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Lithium superpower: How Australia's penny-dreadfuls stole a march on the world
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Tawana boss Mark Calderwood wrote the book on lithium in Australia long before it was fashionable. Trevor Collens
by
Peter Ker
You could say Mark Calderwood wrote the book on lithium in Australia.
When he co-authored the
Guidebook to the Pegmatites of Western Australia almost two decades ago, he never dreamed he was providing a generation of future entrepreneurs with a crucial insight to the type of granite rock that would become the centre of a major mining boom.
In those days, pegmatites were valued for the collection of off-broadway commodities they contained, like tantalum and tin.
"Back then lithium wasn't even discussed," says Calderwood, humbly dismissing suggestions he was preternaturally prescient with the topic of his book.
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"As recently as December 2015 when a broker told me to find him a lithium project, I said 'No, there can't be any money in lithium.' "A few years later we are producing the stuff."
As managing director of Tawana Resources, Calderwood now stands atop Australia's newest lithium exporter, a company whose market capitalisation has risen 17-fold to $206 million over the past two years.
Like its peers, Tawana's extraordinary growth has come on the back of transformational changes to lithium demand as traditional consumers in the ceramic and glass industries have faced competition from the manufacturers of modern batteries.
Lithium-ion batteries have been used in consumer electronics for decades, but their growing use in electric vehicles has, more than any other factor, driven a quadrupling in the price of lithium delivered to China over the past four years.
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As lithium became one of the world's hottest markets in recent years, no country moved faster and grabbed the opportunity more successfully than Australia, which has grown its market share of raw lithium production from about 13 per cent in 2000 to 50 per cent in 2017.
Industry intelligence firm Roskill estimates Australia will supply 62 per cent of the world's lithium in 2018 on the back of three new mines, including Tawana's Bald Hills, coming into production.
Tantalum roots
Australia has stolen a march on the lithium world, and few personify that journey better than Calderwood, who as a 10-year-old boy kicked the rocks around the private mine his father operated near the Western Australian town of Mt Magnet.
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"He had a joint venture and they were mining feldspar for ceramics and he mined tantalum on a very small scale," Calderwood says. Tantalum is a metal used to make capacitors for the electronics industry.
If there was lithium in the pegmatite that Calderwood's father mined, it was of no interest; lithium was for decades discarded, or at best sold as a low-value byproduct from the numerous tantalum mines scattered across Australia's western flank.
But that history with tantalum proved invaluable when the sudden surge in lithium demand arrived;
marginal tantalum mines like Wodgina, now owned by Chris Ellison's Mineral Resources, were acquired and rebadged as lithium assets.
Those spruiking undeveloped tantalum tenements quickly learned it was more productive to market them as lithium projects.
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The growing use of lithium-ion batteries in electric vehicles has, more than any other factor, driven a quadrupling in the price of lithium delivered to China over the past four years. SeongJoon Cho
While that tantalum heritage undoubtedly gave local miners a head-start in the lithium race, credit must also go to the evergreen entrepreneurial spirit that exists at the small end of the nation's resources sector.
Australia's dominant position in lithium was not delivered by the familiar mining giants that have dominated the local industry over the past century.
It was delivered instead by a crop of penny-dreadful micro-cap stocks that were unknown to most investors, politicians and media until very recently.
For a sector often derided for its old-fashioned ways, those that pounced early on the lithium and battery thematics displayed the sort of "agility" that one might normally associate with tech companies.
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Boots and all: Australia has grown its market share of raw lithium production from about 13 per cent in 2000 to 50 per cent in 2017. Erin Jonasson
To illustrate the speed at which the opportunity was grasped, consider where today's market darling lithium stocks were just a couple of years ago.
As recently as May 2016, and before Calderwood took charge, Tawana was trying to convince a bearish market to invest its money into a Liberian iron ore asset. It has since changed focus to lithium, built a mine and started exporting.
When Kidman Resources paid $3.5 million in cash and scrip for the Mt Holland tenement in December 2015, the company hoped the deal would make it a major gold producer. Mt Holland is now considered a lithium prospect after a pegmatite was found on the acreage, and Kidman's partners in the project include major global players like
electric vehicle manufacturer Tesla and the world's biggest lithium producer, Sociedad Quimica Y Minera (SQM) of Chile.
