NEO Lithium: Next In Line

Safety in the Leader

The junior mining or junior natural resource extraction sector is extremely risky. There should be warning labels like, “Do not touch unless you can handle a 50% decline in a month” or “Do not touch unless you can stand being down by 75% for 3 years” and so on. Case in point, Northern Dynasty (NAK) fell 50% the day I am writing this. One thing I learned from my experience as the Industrial Minefinder is that the junior with the very best undeveloped project for each metal is not only the safest way to invest in a junior but the most likely vehicle to capture excellent returns without having to wait too long.

For several years I have been of the view that Lithium Americas (LAC) and NEO Lithium (NLC.V; NTTHF) had the two best junior development projects. Lithium America’s Cauchari-Olaroz has now been funded, is under construction, and is expected to begin producing in 2022. NEO Lithium’s Tres Quebradas (“3Q”) project currently has a definitive feasibility study underway which is expected to be completed in Q2 2021. Both of these projects are brine projects in Argentina, located within the Lithium Triangle which overlaps Chile, Argentina, and Bolivia. 3Q is in Catamarca which is a better province to operate in than Jujuy where Cauchari-Olaroz is located.

Something lit a stick of dynamite in the lithium stocks earlier this year. Albemarle (ALB) has nearly doubled while both LAC and NEO have both roughly tripled.

Photo by Danilo Alvesd on Unsplash

Lithium at a High Level

At a high level, lithium mainly comes from two major sources: South American brines and spodumene (“hard rock”) deposits that are located around the world with Western Australia currently the prominent location. Liquid from brines is pumped into pools where evaporation does some of the processing work. Brine production typically goes into lithium carbonate which is mainly used in lower nickel content lithium-ion batteries. Livent (LTHM) is the exception. Its brine production in Argentina mainly goes into lithium hydroxide. Hard rock is mined and the concentrate is primarily used to make lithium hydroxide. Lithium hydroxide is a “must-have” to produce the highest nickel content lithium-ion batteries. South American brines tend to have a bit lower production costs than hard rock.

Most of the world’s lithium production comes from South American brines (the Atacama in Chile and Hombre Muerto in Argentina) and Western Australian hard rock (Greenbushes, Mt. Marion, Pilgangoora). The major producers are Albemarle, SQM, Ganfeng Lithium, Tianqi Lithium, and Livent. Most of the lithium-ion battery production is in Korea, China, Japan, and the United States by LG Chem, CATL, BYD, Panasonic, Samsung, and Tesla.

Lithium is priced through multi-year contracts and spot pricing. There are generally two types of pricing—the Korea / Japan price and the China price—as shown on the following historical chart:

(Click on image to enlarge)

source: Lithium Americas Investor Presentation; Asian Metal, Japanese & Korean trade statistics

source: Lithium Americas Investor Presentation; Asian Metal, Japanese & Korean trade statistics

The average pricing for Japan/Korea and China varies depending upon the battery quality of material, the supply and demand, and contract versus spot pricing. Higher quality battery-grade material continues to price above $10,000 per tonne. A good band for future price assumptions is between $10,000 to $14,000 per tonne. Hydroxide has historically traded at about an average premium of $2,000 per tonne to carbonate but this could change in the future depending upon battery type demand characteristics.

Although lithium tends to fall into the purview of mining, lithium carbonate production from brine and spodumene conversion to hydroxide is truly a chemicals business. Every resource is different and the processing nuances are different for every single resource. The most critical thing to understand about lithium is that even though there is an abundance of resources around the world, it is still difficult for the industry to scale high-quality battery-grade material. Lithium is also still a small industry and there is not an abundance of know-how and talent to go around. Lithium is not like gold or copper where there is a large industry in existence with an abundance of technical know-how. Nothing like this. As an investor, you want to focus on companies with the highest quality resources, top talent, and proven extraction processes. If you can embed this into your mind and stick with it, you will already be ahead of 75% of the investors in this space.

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This article was originally published as Premium content on November 27, 2020. I am publishing it here as a sample of what Premium offers. I strive to write not about everything there is to know but ...

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