The burgeoning demand for lithium, driven predominantly by the electric vehicle (EV) revolution and renewable energy storage systems, has spotlighted the challenges faced by lithium developers in ensuring a consistent and adequate supply of this crucial metal.
As the world pivots towards cleaner energy solutions, understanding the hurdles hindering lithium deliverability becomes paramount. Moreover, within the lithium sector, distinct differences exist between hard rock and brine developers, each facing unique challenges in meeting the rising demand.
We’ve made our views clear; there will not be enough lithium to meet demand over the next decade, despite commentary that predicts an oversupply of lithium in the near term. Our research shows that even if every lithium project currently know comes online by 2030, there will still be a shortfall of over 50%.
We see significant deliverability challenges for a large portion of the listed lithium companies, and don’t believe many of them will ever become producers. The challenges confronting lithium deliverability are multi-faceted, spanning technological, geopolitical, regulatory, and logistics. Hard rock and brine lithium developers face their own distinct hurdles, from resource location to extraction techniques and cost structures.
Navigating these challenges requires collaborative efforts among governments, industry stakeholders, and technological innovators to drive sustainable, efficient, and reliable lithium production. Balancing environmental concerns, investing in infrastructure, diversifying resource locations, and ensuring stable regulatory frameworks are pivotal steps toward securing a consistent and robust lithium supply chain.
The challenge investors face is how to choose a lithium project invest in. These are the factors we consider before investing in a lithium company.
Resource Location: Hard rock lithium deposits are typically found in pegmatites, while brine deposits are located in salt flats or salars. We’ve also seen some clay projects start to surface, but we’d steer clear of these. There isn’t a single lithium clay project that’s even close to production.
Hard rock deposits are more geographically dispersed compared to brine, which tends to be concentrated in specific regions, and many lithium reserves are based in locations that we view as less stable politically, which adds risk to these projects.
Geopolitical risk is also a factor, with concentrated reserves in a handful of countries, primarily Australia, Chile, Argentina, and China, supply security is a factor. Geopolitical tensions, trade disputes, and policy changes in these regions can disrupt supply chains, emphasising the need for diversification and stable regulatory environments. Our preferred jurisdictions are Australia, Canada, and USA.
Extraction Techniques: Hard rock mining involves conventional extraction methods, while brine extraction traditionally uses evaporation ponds or more modern methods like direct lithium extraction (DLE), which we see challenges with, and would questions any additional costs companies face to purify the water before it is pumped back into the ground. These additional costs would push these companies higher up the cost curve than their feasibility studies suggest.
Production Costs: Hard rock extraction can be more expensive initially, but the processing methods are often simpler. Brine extraction might have lower initial costs but as mentioned above, could entail higher operational expenses due to complex evaporation techniques, or additional costs to purify the water following DLE.
Purity and Quality: Brine deposits generally offer higher lithium concentrations but can involve impurities, which add significant costs to remove and lift the concentrate to battery grade (99.5% purity). Hard rock deposits may also require additional processing to reach the required purity levels.
Price volatility is also a factor in the short term, as falling lithium prices impact the marginal producers ability to obtain financing for their projects. Lithium prices have exhibited significant fluctuations, impacting project economics and investment decisions.
In our view, the lithium sector has been manipulated to the downside by inaccurate and misleading reports and headlines. We’re now starting to see the marginal producers being squeezed, generallyh a sign that buying will soon start en-masse.
It can be difficult to not get caught up in the speculative froth when prices start to increase rapidly like we’ve seen on the ASX in recent weeks. Even though we see the sector as undervalued, you should exercise caution when buying and reach out to your advisor if you have any questions.
