; otherwise, why would a brine producer buy a hard-rock producer?

Second, the acquisition further consolidates an already oligarchical supply structure dominated by the big-three brine companies. This development might be viewed with some alarm by battery manufacturers relying on such a narrow scope of producers. They could well seek new sources of supply to limit supply risks.

For Canada Lithium specifically, it supports our claims that hard-rock miners are legitimate players in the lithium carbonate industry. We’ve conceded that our costs will be generally higher than most brine producers, but not by much. And product purity, the “holy grail” for battery makers, is anticipated to be assured from our operations. This has been problematic for some brine producers.

Bottom Line

With Talison no longer the “go-to” stock for portfolio managers seeking a pure-lithium play, Canada Lithium suddenly might attract more investors’ attention. As well, there may be a brine producer out there looking for a Talison look-alike to add to its producing stable of operations.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

Endnotes:
  1. CLQMF: http://studio-5.financialcontent.com/investplace/quote?Symbol=CLQMF
  2. SQM: http://studio-5.financialcontent.com/investplace/quote?Symbol=SQM
  3. FMC: http://studio-5.financialcontent.com/investplace/quote?Symbol=FMC
  4. PC: http://studio-5.financialcontent.com/investplace/quote?Symbol=PC
  5. LPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=LPL
  6. [Image]: http://investorplace.com/wp-content/uploads/2012/08/083112-lithium-consumption.png

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