ASX-listed Liontown Resources Ltd, which is building the Kathleen Valley lithium pegmatite mine in Western Australia, announced on September 4, 2023 that it had received and accepted a conditional and non-binding proposal from Albemarle to purchase the company for AUD $3.00 per share. This follows a similar proposal made on March 28, 2023 to purchase Liontown for AUD $2.50 per share which I discussed in KW Episode March 29, 2023. Liontown rejected the March offer because it was conditional on an exclusive due diligence period which denied the potential for a bidding war and exposed Liontown to downside risk if Albemarle subsequently declined to make a binding offer. The proposal occurred in the midst of lithium carbonate prices crashing from their $30-$35/lb range in 2022. This time around Liontown has agreed to grant Albemarle an exclusive due diligence period and signaled its willingness to accept a binding offer at $3.00, barring a superior bid. Both have agreed that $3 is Albemarle's final offer unless Liontown receives a superior bid, in which case Albemarle, with the benefit of having done due diligence, can up its bid. Liontown has not told us how long this due diligence period will be. Based on 2.2 billion fully diluted the AUD $3 per share price values Liontown at AUD $6.6 billion, which at current exchange rates is about USD $4.2 billion or CAD $5.8 billion.
This revised proposal which Liontown management appears willing to accept if it becomes binding after Albemarle completes its due diligence is an important development for the Lithium Mania 2.0 emerging in Canada, especially the James Bay district of Quebec. Liontown acquired the Kathleen Valley project in 2016 from gold producer Ramelius based on LCT-type pegmatite showings as part of Lithium Mania 1.0. Liontown is now in the midst of constructing an 8,000 tpd facility for its Kathleen Valley deposit which has a resource of 156 million tonnes of 1.4% Li2O. The mine, which is projected to cost AUD $895 million already funded by equity and credit, is expected to begin production in mid 2024, 8 years after exploration began. Keep in mind that this project's advancement had to navigate the lithium winter in 2018-2020 when lithium carbonate prices sank from the $10-$15/lb range to below $3/lb where the world will never see the supply expansion it needs to meet net zero emission goals via EV's that use the lithium ion battery. The lithium winter was caused when the supply mobilization from new Australian hardrock mines overwhelmed the demand requirements of the nascent EV sector. This imbalance reversed in 2021, leading to abnormally elevated lithium carbonate prices in the $30-$35/lb range in 2022 which is now trying to find a new equilibrium in 2023.
Liontown's Kathleen Valley story, a manifestation of Lithium Mania 1.0 in which Australians very profitably participated, is a poster child for the Lithium Mania 2.0 that is now unfolding in Canada and Brazil with regard to LCT type pegmatite deposits. For Canadian investors snoozing in the new found glory of 4%-5% savings deposit yields after a decade of near zero yields, understanding the Liontown story is a good way to rediscover the notion of rapid 1,000% plus returns in less than two years. The Canadian poster child is the Corvette project whose similar pegmatite showings in the James Bay region of Quebec Patriot Battery Metals Corp began exploring in 2021 (after doing nothing with it during Lithium Mania 1.0 while it held the option on it as an ambulance chasing junior). In July 2023 PMET delivered a maiden resource estimate of 109.2 million tonnes at 1.42% Li2O for the CV5 zone. The next day Albemarle stepped up to buy CAD $109 million in stock at CAD $15.29 per share to acquire a 4.9% equity stake and an agreement to discuss a future lithium hydroxide refinery somewhere in North America. The financing price implied a CAD $2.2 billion value based on 142 million shares fully diluted. PMET stock has since retreated into the $11-$12 share price range as the project shifts into the feasibility demonstration stage and the holders of a large warrant overhang at exercise prices below $1 per share figure out how to exercise the cheap warrants before they expire in December. A short report by Night Market Research has argued that the valuation is excessive given the stage of the project and Canadian risk factors such as arbitrary First Nation wishes and absolutist environmental policies that favor torching the planet to save a few fish.
At Friday's PMET close of $11.68 the Corvette project has an implied value of about CAD $1.7 billion. That is about 29% of the value Albemarle is assigning to Kathleen Valley, which is reasonable given the certainty range for a project at the PEA stage is 10%-25% of the projected outcome value (according to my rational speculation model). Given the similarity in size and grade between Kathleen Valley and CV5 (the proven and probable resource for Kathleen Valley is 68.5 million tonnes at 1.34% Li2O, most of it slated for underground mining), the Albemarle buyout proposal validates the current valuation of Patriot Battery Metals. This is important because the seemingly inbred timidity of Canadians discourages them from taking seriously anything homegrown. (Back in the eighties and early nineties when I worked as an analyst in the Canadian brokerage industry the running joke was that Canadians never accepted a Canadian discovery until it was validated by American buying; with regard to Lithium Mania 2.0 the validation will be created by Australian buying.)
