Joe Lowry One of the World's Leading Lithium Market Experts
Junior (under) Achievement January 8, 2016
The recent resurgence of the lithium market in terms of both demand and pricing has sparked a renewed effort by junior mining companies to tout their projects to both large and small investors.
As the lithium market approaches a demand “tipping point” it cannot continue to rely solely on the “Big 3” and Chinese spodumene converters. If global supply is to keep up with a coming tsunami of demand growth, new capacity needs to emerge in the next few years. Capacity beyond what newcomer Orocobre may (or may not) finally bring to market.
The combination of increased demand, a favorable government change in Argentina (where several junior’s hopes lie), and higher pricing that should remain unabated until the end of the decade is creating the most favorable lithium investment climate in years. Add the turmoil in Chile around national lithium policy going forward that puts a near term cloud around ALB and SQM’s future capacity additions and the environment for investment in juniors looks even better.
Despite the positive climate, many juniors seem to have their focus in the wrong place.
The almost insatiable interest of certain investors in Tesla coupled with Tesla’s inability to bend the “Big 3” lithium companies to their unrealistic price demands has created a “virtual” supply gap in the market that many juniors are pursuing as the lithium"holy grail”. The group of juniors focused on Tesla do so at their peril. Tesla’s significance as a lithium purchaser is significantly overblown. The lithium demand pitch made to investors should be focused on global growth not one nascent electric car company and an unfinished battery factory in Nevada.
Tesla’s car production is a driver of lithium demand but it is currently less than 2% of the global total based on the production of approximately 55,000 cars in 2015 plus a little “Power Wall” demand. I am well aware that Tesla has ambitious battery production plans but so do many others around the world.
Tesla does not directly source large quantities of lithium hydroxide because they are not making the lithium containing cathode at this point. They are currently buying batteries and will be buying cathode for quite some time after they start making batteries in Nevada.
Even if Tesla runs the Gigafactory at capacity by 2020 – they will still be less than 10% of world demand at that time. Tesla uber alles? I think not.
Articles about the “significance” of the Gigafactory come out almost daily. Most of these articles are written by people with no background in lithium or how the lithium ion battery supply chain works. Given the prominence of the “Tesla story” it is not surprising many of the juniors have tied their hopes to their “opportunity” to supply Tesla OR their ability to convince investors they will supply Tesla.
While I understand the marketing strategy of leveraging the “Tesla opportunity”- if a junior miner commits to supply Tesla at a well below market price (which is what Tesla is currently demanding) they are essentially selling their “birthright for a mess of pottage” (meaning the investors are unlikely to get a return on their investment).
Of course, there is a real market shortage developing but the “virtual” shortage created by a misunderstanding of Tesla’s impact seems to get more attention. The real market shortage is the growing gap between existing lithium supply and demand driven by the usual suspects (cell phones, tablets, PCs, power tools, etc) along with e-transport (ex-Tesla) and Energy Storage Systems (ESS) for renewables and power grid use. Financing a rapidly growing globally diverse market should be a more attractive investment pitch than one based on dreams of supplying a single company whose stated objective is to drive down the price they pay for all battery raw materials.
There seem to be two types of juniors: a) those with a leadership that sincerely wants to bring a resource on-line and create value for themselves and investors and b) the charlatans who only want to enrich themselves by promoting a questionable project and offloading it via the “greater fool theory”. From my perspective some of the juniors currently making the most noise in the market are of the latter type.
The market needs one or two juniors to obtain capital in the next year and bring capacity on-line by the end of the decade. The juniors are again a story worth following but for most investors returns will remain elusive.
American readers may be familiar with an organization called Junior Achievement that has a mission of teaching school age children entrepreneurial skills. Maybe instead of Tesla spending time trying to get juniors to agree to deals they have no hope of fulfilling, Mr. Elon Musk and company could “mentor” a junior……. That would be real Junior Achievement.
Below is a link to an interview with a cross section of junior hopefuls that recently appeared in Lithium Investing News. One of them will likely succeed – I will leave it to you to decide which one.
