Greenbushes bears fruit for Talison

Cash-rich Talison Lithium (TLH-T) booked record thirdquarter sales volume, revenue and net income from its high-grade Greenbushes lithium operation in southwestern Australia, and president and CEO Peter Oliver forecasts global demand for lithium will at least double by the end of the decade.

The pure-play lithium producer reported revenues of A$37 million, or US$37.1 million, in the three months ended March 31 — up 27% from A$29 million in the yearearlier quarter — while earnings before interest, taxes, depreciation and amortization reached A$11.96 million, which is up 90% from A$66.31 million.

Net profit soared 112% to A$8.2 million from A$3.9 million in the third quarter of fiscal 2011, with earnings per share doubling yearon- year to 7.6¢. Cash at the end of March stood at A$85.1 million.

Talison, which went public only two years ago but has been supplying lithium for more than a quarter of a century, is doubling its lithium plant capacity to 740,000 tonnes of lithium concentrate and is undertaking a scoping study to determine the viability of going downstream to produce lithium carbonate. Construction of its second-stage expansion remains on schedule and on budget, with commissioning to be completed by the end of June.

“We continue to produce at record rates — in the order of 360,000 tonnes of concentrates per annum — pre-expansion,” Oliver noted during a presentation at an April conference on electric metals hosted by Byron Capital Markets in Toronto. “We drilled last year and doubled our reserves . . . and we’re currently drilling and hope to further double that by the end of this year. To put that into context, we’ll have capacity to supply current global lithium demand today for over thirty years, so we have an enormous reserve.

Talison is one of four producers — the other three are based in South America — that supply more than 90% of the world’s lithium requirements, Oliver said.

The lithium produced by Talison is used in batteries for consumer electronics, electric bicycles, buses and passenger vehicles. It is also used in aerospace alloys, wind turbines, glass and ceramics.

“There are some concerns about the fact that there is a tight concentration of lithium production in South America, so our strategy is to supply concentrates into China, but also produce our own lithium chemicals for supply to Japanese and Korean markets,” he said. “So we’re fast-tracking that project. We have identified a site, we are out marketing with two of the big Japanese trading houses and we are also building a pilot plant at the moment — and will have product out in the market by the middle of this year. We want to finish the full feasibility study and have begun the regulatory approval process, and are targeting completion of the project by 2015.

“Part of the company’s growth strategy involves electrification in the transportation sector. “It is starting to get momentum,” he said of the electric vehicle sector. “Some of the models that we are seeing come out this year and next are looking very attractive economically, and I think they are just reaching the cusp of the technology becoming really acceptable. The question is when it becomes mainstream . . . that’s really when the market accepts it, and that’s really the big unknown.

“New technology pulls forward demand and companies like Talison must put capacity into place to take advantage of opportunities, Oliver noted. On a recent trip to Chengdu, for instance, Oliver discovered that a single factory was targeting a run rate of 100 million iPads a year. “This new technology is a huge driver for lithium demand, and that’s really where we’re building our business — to meet that future growth.

“Jonathan Lee, a mining analyst at Byron Capital Markets in Toronto, has a “buy” rating on the stock with a target price of $6.55 per share. At presstime Talison traded at $3.09 per share within a 52-week range of $1.73–$5.08.

“The tight supply market and continued expansion at Talison’s production facilities have contributed to this success,” Lee writes about the company’s thirdquarter results. “During the past few quarters Talison has been producing at capacity and selling all that it can.

“Lee notes that management has maintained stable margins and believes the markets will continue to work in Talison’s favour.

“With the increased capacity of the expansion plant, investors can expect to see even higher margins due to economies of scale,” he reasons. “Operating costs have been stable, with an average cash cost of $193 per tonne over the past four quarters. We expect higher pricing and lower cash costs going forward.

“Of the world’s big-four lithium producers — including Talison Lithium, FMC (FMC-N), SQM (SQM-N) and Rockwood Holding’s (ROC-N) Chemetall — the company is the only one that is 100% lithium-industry oriented, Lee writes. By contrast, lithium makes up just a minor percentage of the business at the other three large producers. And Talison is the only major lithium miner that produces from a hard-rock source called spodumene, Lee adds.

Dahlman Rose initiated coverage of Talison on May 16 with a “buy” rating and a $4-per-share target price.

“Talison represents over 30% of the global lithium market share and satisfies approximately 80% of China’s annual lithium demand,” Dahlman states in a note, adding that it expects lithium demand may approach 300,000 tonnes per year by 2020 from its current level of 150,000 tonnes per year. Annual lithium demand has grown steadily at 4% to 5%, the report continues, although more recently lithium demand for batteries has grown by 25% a year.

“There are a limited number of known high-grade resources that can be economically extracted,” Dahlman Rose continues, “and exploration stage projects confront significant challenges including considerable capital costs, lower grades and a tight project-financing environment.

“Talison’s Oliver said the world’s major lithium producers enjoy a big head start in terms of meeting future demand.

“It’s our view that the existing four producers have such a strong advantage in terms of quality of deposits, the economies of scale, infrastructure in place and the technology they have that they will grow and expand, and fill that doubling of demand by the rest of this decade,” he said. “New projects will find it difficult to compete for exactly the opposite reasons in terms of raising capital, the technology challenges they face and increasingly, the long development timelines.

“Reviewing the lithium sector in a 130-page report on electric metals that includes analyses of graphite, uranium, titanium, silver, tin, cobalt and vanadium, Byron Capital Markets forecasts lithium demand will grow 10% annually over the next few years, and pointed out that existing mines are expanding their production lines.

“For those producing companies, we see growth in margins widening in the near-term, with higher selling prices as companies are becoming price makers rather than price takers,” the independent investment dealer concludes.

Byron also points to the difficult outlook for financing, and says it doesn’t expect a dramatic oversupply in lithium as some industry observers predict. “There is still room for a few junior projects to supply this increase in demand, but not for all,” the report states. “Lithium projects aren’t on the top of the list to be financed, and only the A-grade projects will be gifted with funds.

“In terms of the scale of future demand for lithium-ion batteries in the electric vehicle market, Byron says
it was also more upbeat than many.

“While there are some people who are less optimistic about the growth in electric vehicles and its lithium-ion battery use, we see macro events happening around the world that may prove otherwise,” the report concludes. “Lithium-ion battery plants are springing up and battery manufacturers’ capital expenditures are in the billions.”