Albemarle is the top diversified lithium producer not dependent on making battery grade lithium precursors in China which has built up excess battery making capacity. A recent Lex blurb in the Financial Times about Albemarle revealed confusion about the difference between the production of lithium and its conversion into battery grade feedstock. China's economy is spiraling into the toilet because Xi Jinping's Maoist vision for China as a totalitarian state enhanced by hyper-surveillance and an alliance with other authoritarian states such as Russia is crushing Chinese citizens into a defensive fetal position even as the rest of the world struggles to reduce its dependency on Chinese production. China's emperor for life has boxed himself into a cul de sac from which the only way to escape domestic insurrection is to create a patriotic distraction in the form of annexing Taiwan. Should it come to this, the excess Chinese lithium concentrate processing and battery making capacity becomes mere dust in the wind. Albemarle getting serious about Liontown goes far beyond enhancing long term shareholder value; it is a strategic move designed to establish it as a premiere supplier of battery grade lithium for the non-Chinese EV sector.
The high probability that the current $3/share proposal will result in Albemarle acquiring Liontown underscores the gain potential participants in the James Bay Lithium Great Canadian Area Play can hope to achieve if they make a similar discovery. And don't worry about too many such discoveries being made; Rio Tinto predicts that by 2035 the world will need 60 Jadars in production in order to supply the lithium needs of the EV production scale required to keep the world on track for its 2050 net zero emission goals. Kathleen Valley and CV5 are each equivalent to one Jadar (btw, the original Jadar is suspended in limbo because its location has been designated by Serbia as a permanent stage for future Heidi movies).
Rio Tinto's 2021 Jadar prediction assumes that the IEA is correct in its 287 page 2021 World Energy Outlook Special Report: The Role of Critical Minerals in Clean Energy Transitions. Slide 6 reveals that an EV will require about 206 kg of critical minerals (excluding aluminum and iron), of which about 10 kg consists of lithium and 67 kg consists of graphite. Rio Tinto's Jadar predictions are based on this lithium requirement, which I assume is represented as lithium metal (many of these demand projections in various venues never mention the lithium units, so it can be confusing).
That IEA report is a couple of years old and is a good illustration of how rapidly assumptions about energy transition related technologies are changing. That report imagines that future heavy duty EV vehicles will be dominated by LFP type batteries which will only feature modestly in light duty vehicles. But today we known the Chinese carmakers like BYD have shifted to LFP batteries for the mass market, and Tesla is contemplating selling LFP cars to the masses in North America. The IEA Energy Technology Perspectives 2023 report released last January in contrast predicts that in 2030 and beyond hydrogen fuel cell technology will dominate heavy duty transport vehicles.
Brand new, however, is Toyota's claim of a manufacturing breakthrough involving solid state lithium ion batteries that provide a 1,200 km range on a 10 minute charge. If true this would involve replacing the 67 kg of graphite in the anode with lithium metal. If the substitution works out to an equal volume basis, then, based on lithium's specific gravity of 0.53, about 23.5% of carbon's 2.26 specific gravity, the anode would require 16 kg of lithium metal, with 51 kg less weight of juice sucking battery material. Assuming the overall battery still needs 10 kg of lithium for the cathode and electrolyte, bringing the total to 26 kg of lithium metal for a light duty EV, the world would need 156 Jadar equivalent mines by 2035. If that became reality, the annual lithium market would easily be worth $200-$300 billion by 2035, more than ten times what it was in 2022, and a thousand times what it was in 2005.
If Albemarle does indeed swallow Liontown, its Australian shareholders will likely deploy a good part of that CAD $5.6 billion liquidity event into the James Bay lithium hunt because Australia cannot fulfill that looming supply gap with more low hanging fruit. And carmakers cannot afford to wait for claystone mines and direct lithium extraction of oilfield brines to demonstrate its lithium carbonate equivalent cost of production. Forget about Africa's LCT-type potential. Zimbabwe has not emerged from Mugabe style authoritarian control. Congo's pegmatite rich interior remains within reach of murderous warlords and corrupt politicians. And the Sahel is spiraling into a battleground between Russian and Islamic thugs. Carmakers thinking about lithium supply in 2030 and beyond when EV adoption goes exponential are all looking at Canada (also Brazil, but the Chinese will out muscle them there).
The only group not looking at Canada are the 95% of Canadians who do not qualify as indigenous. The 5% who claim to own 400% of Canada most certainly are looking at Canadian's lithium supply potential, and while that might explain why Canadians are ignoring Lithium Mania 2.0, they should wake up to the reality that if Canada is to become a major critical metals supplier, the money that pours into the pockets of the indigenous aristocracy will not come from shareholder profits, but rather from the pockets of the 95 percenters in the form of diverting the taxes federal and provincial governments will collect from profitable critical mineral producers. To preserve the idea that Canada's mineral riches will be discovered and developed by venture capital, Canada should adopt a rule that all federal and even provincial income taxes from mining operations should be earmarked for distribution to Canada's First Nations, with no percentage of the project required to be assigned on a carried basis to local First Nations groups, nor should companies be required to waste any effort on "co-operation" deals that are only binding on the companies. The government will collect plenty of tax revenues from the CapEx and OpEx part of the mining equation, which, to ensure development decisions are based on competitive economic factors, should not be required to be larded with inflated local First Nations service contracts. The 95 percenters cannot afford to let Canada become a NoCanDo Nation. |
