The Gold Report: You've indicated strong demand ahead for lithium ion batteries, anticipating a 40% increase by 2014 and suggesting good return-on-investment opportunities in lithium companies. To what extent does the demand for batteries that underlies those expectations rely on an economic recovery?
Jon Hykawy: Due to the downturn's global hits on demand for all metals, no question; and that forecast depends on some sort of economic recovery. But the recovery we've built into our model is actually fairly—and perhaps somewhat surprisingly—slow. We don't see the economy getting back to historic levels of growth in consumer electronics or in battery demand, for that matter, for at least two years, probably not until about 2012. Yet lithium demand and lithium battery growth will increase in much the same way as they have since 1999 or 2000. Part of that demand is predicated on continued growth in sectors where the lithium battery has almost fully penetrated, such as cell phones and laptops. Part of it is continuing cost reductions that are driving lithium batteries into new areas.
TGR: What are some of those areas?
JH: Demand for nickel-metal hydride (NiMH) batteries for items such as power tools will disappear as lithium battery prices continue to fall and start to rival prices for smaller NiMH battery packs. Very few analysts have built that into their lithium demand models to date. It's going to be interesting to see the growth curve over the next two, three to five years.
TGR: Do you see any potential breakthroughs in battery technology that could affect the demand for lithium the same way lithium is affecting NiMH batteries?
JH: Certainly chemistries are under development that could be positive for lithium. Various groups are investigating the use of lithium vanadium phosphate batteries or lithium vanadium fluorophosphate batteries. Their advantages over current chemistries are greater safety and much longer operating lives, which might be very, very interesting for automotive batteries. But these are out a number of years.
On the flip side, things that could damage lithium demand—we know of a couple of companies that are doing a fair bit of research into NiMH batteries, specifically into the powders used in those batteries. They could certainly take a significant chunk out of demand for conventional NiMH powders in NiMH batteries because their chemistries are cheaper to produce and actually slightly more efficient in terms of the battery that they can create. But the companies themselves would by no means claim that they can beat lithium ion at its own game, so lithium ion demand shouldn’t be impacted.
The only other thing I've seen that's credible for automotive use, for instance—certainly not for handhelds—are some of the molten salt batteries or sodium-sulfur type chemistries, or some other similar things that have been proposed. They have a very long operating life, long enough to have the game won over lithium in that regard. Although not nearly as good as lithium, they also have reasonably good energy density and power density. The problem is that they have to run at several hundred degrees, creating both infrastructure and safety issues.
I know people are working on lightweight lead-acid versions and various other chemistries. I wish them all the luck in the world, but I don't think they'll be able to do anything to blunt the scale or the pace of lithium battery development. So, no, I don't see anything in the immediate future with the potential to really push lithium ion out of the game.
TGR: So the battle for batteries in the current marketplace is between lithium ion and nickel-metal hydride?
JH: Yes, and the decision has kind of come out in lithium ion's favor simply because it can put out so much more energy. Basically you get operating lifetime per charge out of the battery, and now it can also put out the power. The one area in which nicad (nickel-cadmium) or NiMH was once better was an abundance of power; so, in the past, the ability to turn a screw into hardwood with a power drill or accelerate an electric vehicle favored NiMH. But that's no longer true. Lithium's development has been so rapid that its specific power—the amount of power that you can draw out of the battery of a given size and weight—has now overtaken NiMH.
TGR: What about the electronics space?
JH: Portable game-playing devices would be a good example. Circa 2000, Nintendo would have shipped the Game Boy Advance without batteries. It would have come with slots where you plugged in either your own rechargeable AA batteries or regular alkaline batteries. The new Nintendo DSi comes with a rechargeable lithium ion battery. Until recently, it would have been too expensive to include it with the device, but it's dropped to a feasible price point now. And frankly, NiMH was never there in terms of its performance. It simply couldn't deliver an experience that would make Nintendo happy.
TGR: Is the electronics arena where you see future growth coming from as well?
JH: Since 2000, though we've seen about 30,000 or 40,000 tons a year of additional demand arise for lithium, most of it coming out of nowhere in terms of these consumer batteries. And that demand continues to grow, so lithium is in substantial demand. The price has gone up as a result, and we continue to see that kind of growth.
Lithium is also used in glass production, basically to drive down the melting point of glass and keep energy costs low.
We believe future growth will continue to come from a combination of theft of market share from some of the other rechargeable chemistries and encroachment into new areas where the lithium ion battery hasn't been before. It's entirely possible that we'll see lithium ion batteries become the batteries of choice for starting and lighting in the automotive industry, for instance, but price points have to drop considerably before that happens.
TGR: Will lithium-oriented batteries play a role in alternative energy technologies?
