Arkansas lithium projects heat up with royalty battle, huge underground resource

As Arkansas contends with booming lithium discoveries and investments by ExxonMobil (NYSE: XOM), Albemarle (NYSE: ALB) and Standard Lithium (TSXV: SLI) among others, the state faces a battle over the amount of royalty to pay landowners.

The Arkansas Oil and Gas Commission on Nov. 4 is to hear an application filed by those companies and others to potentially set the royalty rate. They have proposed a 1.82% royalty, while landowners are seeking 12.5%, according to BMO Capital Markets mining analyst Greg Jones.

The landowners’ proposal is “a level that would strain project cash flows based on our modelling,” Jones said in a note on Thursday. “We assume a 2.5% royalty in our base case, within the range of royalties applied in other jurisdictions. We anticipate the commission will take a balanced approach to support development of Arkansas’s lithium industry.”

This week, the United States Geological Survey and the Arkansas government said they’d found enough lithium in brine in the Smackover Formation within the state to supply global demand. They estimated the amount in the formation’s porous limestone left from an ancient sea at 5 million tonnes to 19 million tonnes. Scientists used water testing and machine learning to calculate the resource. The formation stretches from Texas to Florida, suggesting there could be even more lithium. 

Standard project

The discovery comes as Standard and partner Equinor (NYSE: EQNR), Norway’s state-owned petroleum company, develop their South West Arkansas project in the same geologic structure towards a definitive feasibility study and formal investment decision next year. Equinor paid US$30 million in May for 45% of Standard’s lithium projects in southwest Arkansas and East Texas, plus a pledge to invest US$130 million more in the projects if they go ahead.

The U.S. Department of Energy said on Sept. 20 it’s considering funding the project with as much as US$225 million, one of the largest ever U.S. government grants for critical minerals.

It’s part of the Biden administration’s push to source domestically more of the critical minerals needed for the energy transition. The departments of energy and defence as well as the Export-Import Bank are potentially able to allocate billions of dollars in funding for projects from mining and processing to finished products like vehicles. Even projects in Canada are getting financed. But the industry faces significant challenges as the price of lithium has crashed over the past two years.

Royalty faceoff

The South Arkansas Minerals Association, which represents the landowners, says the companies haven’t provided enough financial information to justify their proposed rate, BMO reports.

An Oct. 11 pre-hearing referenced some of the measures in state law for calculating the rate, such as the brine has to be profitably extracted before a rate can be applied, BMO said. But even the hearing officer noted it was unclear what evidence the commission would require to ensure a fair and equitable rate.

The companies’ proposed 1.82% royalty is based on precedent from a 2007 commission order, BMO said. The ruling determined the additional compensation attributable was US5.65¢ per barrel of brine. That equalled 1.82% of the per-acre value of the bromine extracted.

Other jurisdictions have different rates, according to BMO. California charges per tonne of lithium carbonate-equivalent, from US$400 to US$800, depending on production totals. Nevada has a 5% tax on net lithium sales.

Western Australia levies a 5% royalty on revenue from sales of spodumene concentrate, which is from hard rock lithium ore, not brine. Argentinian provinces apply a 3% royalty to extracted minerals. Brazil charges a 2% royalty on gross income from lithium sales with deductions allowed for taxes paid on commercial sales.

Direct extraction

The projects in Arkansas, and in some other places where there is underground brine, such as Chile and Alberta, plan to use the emerging technology of direct lithium extraction (DLE). It’s somewhat like pumping crude oil, which would seem to be an opportunity for fossil fuel companies intent on expanding their energy focus. Miners can also benefit from vast petro-coffers. The combination is already tapping some Prairie former oil fields that have brine.

ExxonMobil is evaluating potential production costs after drilling exploratory wells at the 486-sq.-km Mobil Lithium project on the Smackover Formation this year. It plans initial production of the battery metal in 2027. By 2030 it wants to produce enough for 1 million vehicles.

In southern California, Occidental Petroleum and a unit of Warren Buffett’s Berkshire Hathaway (NYSE: BRK.B) have begun feasibility testing to produce battery-grade lithium from the brine of 10 geothermal power plants.  

In Alberta, E3 Lithium (TSXV: ETL; US-OTC: EEMMF) is advancing its US$2.5-billion capex Clearwater project on one of Canada’s largest resources of the battery metal. It’s tapping former oil wells once pumped by ExxonMobil unit Imperial Oil (TSX: IMO), which is also helping fund the prefeasibility-stage project.

DLE advantages

DLE may cost more than using conventional brine evaporation ponds, but it can produce the battery metal in hours instead of months, can recover around double the metal, and occupies a much smaller footprint. 

In Chile, where evaporation ponds dominate, heavyweight producer SQM (NYSE: SQM) has been testing various DLE technologies including a collaboration with French chemical company Adionics.

Their trials have shown recovery rates reaching up to 98% from brine at the Salar de Atacama. SQM aims to integrate DLE into its operations as part of Chile’s new public-private model for lithium production​.