Lithium: Is it worth the hype?

Vancouver – Lithium demand is on the rise and supply may or may not be able to keep up, according to industry experts, which means that while the recent surge of interest in the light metal has been over-the-top the metal’s market fundamentals are strong.

“The outlook for lithium demand is robust in both the short and long term,” says Jon Hykawy, lithium analyst with Bryon Capital Markets. “It’s not as robust as some would make it out to be – we’re not expecting demand to triple by 2015 or anything goofy like that – but we do see, just on the basis of continued demand for consumer electronics and continued erosion in lithium battery prices, a 30% to 40% increase in lithium demand by 2015.”

Hykawy’s forecast is in line with the predictions out of TRU Group, a private lithium consulting group headed by Edward Anderson. Anderson sees demand climbing steadily at 7 to 8% for the foreseeable future, in part because two major new uses of lithium – in electric vehicle batteries and in alloys used in aircraft manufacturing – will have a “strong and sustained” impact on demand, starting within five years and lasting through to 2020 at least. For example, in 2007 batteries accounted for only 14% of lithium use. By 2020 that number is expected to rise to 40%, primarily because of hybrid and pure electric vehicles.

“The astounding hype around lithium is not justified,” Anderson says. “On the other hand, there are very few markets that have as much certainty as lithium. Its growth rate is at least double the average and, as far as I’m concerned, there is very, very little risk in lithium demand.”

So demand is on the rise, and it is not just because of car batteries and airplane alloys. Lithium’s properties have made it an important component in many products or production processes. For example, lithium has the highest specific heat of all solids, which means it resists changing temperature. As such the metal is often used in heat transfer applications, such as the use of lithium stearate as a high-temperature lubricant. And when used as a flux for welding or soldering lithium promotes metal fusing and eliminates the formation of oxides by absorbing impurities. The same qualities give it an important role to play as a flux in the production of ceramics, enamels, and glass.

Organic reagents made from lithium facilitate the formation of carbon-carbon bonds, which means organolithium compounds are used to make polymers. And lithium also boasts a list of uses in the medical world, the most significant of which is the use of lithium salts to treat psychiatric disorders such as mania, depression, and bi-polarism.

As for lithium as a building material, alloys of lithium with aluminium, cadmium, copper, and manganese are now being used in structural airplane components. While lithium alloys at present accounts for less than a percent of lithium demand, by 2020 some analysts predicts the alloys will take up as much as 10% of lithium use.

But lithium batteries are the main talk around town and their usage is also on the rise. There are three mains kinds of lithium batteries. Primary lithium batteries are disposable batteries with a lithium anode. The batteries in more than 60% of the world’s cell phones are made with lithium niobate. And the high energy-density batteries that are expected to power the coming surge of hybrid electric and pure electric batteries are lithium-ion batteries.

The reason lithium is so useful in energy storage is that is has a high electrochemical potential, which means a typical lithium-ion cell can generate roughly 3 volts, compared with 1.5 volts for lead-acid or zinc cells. And lithium’s low atomic mass means that lithium-ion batteries have high charge-to-weight and power-to-weight ratios.

It is the increasing use of lithium-ion batteries in all kinds of electronics, not just in cars, that will really help lift demand. Use of lithium-ion batteries in digital cameras increased from just 100 kg in 1996 to 19 tonnes in 2005. Lithium-ion batteries are now in many kinds of electronics, from digital music players to power tools, and as Hykawy points out demand for those items grows with gross domestic product.

As for car batteries, Hykawy thinks the impact they will have on lithium demand may be quicker than most people realize. Both the Chevy Volt and the Nissan Leaf will utilize lithium-ion batteries. Assuming each maker will produce between 200,000 and 300,000 annually, and knowing that each battery uses 20 to 30 kg of lithium carbonate, Hykawy points out that is already “thousands of tonnes a year.”

“It doesn’t take much to make an impact when you’re talking about a market that only goes through 120,000 tonnes a year – the impact will be appreciable pretty quickly,” he says.

One important point that is easy to lose sight of amidst the lithium madness is that the much-discussed lithium-ion batteries that will power the electric vehicles of the future do not yet exist. Developing an inexpensive, reliable lithium-ion battery has proven challenging, which is why all of the hybrid vehicles currently on the market still use nickel-metal-hydride batteries.

Anderson predicts lithium-ion batteries for use in hybrid vehicles will be ready by 2011, those for use in plug-in hybrid vehicles will be ready by 2014, and those for plug-in electric vehicles will be ready by 2016. Anderson is slightly less optimistic about the batteries than is Toyota, which has already announced a transition to lithium-ion batteries for its Prius cars next year.

And the timeline is important with respect to lithium demand because the amount of lithium used in each kind of battery increases moving from batteries in hybrids to those in plug-in electrics to pure electrics. Hybrid vehicle lithium-ion batteries each use less than 1kg of lithium carbonate. The battery going into the Chevy Volt, a plug-in electric, is expected to use 20 to 30 kg of lithium carbonate. So as vehicle and battery makers move their technologies along towards pure electric vehicles, and as consumers become more comfortable with the idea of driving an electric car, the impact on lithium demand will increase.

