Lithium is not just a flavor of the year. It is in high demand for hybrid and electric vehicles, laptops, cell phones and will remain even more so as technology is perfected and consumer demand increases globally. The Gold Report recently spoke with Jon Hykawy, lithium analyst for Byron Capital Markets. Jon discusses the various factors involved in supporting the market for lithium as well as vanadium. He recommends a basket of lithium companies, yet admits that the basket is small. These are still early days and opportunities are presenting themselves for companies and potential investors.

The Gold Report: Jon, you're a very strong proponent of lithium and from what you've told us previously you believe it's hot. How hot is it?

Jon Hykawy: Hot and getting hotter. What we've seen recently is a number of deals coming to market looking for financing and those deals are getting done. We're currently in the midst of one Toronto IPO. It's an Australian-listed company called Orocobre Ltd. (AU:ORE). The company just put out press releases suggesting that they're going out and raising $22 million, to be exact. There's a rumor that we're going to see their direct neighbor on the salar in Argentina come to market soon with their IPO. We've seen a number of offtake and partnering agreements being signed including the Toyota Tsusho (OTCBB:TYHOF.PK) agreement with Orocobre. The interest in the sector has never been greater.

TGR: How are these deals getting financed so easily compared to other rare earth deals?
JH: I think part of it is we're seeing so much media attention paid to electric vehicles. I was actually just at the Geneva Motor Show. That particular event was actually being referred to by people in Geneva as the "electric car show." I went in at the behest of my company president to take pictures some of the new hybrids and electric vehicles that are available. I realized about 10 minutes in that I was going to have to ration the number of flashes I was expending from my cell phone camera because I was going to run out of battery. Every major dealer of motor vehicles in the world was represented there and each of them had new hybrids and/or new pure electric vehicles.

TGR: Is the lithium ion battery going to be sustainable over the next two years with potential new technologies coming into the market?

JH: Absolutely. The new technologies that are potentially coming to market are largely new iterations of lithium ion batteries with new chemistries in the cathodes and new materials being used for anodes. You can improve lithium batteries considerably from here. Keep in mind this is a technology that's only really been under development since the mid '80s and commercially since about the late '90s. This is a technology that has a long way to go.

TGR: You mentioned in one of your research reports that you're recommending that investors consider a basket of lithium companies. A lot of these are development companies from what I understand. Are they long-term plays?

JH: They are. Well some of them are longer-term than others. There's really no way to play lithium directly out of the existing producers with the possible exception of Talison Lithium (currently a private company) coming to market; should they come back for the IPO and should that succeed. Talison, in the minds of most investors, I believe, is not going to play a major part in the battery industry. What you're looking for is lithium development companies that can play that role producing inexpensive battery grade lithium. That largely consists of brine and clay producers. That's the basket that we're referring to. It's companies similar to the ones we have under coverage like Western Lithium Corp (TSX.V:WLC), Rodinia Minerals Inc (TSX.V:RM) and Salares Lithium Inc. (TSX.V:LIT).

TGR: Explain the difference between brine and clay producers, if you don't mind.
JH: With regard to brine producers; lithium is commonly produced today by pumping salty water out of dry salt lakes in South America. This has historically continued to be the least expensive way to produce lithium. The lithium is in the brine in the form of lithium chloride salt. What you do to simplify it dramatically is you basically evaporate the water leaving behind the lithium in the brine and then treating it to produce a chemically tractable form.



The clay producers are a different story. Western Lithium is one of those companies with an extremely large deposit of a lithium-bearing clay in Nevada, actually near the northern border with Oregon. They have the ability to produce, according to their scoping study, relatively inexpensive lithium. It should be very clean lithium which also brings the cost down for producing that ultra pure battery grade. We're very positive on that possibility and we have a couple of other brine companies that we believe have relatively low cost and can find their way into the market as well.

TGR: You stated earlier that brine-based lithium supplies are active and cannot be produced too quickly, referencing evaporation. If the supply is there, won't it come down to companies that can bring it to market quickly in the long run as far as share value is concerned?

JH: It has to get to market relatively quickly and relatively inexpensively. With any commodity industry, your biggest issue is maintaining control of your costs. You must make sure that when the inevitable price decreases do hit the market, you are not one of the companies that fail as a result. Our basic approach at Byron has been to build a model for what we believe the pure variable cost for production out of a specific deposit is and then look to find the lowest cost potential producers.

TGR: Is the potential nationalization of lithium in Bolivia and Chile where Salares is going to potentially affect the price of lithium?

JH: Actually it's not even potential anymore. Bolivia has announced that they're going to be creating a national lithium company whose mandate I believe is to go out and develop Salar de Uyuni as a source. The media hype over the last year has been that Bolivia is the pending Saudi Arabia of lithium.

That Salar de Uyuni is the greatest deposit in the world. I'm afraid that is going to be much more problematic than most people think. Our original lithium report indicated that one of the major cost drivers is the amount of magnesium dissolved in the brine along with lithium. The higher the level of the magnesium, the more expensive it is to produce the lithium and Uyuni is an absolutely marvelous source of magnesium. You're going to have a significant problem developing that economically.

We don't have any shortage of lithium. What we have is a shortage of inexpensive lithium and that's going to come back to bite the Bolivian company. I just don't see how they're going to be able to develop Uyuni at present price points. As far as Chile is concerned, there's been one senator that's proposed nationalizing the industry. The government has just changed recently to a more central right government as opposed to the left-leaning party that was in power previously. I think you're going to see a much more pro-business and pro-mining stance taken by the government there. I don't think nationalization is in the cards.

TGR: When you're looking at a company like Salares in Chile and comparing them with Western Lithium in Nevada, would you as an investor take position in both?

JH: There are different risks associated with each. No one has yet produced commercial quantities of lithium from clay in Nevada or anywhere else for that matter. You have to balance the technology risk. We believe it's relatively minimal because the processing of clay for lithium looks very much like the processing of hematite or magnetite ores for vanadium. That's a process that's been conducted commercially for decades now.

Balancing the two, I think you're probably better off finding a basket of collectively low cost potential producers. Fifteen percent of world production comes from FMC (NYSE:FMC) at a place in Argentina called Salar del Hombre Muerto. That is expensive lithium and it's not an inexpensive place to produce from. It's significantly more expensive than Atacama. It leaves a fair bit of room for others to come in and try to take up some of that 15% market share.

TGR: That helps drive the market, does it not?

JH: It absolutely does. It's not only growth in the market overall which we see being significant over the next few years; it's the potential to displace some of the expensive supply that's in the market place today.

TGR: How many companies are in the lithium basket?

JH: We have three names under coverage and they are Canadian-listed companies. We haven't touched companies like Orocobre which has signed an off-take agreement with Toyota Tsusho. This will provide Toyota Tsusho with the ability to buy up to 25% of their first project. That's a significant endorsement making Orocobre a pretty strong company in the space. Beyond Rodinia Minerals, Salares Lithium and Western Lithium, which we like and have under coverage, another Canadian-listed name that is an obvious candidate would be Lithium One Inc (TSX.V:LI).

We don't have a recommendation on it at this point but people can look it up. What they'll find is that Lithium One is sharing Salar del Hombre Muerto with FMC. When you have a company producing 15% of the world's lithium just down the road, it's a pretty good indication that you know you might have a commercially viable project on your hands as well. Literally they are right across the salar from one another, so this is not a proximity play. This is a direct neighbor on the same producing salar. That's good in some ways having that proximity. It's bad in other ways in that they are sharing the same water.

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