A Blue Ocean Opportunity with the White Oil of Lithium

A rising tide lifts all boats is a fair aphorism for what electric car maker Tesla (NASDAQ: TSLA) has done for companies in the lithium space lately. Lithium prices soared about 200 percent late in 2015 as speculation started rising about an impending supply/demand imbalance, in part due to Tesla’s manufacturing forecast. Lithium has been coined “white oil” and other such terms as a result and lithium miners of all sizes have mostly appreciated in value accordingly. Discussing just how much lithium will be needed for their batteries, Tesla chief executive Elon Musk said last year that at current production levels his company would need to absorb the entire world’s lithium ion production if his company were to reach its goal to produce 500,000 cars annually.

Thing is, Tesla is moving towards that goal, hence, more lithium is going to have to be produced. The company’s massive gigafactory in the Nevada desert is expected to be operational by 2017, with projections by Tesla that it will be producing enough batteries to meet the half-a-million unit goal in 2020. Fanning the fire, Tesla said that as of April 7, it has received 325,000 orders for its new Model 3, a less expensive version of its other electric cars that is expected to start deliveries to consumers late next year.

Investors are seeing the opportunity at hand and jumping into lithium miners, as companies jockey for position to capitalize on increasing demand or perhaps even strike a favorable supply deal with Tesla. The biggest three players in the space are Albemarle Corp. (NYSE: ALB), Sociedad Quimica y Minera de Chile (NYSE: SQM) and FMC Corp. (NYSE:FMC), companies that cumulatively supply 90 percent of the world’s lithium. Nearly all of the lithium produced annually comes from outside the U.S., namely Chile, Argentina and Bolivia. 70 percent of mined lithium carbonate output comes from these three countries.

Musk previously said that he wants to use lithium produced in Nevada, which certainly makes logistical sense and repays the state than provided more than $1 billion in subsidies to have the gigafactory built there. However, production is thin currently, to say the least, but it’s better than anywhere else in North America and will almost surely increase in the coming years when Tesla really starts to need it. Albemarle’s Silver Peak brine evaporation pond project in Clayton Valley, Nevada is the only commercially producing lithium project in North America. Albemarle acquired the project in 2014 when it bought Rockwood Holdings for $6.2 billion. To date, no news of a pact between Tesla and any of the majors has come to fruition.

The only agreements Tesla has made are for purchases of minimum tonnage with two early-stage companies that have never even produced lithium products before and involve technology that has yet to be tested at a mining scale.

“I think most people assumed that Tesla would run to one of the majors and squeeze out an inexpensive price for a long-term contract, but that hasn’t happened. Tesla is messenging their willingness to look at smaller players in the space, which is great for creating awareness and interest in up and coming companies with prime lithium properties,” said Brian Paes-Braga, CEO of Vancouver-based miner Lithium X Energy Corp. (TSX-V: LIX) (OTCQB: LIXXF), in a phone interview with Baystreet.ca (BMC).

In March, Lithium X partnered with Aberdeen International (TSX: AAB) to acquire up to 80 percent of Potasio y Litio de Argentina SA, the company that owns the Sal de los Angeles lithium-brine project in Salta Province, Argentina, located in what has been aptly coined the “Lithium Triangle.” As announced on April 21, Lithium X completed its acquisition of an initial 50% interest in Potasio y Litio de Argentina SA from Aberdeen, with an option to acquire an additional 30% interest based upon certain criteria.

The project is near FMC Corp.’s Salar de Hombre Muerto project, one of the biggest lithium operations in the world. About C$17 million has been spent on exploration and development of Sal de los Angeles, which has a deposit with an historical resource of 2.8 million tonnes lithium carbonate equivalent at a grade of 556 mg/l.

In the States, Lithium X is rubbing shoulders with Albemarle, owning the land to the north and to the south of the Silver Peak mine. With 15,020 total acres, Lithium X is the largest claims holder in the prolific Clayton Valley. Historic drill information and a geophysical survey for Clayton Valley North show the company’s property to be similar to the sediments on the producing property of Albemarle. Lithium X’s Clayton Valley South Expansion borders not only the Silver Peak mine, but also the Clayton Valley South project of Pure Energy Minerals to the east and the Neptune project of Nevada Sunrise Gold Corp. (TSX-Venture: NEV) to the west. If you’re judged by the company that you keep, Lithium X is in a great position going forward.

Drilling is set to commence this quarter on the Clayton Valley North project as part of an exploration program designed to confirm lithium-brine-bearing formations. The plan is to incorporate initial drill results into a maiden resource estimate.

“I don’t think anyone views the future supply issues as a tempest in a teapot; more lithium simply has to be produced,” commented Paes-Braga in our conversation. “Pressure is building from multiple directions by automakers and tech companies worldwide, essentially creating what you could call a bit of a blue ocean opportunity for companies our with established resources due to expectations for soaring demand.”

Worldwide consumption presently stands in the area of 175,000 metric tonnes of lithium, according to Luke Kissam, CEO of Albemarle, in a Financial Post interview. The ramp up in lithium ion batteries is expected to cause a surge to as much as 300,000 tonnes annually in the next four years.

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