Regardless of when, exactly, the battery technology is ready it is already clear that price will be the main battle. The battery is already the most expensive single component of current electric vehicles; the battery pack for the Chevy Volt is expected to cost roughly US$8,000.

The price of lithium is not widely published. According to Hykawy, lithium carbonate is currently valued at US$6,600 per tonne. Ten years ago the price sat neat US$2,500 per tonne.

WHAT ABOUT SUPPLY?

The lithium industry is small, with worldwide annual production averaging just 120,000 tonnes of lithium carbonate. And the market is dominated by four companies – SQM of Chile (SQM-N), Rockwood Holdings (ROC-N), FMC (FMC-N), and privately-held Talison Minerals of Australia – that produce 85% of world supply.

Chile leads the world in lithium production, followed by Argentina. Both countries recover lithium from brine pools. The United States comes in third, based on the output from several lithium brine operations in Nevada, followed by Australia.

So analysts, including Hykawy and Anderson, seem to agree that the lithium demand outlook is strong. It is on the question of supply that opinions start to diverge.

Anderson does not see the need for a significant increase on the supply side. If the current producers expand their existing facilities, that alone would almost meet demand; if one new project comes online the industry will stay in slight oversupply.

And the TRU group thinks that one new project will be Rincon Lithium, a new lithium-brine extraction facility currently under construction in Argentina. Rincon is owned by privately-owned Sentient Group, so it is difficult to know basic production information, but Anderson thinks Rincon production will put the market into slight over-supply at least until 2020. If Rincon, or a similar operation, does not come on line soon then Anderson predicts be a supply crunch between 2015 and 2017.

Hykawy is more bullish on the need for new production, in part because he does not see the current producers rushing to expand their facilities.

“The issues they face are two-fold,” Hykawy explains. “One, for most of them lithium is not the focus. SQM out of Chile, for example, is a potash producer; in their operation lithium comes off as a by-product. So are they really going to alter their entire method of production and pump more water for a product that makes up about 10% of their revenue? It’s not likely.

“The other issue you have is that brines are living systems. If you start pumping out serious amounts of water – if you double or triple your pumping – you run the risk of depleting that aquifer and then you’ve lost the potash, the lithium, everything.”

Instead of expanding their facilities, Hykawy thinks the producers will bank on the other tried-and-true way for a major to increase its reserves – letting a junior do the work.

“A lot of these companies are likely going to look for juniors to do a lot of the exploring for them, and then they’ll come in afterwards and buy the top-producing brines,” Hykawy predicts. “It will take some new entrants into the game.”

But with dozens of juniors having staked or re-activated lithium projects in the last few months, how is one supposed to know which companies are just riding the share price boost and which actually have a chance of producing the needed metal? Rather than discussing specific companies, Hykawy prefers to point out the attributes of a good project.

The main consideration is the cost to developing a mine and then the price to produce lithium carbonate at the facility. With lithium, brines operations are cheaper to both build and operate. Building a brine facility costs $60 to $80 million, according to Hykawy, whereas building a hard-rock mine usually averages $500 million, and production costs are far lower with brines. And developing a brine facility from permitting through to commissioning can take as little as two years in the U.S., whereas the same process for a hard rock facility takes at least five years.

But even though brines are usually preferable, Hykawy warns that just because a brine contains lithium doesn’t mean that it will be cost-effective to recover the metal. The key question when it comes to lithium brines is the magnesium concentration.

“It doesn’t take a lot of bad chemistry – and by bad chemistry I mean high magnesium-lithium ratios – in the brine to throw the costs out of whack,” says Hykawy. “And that opens up the chance for something like a Western Lithium Canada (WLC-V) with its clays.”

It may cost significantly more to develop a mine based on a clay-hosted lithium deposit but once the mine is built it has the flexibility to produce according to spikes in demand or price. Changing production levels significantly is not really an option with a brine operation. And hard rock operations often offer the chance to produce other products, such as potash or hydrofluoric acid.

Another related consideration is the project’s location: “On the brine side we prefer to see something that is in a relatively well-known lithium area so that the chemistry is well understood,” says Hykawy. “And if you’re in a known area, where other producers have been active for a while, then you have a pretty good idea that the hydrogeology works too – that you’ll be able to pump at a reasonable rate and not deplete the source.”

Those well-known lithium areas, for Hykawy, are Nevada, Chile, and Argentina. Bolivia, which is thought to host 5.4 million tonnes of lithium or roughly half the world’s supply, is not part of Hykawy’s list because he is concerned about the chemistry of its brines.

“Frankly a lot of the work that’s been done there indicates you would more often than not find chemistries that don’t work,” Hykawy says. “So they may have a lot of the world’s lithium, but at what price?”

 
WHO’S OUT THERE?

The list of companies exploring for lithium has been growing daily of late. Here are a few of the more active members of that list.

