Midas Letter in Argentina: 650 million tonnes of lithium to be exploited

One is constantly having to remind one’s self that the lithium market is still only a few billion dollars annually in total market size. But that hasn’t stopped speculators from piling into the space in anticipation of increased consumption by anode and cathode makers in Korea, China and Japan.

It is important to note that manufacturers of batteries outside of Asia are mostly assemblers of battery components, and are not consumers of lithium directly.

Thus, while Tesla Motors continues to bamboozle market observers with paper offtake agreements and visits to the lithium triangle in South America, that is entirely a tactic, at this point, of an attempt to maintain stability in cathode costs by encouraging a robust expansion of lithium capacity — which is working — a bit.

But lithium prices are still rising.

Prices for lithium carbonate and lithium hydroxide are currently pegged at $11,500 and $16,000 respectively, according to Benchmark Mineral Intelligence reports, which are widely viewed as the most credible. This supports geographically the dominance of Australian spodumene mines for hard rock feedstock from the the Greenbush mine in Australia, operated by Talison, itself 49 per cent owned by Albemarle Corporation (NYSE:ALB) and Tianqi Lithium Industries Inc. (SHE:002466).

This is what is driving the opportunity for investors. In the near term — say the next two years — there will remain a supply-side tightness, particularly for hydroxide, that will keep prices under upward pressure. But the high prices are also driving a tonne of investment. In fact, I think the investment and the subsequent explosion of supply that is three years out is going to result in a reversal in pricing by 2018, maybe even toward the end of next year.

This more or less reflects the popular discourse among credible market observers. But what is not thoroughly discussed is the chilling effect such a price reversal is likely to have on development projects that remain unfunded toward 2018. As supply surges, prices will reverse — there’s no doubt about that. And so that future inflection point begs a closer look at the projects proposed to come onstream in that time frame: only the high quality projects with superior access to capital and experienced process engineers are likely to make it to the end zone before time out on price increases occurs.

Undersecretary of mining for Argentina: Promotion is job No. 1

Last Monday, I interviewed Mario Capello in Buenos Aires. He is undersecretary of the Ministry of Mines and Energy for Argentina and his message to foreign investors is clear and consistent: Argentina is open for business.

Argentina’s mining code is second to none when it comes to questions of taxation and ownership — at least on the federal level. But the provinces retain jurisdiction over the granting of concessions, and also have the ability to impose their own financial burdens.

For example, Catamarca province has awarded concessions that are already awarded geographically by the province of Salta. While that is the kind of conflict that has the potential to spook investors, Capello is non-plussed by the dust-up.

“The provinces will work their way through it very simply: regardless of which province the concession is determined ultimately to fall within, it will be the company who first legally obtained the concession who will be the final owner of it.” So that won’t be an issue, as far as the ministry is concerned.

But what should be a little more disturbing to investors is the reality that Argentina has enough lithium reserves to be able to single handedly supply global demand, including the rosiest of demand-side forecasts, for more than 300 years.

“Argentina has over 650 million tonnes of lithium in known salars,” says Capello. “We are also of the position that the opportunity for the Argentinian economy is substantial, and therefore we have an obligation to the people of Argentina to exploit that opportunity.”

Over a 45 minute conversation, it became clear that, at the federal level, the Argentinian government is concerned only with smoothing the way for, and actively promoting, mining development across not just lithium, but all commodities, in Argentina.

Boom turns to bust
The favourite song sung by mainstream market mavens these days is the “Bubble” song: Everything that shows the slightest sign of a price surge is categorized as a “bubble” that must surely burst. But that term is becoming so cliched that its very meaning becomes lost through overuse — much like that other modern media cliche, “sustainability.”

The problem with categorization of industries in such terms is that it fails to invoke the temporality implied in such language. A salar of a certain known resource size can be sustainably mined until the resource is exhausted. Just as an asset bubble might continue to inflate so long as supply exceeds demand. But when the temporal limits of those activities are reached as a result of physical and mathematical inevitabilities that must insinuate themselves on the timeline, those terms demonstrate their insufficiency. Is every commodity supply and demand wave that invariably crosses threshholds of equilibrium then a bubble?

And is every commodity price cycle “sustainable” in either direction, when contemplated on the infinite timeline?

Obviously not, in both cases.

And so it goes for lithium. The art for investors is to exit before the inevitable reversal undermines realized gains. The art for lithium-endowed countries like Argentina, however, is to avoid the temptation to overdevelop assets indiscriminately, to preserve for as long as possible the sustainability of prices that support the incremental growth of the industry.

But that is the essence of cyclicality in commodities, isn’t it? Governments are driven by a simple survival instinct to max out commodity wave peaks as the financial success acts to burnish the popularity — and re-electability — of administrations who do so. At the end of the day, that is human nature, from which there is quite simply no escape.

James West is an investor and the author of the Midas Letter, an investing research report focused on Canadian markets. The views expressed here are his own and are presented for general informational purposes only — they should not be construed as advice to invest in any securities mentioned.

James West and/or associated funds do not own shares in any securities mentioned in this article. For the full Midas Letter disclosure policy, click here. Postmedia and Midas Letter have a revenue sharing arrangement.