Is Chile losing ground in the lithium space?

Chile should lead the world in lithium production.

The Salar de Atacama in northern Chile is the world’s largest and richest lithium resource, containing almost half the world’s known reserves, according to the United States Geological Survey. And the region’s geological and climatic conditions make it the most competitive place to produce the mineral.

The country’s only two lithium producers, Albemarle (NYSE: ALB) and Sociedad Química y Minera de Chile (NYSE: SQM), enjoy production costs of less than US$3,000 a tonne, compared to almost US$4,000 a tonne in some Argentine salars.

So when lithium demand and prices took off earlier this decade, Chile’s economic development agency, Corporacion de Fomento de la Produccion (CORFO), which owns mineral rights on the Salar, signed new lease contracts with Albemarle and SQM allowing them to increase production to around 2 million tonnes over the life of the leases.

Last year, SQM expanded its capacity on the Salar de Atacama to produce lithium carbonate to 70,000 tonnes a year, and plans to complete a second expansion to 120,000 tonnes a year by late 2021. A third expansion to reach 160,000 tonnes is pencilled in for 2023.

Albemarle plans to increase production from its own operations on the Salar to 85,000 tonnes from 2020, up from 40,000 to 45,000 tonnes this year.

But how fast these proposed expansions can be converted into output is anyone’s guess. Speaking at ForoLitio, a lithium industry event held in Santiago in early August, Victor Rodriguez, a Chile-based principal consultant at CRU Research, estimated that Chilean lithium production could rise 55% from 85,000 tonnes in 2019, to 120,000 tonnes by 2024.

Meanwhile, to meet global lithium consumption — which  grows by about 19% annually, according to minerals consultancy Roskill — production has been moving much faster elsewhere.

Lithium Chile’s Salar de Atacama lithium property in Chile’s Antofagasta region. Credit: Lithium Chile.

Like Chile, Argentina is also ramping up output. New operations on salares in its arid northwest, such as Lithium Americas’ (TSX: LAC) Cauchari–Olaroz project and Rincon Lithium’s Salar del Rincon, are set to expand the country’s annual production from 25,000 tonnes in 2015 to 180,000 tonnes by 2024, according to CRU Research.

But the real winner, Rodriguez says, has been Australia, where lithium is extracted by crushing rocks rather than by evaporating brines. This year Australian production of lithium could reach 200,000 tonnes of lithium carbonate equivalent — a tenfold increase from a decade ago — while new projects could add 100,000 tonnes of capacity by 2024, according to CRU estimates.

Even the Chileans are investing in Australia’s lithium boom: in 2017, SQM acquired a 50% stake in Kidman Resources’ (ASX: KDR) Mount Holland project in Western Australia. A feasibility study on the US$737-million project is scheduled for early next year.

As a result, Chile’s share of the global lithium market is shrinking. According to CRU forecasts, Chile’s global production will fall to 18% in 2024, which is down from its nearly 40% market share in 2015.

Changing technology is one reason driving Chile’s declining market share, says Daniela Desormeaux, of consultancy signumBOX Inteligencia de Mercados. Chinese lithium processors transform spodumene, the lithium-bearing mineral extracted in Australia’s mines, directly into lithium hydroxide, a chemical that could soon overtake lithium carbonate as the preferred form of the mineral among producers of lithium-ion batteries.

But some of Chile’s lost competitiveness is of its own making, critics charge.

First, the industry is tightly regulated. Unlike other minerals such as copper, gold or iron ore, companies wishing to produce lithium need a contract with the state.

Although an anachronism from the Cold War, when it was thought that the mineral could be used in nuclear weapons, successive administrations have maintained its reserved status.

Second, CORFO’s new contracts, signed in 2017 and 2018, have placed onerous demands on the country’s lithium producers, critics say. In exchange for higher production quotas, Albemarle and SQM must pay a sliding royalty on production, which can reach 40% when lithium carbonate prices exceed US$10,000 a tonne.

During the recent rally in prices last year to over US$20,000 a tonne, the royalty effectively eliminated Chilean producers’ 45% advantage in production costs over rivals in Argentina, Rodriguez said, although royalty levels have subsided somewhat, as prices have pulled back towards US$10,000 a tonne in recent months.

In addition, the companies must spend tens of millions of dollars each year on lithium-related research and design in Chile, and on supporting local communities and regional development. They must also sell a quarter of their lithium output at market prices to local industries for processing into more advanced materials, such as battery cathodes, as part of an ambitious CORFO plan to push Chile up the lithium value chain.

Whether Chile can compete in the production of advanced lithium materials is doubtful, some industry observers caution. All three consortia — Chile’s Molymet, Posco and Samsung of South Korea, and China’s Sichuan Fulin Transportation Group — that won rights to lithium produced by Albemarle in a tender held last year have since pulled out of the deal, for reasons which have not been made clear.

Lithium Chile CEO Steve Cochrane (second from right) poses with his team and guests on a visit to the company’s property in Chile. Credit: Lithium Chile.

As Chile loses ground in the global lithium boom, the government has realized a rethink is needed, politicians say. President Sebastian Pinera will make a key announcement on the government lithium policy in the coming weeks, Mining Minister Baldo Prokurica has said.

Some Chileans would like the state to play a bigger role in the industry through the creation of a national lithium company, just as neighbouring Bolivia has done. Yacimientos del Litio Bolivianos has signed deals this year with Chinese and German companies to produce a range of chemicals from salar brines.

Chilean lawmakers have presented several bills in recent years to increase state control over the country’s lithium resources, but so far none has prospered. In early September, the Chamber of Deputies’ Constitution Committee rejected legislation to nationalize SQM for breaching constitutional strictures against the expropriation of natural resources.

Speaking at ForoLitio, CORFO’s newly appointed executive director, Pablo Terrazas, said that the new policy would instead focus on pushing state mining companies Codelco and Empresa Nacional de Mineria (ENAMI) to explore and produce lithium in partnership with private investors.

Private companies have staked claims on the dozens of salares in northern Chile, but the need for a government contract has limited how far they can advance on their own.

As one of the world’s largest mining companies, Codelco has the financial muscle and technical know-how to take on the challenge. Its claims, located on the Maricunga and Pedernales salt lakes, south of the Salar de Atacama, are the most promising for lithium production.

Last year, the government granted the company a special contract to produce lithium covering the whole of the Salar de Maricunga, 170 km northeast of Copiapo.

In August, Codelco inched closer to lithium production with the signing of a memorandum of understanding with privately owned Minera Salar Blanco (MSB). Under the memorandum of understanding, the two companies will assess whether it makes sense to fold their claims on the Salar into a joint venture.

MSB (previously known as Li3 Energy) has been exploring the Maricunga for over a decade, and is owned by Australian junior Lithium Power International (ASX: LPI), Chilean businessman Martin Borda and Canada’s Bearing Lithium (TSXV: BRZ). Earlier this year, it published a bankable feasibility study for a US$1.3-billion project that would produce 20,000 tonnes per year of lithium from its 25 sq. km of claims.

But without a government contract, it could not proceed. A deal with Codelco, which has also obtained permits from Chile’s nuclear energy authority Comision Chilena de Energia Nuclear to extract lithium from the same salar, represents a possible workaround.

LPI jumped almost 30% on the Australian Stock Exchange to A44¢ a share after the potential joint venture was announced on Aug. 1.

The government hopes more deals like this could help Chile remain one of the top players in the global lithium industry.

“If we do things well, we will be able to maintain our market share in the face of a demand that is growing rapidly,” said CORFO’s Terrazas.