TNR Gold (TNR-V) is exploring a handful of lithium projects. At the Mariana project in Salta province, Argentina, TNR recently contracted advisors to help guide an exploration program. Mariana is a road-accessible lithium-boron salar, or salt lake; salars host some of the world’s largest known lithium and boron resources. The advisors’ work will inform a National Instrument 43-101-compliant report on the project; once TNR has a project report it can complete its previously-announced spin-off of International Lithium.

TNR also owns eight exploration licenses in Ireland’s Leinster pegmatite belt, which it says are prospective for lithium, tantalum, and other rare earth elements. The company recently acquired the Maximoose lithium property in the Northwest Territories from a private owner and is exploring two lithium projects in Nevada as well as three lithium properties in Ontario.

TNR’s share price hit a low of 2¢ in December but by mid-August rallied to a high of 35¢ and currently sits near 27¢. The company has 85 million shares outstanding.

Canada Lithium (CLQ-V) is primarily focused on the Quebec Lithium project that it bought for 6 million shares and $350,000 in spring 2008. The property hosts a lithium spodumene deposit that supported an underground mine for ten years in the mid-1900s. When operations were suspended in 1965 the reserve count stood at 15 million tons grading 1.14% LiO2 down to the 150-metre level. Canada Lithium is currently advancing metallurgical studies and recently produced lithium carbonate within battery industry specifications. Canada Lithium has already signed a marketing agreement for the Quebec Lithium project, inking a deal giving Mitsui of China sales rights to lithium production.

The company also owns 75% of the Paymaster lithium brine project in Nevada, where partner and project operator Gold Summit (GSM-V) has recently recommenced fieldwork. The partners are planning to drill a test hole targeting an aquifer, once permits are received.

Canada Lithium’s share price has gained as much as 394% since May, climbing from 17¢ to a high of 84¢ in mid-August. The company’s share price is currently near 60¢ and it has 114 million shares outstanding.

Western Lithium’s Kings Valley project is one of the larger and more advanced lithium projects around. Located in Humboldt County, northern Nevada, Kings Valley is home to 48.1 million indicated tonnes grading 0.27% lithium and 42.3 million inferred tonnes at the same grade. The resource is hosted in five lenses that stretch along 30 km.

The company envisions a staged development approach at Kings Valley, wherein Phase I would potentially support the production of 25,000 tonnes lithium carbonate per year and subsequent phases would increase production. Western Lithium is expected to release a scoping study for Phase I very soon.

In August Western Lithium’s share price jumped from a spring-summer average near 65¢ to a new hover just over $1. The company has a 52-week trading range of 10¢ to $1.33 and has 62 million shares outstanding.

Lithium One (LI-V) is advancing its Cyr lithium prospect in northwestern Quebec. The spodumene, or lithium aluminum silicate, project has seen sporadic exploration since the mid-1960s but does not hosts a defined resource. The company is working through an 11,000-metre drill program and recently released the program’s first set of results. All 17 holes intersected significant pegmatite; highlights include 10.5 metres grading 2.38% Li2O and 22.5 metres of 1.51% Li2O.

Channel Resources (CHU-V) is taking a different approach to lithium exploration by essentially letting someone else do the work of drilling. The company’s Fox Creek property in west-central Alberta includes some 113 oil and gas production wells, of which some 44 area currently active. Most of these wells penetrated one of Channel’s targets – the Beaverhill Lake aquifer – at roughly 3,200 metres depth; active wells are producing significant volumes of brine along with petroleum products. At present the brines are separated from the petroleum products and injected back into the aquifers.

In mid-August Channel kicked off a sampling program at Fox Creek designed to verify the concentrations of lithium as well as of potential by-products such as potassium and bromine in the brines.

And New World Resources (NW-V) is exploring for lithium in that well-endowed country, Bolivia. The company has a 125-sq. km property covering a large salar, which it sampled in July. Results from the sampling program, which was designed to verify and expand historic resources, are expected this month.

New entrants into the lithium scene include First Gold Exploration (EFG-V), Mineral Hill Industries (MHI-V), and Habanero Resources (HAO-V).

First Gold just picked up two lithium exploration properties in the Quebec Eastmain greenstone belt adjacent to and along strike from Lithium One’s Cyr discovery. The company’s share price soared 50% on the news to 15¢ but has since settled back to 11¢.

Mineral Hill is now also looking for lithium in Quebec greenstone. The company acquired two lithium properties over the summer in the Abitibi Belt, known as the Chubb and International properties, and recently commenced exploration efforts.

Once its 13 applications are processed Habanero will be one of the largest land holders in Alberta’s South Leduc Formation, where the company plans to explore for lithium.

So there is no shortage of lithium explorers; there are even a few companies with potential production on the horizon. But Anderson wanted to spread a word of caution.

“I gotta tell you – there are a lot of juniors out there and most of them know absolutely nothing about lithium, so be careful,” says Anderson. His key concern regarding the lithium exploration rush is a lack of geologists with training specific to lithium.