During Q2 of 2022 I began to get my head around the lithium supply problem as it related to the energy transition goal of replacing ICE car sales entirely by EV sales in 2035. I ignored Lithium Mania 1.0 during its 2015-2018 run because I did not believe EV adoption would happen as rapidly as predicted. I also assumed the Lithium Triangle in South America and the Australian pegmatites would supply whatever the EV sector needed. Between 2018-2020 the price of lithium carbonate crashed from its $10-$15/lb range to below $3/lb when the Australians proved very efficient at mobilizing new lithium supply. So ignoring lithium spared me the lithium winter that followed. In 2021 two important things happened. First, Trump failed to steal the 2020 election so that he could continue his promotion of fossil fuels and climate change skepticism, and, second, more importantly, the car companies had ignored Trump and committed themselves to switching to electric vehicle fleets to such an extent there was no turning back. This reversed the lithium supply surplus and lithium carbonate prices increased more than ten-fold, spending most of 2022 in the $30-$35/lb range.
I could see that the Lithium Triangle and Australia's pegmatites could deliver the first half of the projected ten-fold demand expansion, but where was the other half supposed to come from? Goldman Sachs thinks it will come from Chinese brines and pegmatites, perhaps repeating what happened with rare earths, zinc and molybdenum during the 1980s, but I don't think that will be the case. The obvious answer was that it would need to come from pegmatites located within Archean settings in Canada, Scandinavia, Africa and South America. But because it takes 5-10 years to bring a new mine into production, if the other half is to arrive by 2030 when EV sales are supposed to go exponential, there has to be an exploration boom over the next three years that reveals the pegmatite resource base available for development.
I coined the term Lithium Mania 2.0 to reflect this pegmatite exploration boom that will sweep beyond Australia. Some people think it is impossible for a market worth only $1 billion in 2015 to grow into a $100-$200 billion annual market by 2035. Pegmatites, which you cannot easily find if they don't daylight, were frequently observed during decades of base and precious metals exploration, but ignored because the market was small less than $200 million before 2006 when usage was dominated by glassware and ceramics, and more than adequately supplied by the Chilean brines and Australia's giant Greenbushes pegmatite. It will not be hard to revisit these forgotten pegmatites and the trends within which they sit, figure out which ones are LCT type, and drill a few holes across them to establish which ones have sufficient grade and tonnage to be development candidates.
Lithium Mania 2.0 will explode in 2023 even if lithium carbonate prices drop back into the $10-$15/lb range. Usually the optics of the reversal of an exponential price rise hurts market sentiment, but so long as the price stabilizes in the $10-$15/lb range and does not crash to $5/lb as Goldman Sachs hopes, the boom will continue because at that price pegmatites grading 1% Li2O are well in the money. This is a discovery exploration boom, not a gold price gain optionality story. Brunswick Exploration is the pegmatite grassroots discovery junior in the 2023 Favorites while Critical Elements with its Rose pegmatite is the development stage Favorite. The Rose project is in the money at $12/lb lithium carbonate.
Cypress Development is included in the 2023 Favorites because it is working on a feasibility study for its claystone project in Nevada. Claystone deposits were the rage in Lithium Mania 1.0 because these are giant, open pittable systems though with a low grade. None is yet in production because they have been hung up in permitting issues involving Native Americans and sensitive habitats while less advanced ones like Cypress have been solving flow-sheet problems. Water rights are a big obstacle for developing a claystone deposit. The extraction flow-sheet is never simple for claystone deposits and has to be customized for each deposit. Cypress has water rights, is not in an environmentally sensitive area, and is on its second flow-sheet iteration which appears to have solved key problems. Costs will probably be double, but, using the ore schedule in the PFS, Clayton Valley is very much in the money in the $10-$15/lb range.
Kaiser Watch episodes in 2023 will frequently touch on lithium and discuss companies whether or not they are Favorites because the lithium topic is crucial to the energy transition which will continue to march onwards even during a recession. |
