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Argentina pushes lithium investments

Sep 1, 2017

Argentina is courting junior miners and global investors as it aims to supply half of global lithium demand

Mick Bowen

Keywords: argentina lithium macri

As the world’s electric car manufacturers and renewable energy firms invest heavily in battery development and manufacturing facilities, Argentina has emerged as an important future source of a crucial ingredient, lithium. With several projects set to begin construction, Argentina’s Ministry of Energy and Mining expects the country to produce half the world’s lithium by 2020.

South America’s "lithium triangle," which straddles northwest Argentina, north Chile and southwest Bolivia, contains more than half of the world’s identified lithium deposits, mostly in high-altitude salt flats called salares. But while Bolivia has committed to maintaining government control and Chile has opted for a quota system and public-private partnerships, Argentina has opened up its deposits to foreign junior mining companies (small cap mining exploration companies) with an appetite for risk.

Pointing to the "numerous interesting prospects" currently under development by mining exploration companies, Gabriel Rubacha, president of South American operations for Lithium Americas, notes: "Brine projects can be expensive to set up but have very attractive operational costs." In contrast to hard-rock lithium projects, common in North America and Australia, lithium brine is a liquid that can be pumped up, much like oil or water. 

Lithium Americas, through a joint venture with Chilean lithium miner Sociedad Química y Minera (SQM), is developing the Cauchari-Olaroz brine deposit in northern Argentina. The estimated project costs for the lithium carbonate mine are $425 million, but the operating costs are expected to be $2,495 per ton, compared with the $4,000 per ton operating costs typical of hard rock lithium projects. In late 2016, SQM signed lithium carbonate contracts at a price of $12,000 per ton.

Three other projects, owned by Canadian, Australian and French companies, aim to add nearly 100,000 tons to Argentina’s production levels within three years, and Australia’s Orocobre plans to double capacity at its existing 17,500-ton Salar de Olaroz facility. Those projects alone would boost production in Argentina to 165,000 tons from 29,000 tons in 2016.

But more junior miners are also looking to stake ground in Argentina, encouraged in part by the policies of President Mauricio Macri. "Argentina is recovering the confidence it had lost under the previous administration," says Mario Capello, the undersecretary of mining development. "Much of the focus has been on lithium, and it is the government’s duty to develop the potential of these resources."

Light at the end of the tunnel

As Capello explains, more than 30 companies have undertaken lithium exploration projects in the past year, investing over $200 million so far. With research firms predicting that global lithium demand could triple to 750,000 tons annually by 2025, the more advanced projects could benefit from being early movers.

But they could face challenges to access financing. Until now, lithium developers have tended to partner with strategic investors higher up the value chain. For example, in January 2017, Lithium Americas, which is listed on the Toronto Stock Exchange, sold a 19.9% stake to China’s Ganfeng Lithium for 64 million Canadian dollars ($48.3 million) and $125 million in debt financing. As part of the deal, Ganfeng’s offtake agreement entitles it to 70% of Lithium Americas’ share of production from the Cauchari-Olaroz project.

"As a junior company developing a half-a-billion-dollar project, we needed a strong strategic partner that understood the product and the market," says Rubacha. "Both parties agreed to the offtake contract at market prices as the most convenient solution."

Also in January, Lithium Americas sold a 16.4% stake to BCP Innovation, a subsidiary of Thailand’s Bangchak Petroleum, for $112 million and another $80 million in financing. BCP’s offtake agreement calls for 15% of Lithium Americas’ share of production at market prices. 

But would-be lithium miners may soon have to cast a wider net to find financing, according to Chris Berry, founder of the research firm House Mountain Partners. "A small number of development-stage projects looking for major financing will need to rely on more than just strategic investors to attain adequate capital and meet the strong demand forecasts," he says.

Banks and hedge funds have shown interest in funding some projects, but Berry says lithium production involves unique operational risks and lower equity and debt prices could attract varied sources of capital.

Lithium miners in Argentina could also learn lessons from the first lithium boom of 2008 to 2012, when many companies rushed to find financing. Orocobre, for one, became the most shorted stock on the Australian Stock Exchange after it admitted that a "spreadsheet error" had overestimated the concentration of brine at its Olaroz project. Galaxy Minerals, which is also developing a project in Argentina, narrowly escaped bankruptcy after its Chinese processing factory racked up huge losses.

"As much as we’d like to, these projects can’t be rushed," Berry says. LF



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