JH: Not a huge role. We don't factor that into our model for lithium growth at all. I am a big believer in the space generally, but existing small-cell battery technologies such as lead-acid have been disproven already and actually have come to be hated in the alternative energy industry. A number of large-scale lead-acid power-storage experiments were economic disasters for the companies that tried them. Lithium is likely to fall in the same camp.
TGR: What's the problem in those situations?
JH: When you move up to the scale required of large alternative energy projects such as wind farms, when you pile that many of them together, even lithium ion batteries have an unacceptable failure rate on an individual cell basis. After a period of time, you end up with a stream of technicians running in and out of the storage facility just carrying batteries. It's not a pretty picture.
TGR: And there is a global abundance of lithium on the supply side to meet the demand you foresee?
JH: There absolutely is a huge abundance of lithium. It is about as common in the earth's crust as nickel or lead. But on a global basis, the question is never whether there is a ready supply or an abundance; it's whether the supply is economically viable. There are huge quantities of lithium available in the ocean too, but it's extremely dilute and its chemical similarity to the huge quantity of magnesium that's also in the water is another issue. Getting to the lithium supply economically at a price point similar to today's is even trickier. So while lithium may be plentiful, there is not a huge abundance of places on earth where you can get inexpensive lithium. That's really the question to concentrate on.
TGR: Where would an investor track the price of lithium?
JH: That is a tough one. The market really is dominated today by four very large chemical company players, to which lithium is somewhat an afterthought. They tend to sell to only a few buyers who basically phone them and set up contracts. We track the price of lithium either by calling these companies ourselves and asking about the short-term delivery cost for a ton of lithium carbonate or relying on Industrial Minerals magazine. It has fairly good coverage of the lithium space and puts out reasonable numbers gleaned from those buyers on longer-term contracts.
TGR: So, it's similar to uranium before uranium started trading on the futures exchange.
JH: It really is. It's a relatively small market controlled by very few players. You certainly can't trade contracts or anything like that in lithium, so it's tougher to watch. Since SQM (NYSE:SQM) drove a lot of the hard rock players out of the market in the 2001–2002 timeframe, the price has marched up steadily. We have seen prices go to the range of $6,500–$6,600 per metric ton of lithium carbonate equivalent. It has plateaued a bit through this downturn, but I fully expect the price to climb again.
TGR: Where can an investor look at the price trends?
JH: The U.S. Geological Survey is actually the easiest place to check. I believe the price was about $3,500 per ton in the late '90s. When it hit about $4,000, spodumene producers started to make inroads into the market because that price made them economically viable. SQM flooded the market with lithium and drove the price down to about $1,400, taking a lot of the spodumene players out of the game. The only one left standing at the end of the day was Talison Minerals Pty Ltd. in Australia because they had tantalum to tide them over. The price climbed from the 2000–2001 low point at that time to as high as $7,000, and then leveled off to about $6,500 through this downturn. It remains near historical high levels.
TGR: What's driving the price of lithium up if there's enough production to match demand?
JH: Good point. The lithium is out there and available. The problem is the big producers today are not producing it as their sole product. For instance, lithium probably drives only 7% or 8% of SQM's revenues. Their primary product is potash. Secondly, the largest producers in the world—SQM (NYSE:SQM), FMC Lithium, which is part of FMC Lithium Corporation (NYSE:FMC) and Chemetall Lithium, which is part of Rockwood Holdings Inc (NYSE:ROC) —by and large draw from aquifers, from brines, to produce the lithium. If you pull too much water out of the aquifer too fast, you run the risk of depleting it completely or diluting it substantially and damaging not only lithium production, but also potash.
TGR: What's the investor opportunity in lithium if the majors treat it as an afterthought?
JH: We believe the best way to play the market is to buy a good basket of juniors that are exploring for lithium. It's traditionally the juniors that go out and find it and either become major players themselves or get acquired by players already in the market.
TGR: Brine extraction is today's low-cost production technology for lithium, but aren't these juniors looking at a different type of extraction?
JH: Yes and no. Brine certainly is, by and large, the lowest-cost way to go, though investors have to watch out for some things. The first cut for wheat from chaff is the magnesium-to-lithium ratios in brines. For every integer point increase in that ratio, add $180 to $200 of cost per ton. That puts the economically viable point for brine these days at a ratio of about 11:1 or 12:1. If you see anything much higher than that, run; there's no point in looking at it. Anything close to that actually gets to be economically scary because certainly we could have downturns in pricing.
A lot of the juniors are looking in places with good magnesium-to-lithium ratios, good concentrations of lithium in the brine, good evaporation rates so that production is relatively quick and good hydrogeology so they can actually pump enough water out of the ground to reach reasonable annual production levels.
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