|January 21, 2020|
Lithium isn't the new gold --- yet
|In late 2018, Jean-Denis Caron sank most of his life savings into the shares of Nemaska Lithium, a Quebec City--based producer backed by Japan's SoftBank that promised to "facilitate access to green energy, for the benefit of humanity."|
Last month, Nemaska filed for protection from its creditors, following a collapse in the price of lithium hydroxide, a key component in batteries for electric vehicles (EV). The shares, down 93 percent from the peak, have stopped trading and the company is set to be kicked off the Toronto exchange.
Caron, a 36-year-old software engineer, says he was completely "sold" on the idea of the company using the region's abundant hydropower to mine and produce lithium for EV batteries, undercutting rivals around the world and providing an alternative to a supply chain dominated by China. "For me it was a no-brainer that it was going to work," he says.
Nemaska's failure highlights the difficulties of a market dominated by a small cadre of producers and vulnerable to sudden changes in outlook. Last year, demand was hit by a cut in subsidies for electric cars in China and a rapid increase in supply of lithium from new mines in Australia, which dig up lithium-bearing rock and send it to converters in China to process into pure lithium compounds.
"Three years ago, every single producer, every single miner, was increasing production and investing in capacity to expand production --- that is something I've never seen before," says Michael Widmer, a strategist at Bank of America Merrill Lynch. "And what happened? Prices collapsed."
Analysts and executives say prices could pick up this year, as capacity is cut and demand starts to increase in China. Shares in Chinese lithium producers have rallied hard in recent days, following the opening of Tesla's new factory in Shanghai. Chinese officials have also indicated they will not cut subsidies for electric carmakers anymore this year.
"I think probably this year we will reach a bottom," says Wang Xiaoshen, CEO of Chinese producer Ganfeng Lithium. "The sentiment has changed in China; more and more people realize the shift to EVs is unstoppable. It's just a matter of time."
Shares in Ganfeng, which supplies Tesla, have risen by 25 percent on the Shenzhen stock exchange this year. The company is finalizing a deal to supply Volkswagen and plans to expand production in its hometown of Xinyu in central China, Wang adds.
Still, analysts say pressure is likely to remain on some small miners in Australia that do not produce higher-value-added battery chemicals, but instead export lithium-containing rock known as spodumene.
Last August, Alita Resources tipped into administration, having opened a mine near Kalgoorlie about 18 months earlier. In December, the company said it had received a $48 million loan from a Cayman Islands company described as a "special-purpose vehicle for a Chinese buyer."
One of the largest producers, Pilbara Minerals, has also had to abandon plans to sell a 49 percent stake in the company, CEO Ken Brinsden says. It has since had to lay off staff and operate at reduced capacity.
"The market just beat us down," says Brinsden, a former executive in the iron-ore mining industry. Spodumene is currently trading at $480 a metric ton, according to Benchmark Mineral Intelligence. If it drops to $400 that will become "very tough" for Australian miners, Brinsden says. The price is "getting close to a bottom," he adds.
Any recovery comes too late for Nemaska, which had ambitions to become a fully integrated lithium producer --- both mining and processing lithium into the form required by batteries. Analysts say the company underestimated the costs of building the mine and the processing technology.
In February 2019, the company stunned investors by saying it would cost $287 million to finish the project. Nemaska CEO Guy Bourassa, a former lawyer, talked to investors for just half an hour before saying he had to leave to catch a plane, Caron recalls.
Nemaska had raised $1 billion in funding and signed agreements to supply lithium hydroxide to a host of major buyers, including Korean battery-maker LG Chem, Johnson Matthey and Northvolt, a Swedish company that is building Europe's first battery "gigafactory."
Its demise will leave carmakers and battery-makers even more dependent on supply from China, where most of the world's lithium is processed, Pilbara Minerals' Brinsden says.
Caron, a longtime Tesla fan, grew up in Arvida, a small Quebec town founded by Alcoa in 1926, where his father and grandfather worked at the local aluminium smelter. "I am still confident about my original vision," he says, sighing. "I might just have bet on the wrong horse and I should have been more careful."