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Nov 15 2018 at 11:00 PM

Updated Nov 15 2018 at 11:00 PM

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Banks warm to lithium but the training wheels are still on

https://www.copyright link/business...-on-but-banks-warm-to-lithium-20181113-h17uzu

Mainstream banks want to get more involved with Australia's rapidly expanding lithium sector but have been held back by the lack of a well-defined index price for the lightweight metal, according to one of Australia's top bankers to the resources sector.
Westpac global head of natural resources Patrick Cocquerel said the financial sector still had "the training wheels on to some degree" when it came to servicing the Australian lithium sector, which has grown from one mine to seven in less than two years.
That extraordinary growth has required billions of dollars of capital spending on new and existing mines, but mainstream banks have supplied little of that finance, with the boom instead funded by shareholder equity, customer prepayments for future delivery of lithium, high-cost bonds and some specialist lenders to the small end of the resources sector.
Mr Cocquerel said Westpac had been involved in two lithium transactions in the past year, but he said it was broadly true that mainstream banks had played little role in the lithium boom so far.
https://www.copyright link/content/dam/images/h/0/z/e/v/8/image.imgtype.afrArticleInline.620x0.png/1524999997240.jpgMainstream banks want to get more involved with Australia's rapidly expanding lithium sector, but have been held back by the lack of a well-defined index price for the lightweight metal.
"We have the training wheels on to some degree but hopefully, we are learning fast because we want to support them," he told The Australian Financial Review.

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Lack of clarity

Lithium was traditionally a mere byproduct sold to ceramic and glass manufacturers, but demand has soared in the past three years from the manufacturers of lithium-ion batteries, and is tipped to continue rising on greater adoption of electric vehicles.
Unlike major traded commodities like gold and copper, price reporting agencies publish up to 30 lithium prices in their bulletins, with prices varying according to lithium content, chemical state, the location of the buyer and whether the lithium is sold on long-term contracts or the spot market.
Australian miners typically produce a lithium-rich spodumene concentrate, and Mr Cocquerel said the lack of clarity over pricing had made it hard for mainstream banks to lend to lithium miners.
https://www.copyright link/content/dam/images/h/1/7/q/5/4/image.imgtype.afrArticleInline.620x0.png/1541740699344.jpgLithium was traditionally a mere byproduct sold to ceramic and glass manufacturers, but demand has soared in the past three years from the manufacturers of lithium-ion batteries, Bloomberg
"The mining risk from mining spodumene is not significantly different from other minerals. Our challenge is more about getting some certainty over the future cash flows in the absence of a well-defined and published index prices (like London Metals Exchange, Metal Bulletin etc) that provides a forward market to hedge price risk," he said.
"Banks are therefore reliant on the strength of the offtake arrangements that miners commit to; what is the credit quality of the offtaker? What is the agreed price mechanism? What is going to be the supply demand balance in the next three or five years? There are still a lot of questions to be answered."
A spokesman for Commonwealth Bank also highlighted lithium pricing as one of the factors that had made banks cautious.
"While Australia has one of the world's largest lithium endowments, we are still deepening our understanding of the market more broadly, including around the pricing mechanisms that are in place," he said.
https://www.copyright link/content/dam/images/h/1/7/u/o/7/image.imgtype.afrArticleInline.620x0.png/1542085597904.jpgMr Cocquerel said the lack of clarity over pricing had made it hard for mainstream banks to lend to lithium miners.Louie Douvis
Mr Cocquerel endorsed Pilbara Minerals boss Ken Brinsden's comment earlier this week that banks were unlikely to get involved with a lithium miner prior to them being in production.
"We are bankers, so if the only cashflow is from a new mine with a commodity with little price and volume certainty, it will be more difficult," he said.
Coming clean

Westpac made headlines in April 2017 when it announced it would tighten its lending to the coal sector, with the bank now lending to mines in only existing coal basins and which produce coal with high energy content.
https://www.copyright link/content/dam/images/g/u/h/9/3/g/image.imgtype.afrArticleInline.620x0.png/1508299990519.jpgCommonwealth Bank also highlighted lithium pricing as one of the factors that had made banks cautious. Michel O'Sullivan
Mr Cocquerel said the flipside of that policy was that Westpac wanted to be more involved in lending to producers of the battery minerals like lithium that will help drive clean-energy technologies.
"We are very keen to do work in lithium, we are very keen to work with nickel, cobalt, graphite and all the other battery minerals. It is important for us to be consistent with our sustainability agenda and support the clean energy of the future," he said.
"We all agree it is a very fast-growing sector, it is going to be a significant industry in the future."
While mainstream Australian banks have been cautious, some foreign banks have been more willing to embrace the sector, with BNP Paribas signing small loans with Galaxy Resources and Pilbara Minerals over the past 18 months.

Kidman Resources managing director Martin Donohue said his company wanted to use debt rather than equity to fund its $US300 million share of construction costs on the Mt Holland lithium project in Western Australia, and was in discussions with mainstream banks about funding.
"They appear to be showing more interest, they certainly are with us," he said on Thursday.
"We have a fairly extensive list of banks that we are talking to about debt, they are getting their head around it, that is our experience."
Mr Donohue said partnering on Mt Holland with a major player like Chile's SQM, and the high calibre of Kidman's lithium customers (the company has agreements with Tesla and Mitsui) had given potential lenders confidence.
"With the two offtakes we have done with Tesla and Mitsui, we have either got a fixed price or a floor price and that takes the market risk out of it for the debt guys," he said.
State of the matter

S&P Global Market Intelligence reported this week that exploration budgets for lithium and other battery minerals such as cobalt had risen more than 500 per cent since 2015, and rose 82 per cent over the past year.
Once expected to be the world's high-cost and marginal producers of lithium, Australian miners have been buoyed by a change in demand from battery consumers who are increasingly preferring their lithium in a hydroxide state rather than the traditional lithium carbonate form.

The change is driven by the fact that batteries containing lithium hydroxide can give an electric vehicle longer range before needing to be recharged.
While South American producers, who extract lithium from briny water beneath salt lakes, are cheaper producers of lithium carbonate, they have to add an extra processing stage to convert their lithium carbonate into lithium hydroxide, and that has erased their cost advantage over Australian producers, who extract lithium from hard rock spodumene.
The trend has prompted US lithium giant Albemarle (which produces lithium in both South America and Western Australia) to announce last week that it was accelerating its Australian expansions while putting its Chilean expansion projects on the back burner.

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