ASX listed lithium plays like Pilbara Minerals, Galaxy Resources, Altura Mining and Kidman have each enjoyed share price gains of at least 18-fold, and as much as 30-fold, since June 2015.
When combined with Orocobre, Mineral Resources and Tawana, the seven biggest lithium biggest stocks on the local bourse had a combined market capitalisation of more than $9 billion this week.
A nation can't capitalise on a commodity boom without being blessed with the right geology, but data provided by Roskill suggests that many other nations could have seized the lithium opportunity like Australia did.
Despite producing 62 per cent of the world's lithium this year, Roskill analyst Robert Baylis said Australia holds just 17.1 per cent of the world's defined lithium resources and 12.6 per cent of the world's defined lithium reserves (a classification that implies higher geological certainty than resources).
"Australia is blessed, we have just got this incredible mineral endowment, but the fact we have got a very established mining sector with a very active exploration industry and an equity market that is willing to finance that, does put us in much better stead to be able to deliver these things as industries like this need it, in much the same way that we were able to deliver all the iron ore during the steel boom," said Canaccord Genuity analyst Reg Spencer.
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The Mount Marion lithium mine in Western Australia. Australia will supply 62 per cent of the world's lithium in 2018 on the back of three new mines. Supplied
From employing 399 people in December 2014, the number of people employed in the local lithium sector had risen to 2659 people by December 2017, according to WA treasurer Ben Wyatt.
Australia's three existing lithium exporters were joined by Tawana's Bald Hills in April, and two more mines are scheduled to begin exporting within months, prompting the
Western Australian government to factor in a $41 million increase in lithium royalties for fiscal 2019, taking the sector's contribution to $131 million.
Banks miss the boom
While the small end of the resources sector feasted on the lithium boom, the same can't be said for Australia's banks.
"Definitely on the lending side the banks weren't there, they just weren't there," recalls Neil Biddle, who ran Pilbara Minerals when its shares were worth 2¢. The stock traded as high as $1.22 earlier this year, and was fetching 88¢ this week.
"They [the banks] just couldn't get their heads around lithium at all. I still doubt they could, I doubt you could fund a lithium project today through an Australian bank, certainly none of the tier one banks, it is still not mainstream enough for them."
The new generation of Australian lithium mines were funded by end consumers (such as Korea's POSCO) who rushed in to sign early supply agreements, US debt markets, specialist resources funds and retail punters, who have been zealous supporters of the sector.
Brisbane-based Orocobre, which has a lithium operation in South America, relied on its partnership with Toyota to get affordable debt from Japanese banks.
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The seven biggest lithium biggest stocks on the ASX had a combined market capitalisation of more than $9 billion this week. Patti McConville
"Much of the early funding for new projects has so far been provided by non-bank financiers with interest rates varying from 10 per cent to 15 per cent," Orocobre's investor relations manager Andrew Barber says, adding that Orocobre was able to get debt below 5 per cent.
"Lithium is not traded on commodity exchanges and that lack of transparency on pricing and contract terms has restricted the ability of traditional banks to manage risk and establish hedge positions that would normally underpin debt facilities to resource projects."
Unlike major commodities like gold and copper, lithium does not have a single global benchmark price that lenders and investors can track.
The major price reporting agencies publish up to 30 different lithium prices in their bulletins, with discrepancies existing across geography, product grade, chemical state and whether the lithium is sold on long-term contracts or the spot market.
In the search for a barometer, many local players watch the price at which battery grade lithium carbonate with 99.5 per cent purity sells into China. That price has surged from about $US4900 per tonne in September 2014 to about $US20,000 per tonne in recent months.
The hydroxide revolution
As they raced into the rapidly expanding but still opaque lithium market, Australian miners were expected to become the world's marginal, high-cost producers based on perceptions it would be more expensive to blast, mine and concentrate lithium from Australia's hard rock deposits than to extract it from the briny water that gathers beneath the salt lakes of South America's Andean deserts.
The latter method, which produces lithium in a carbonate compound, had dominated global lithium supply for decades.
"I am here to tell you that conventional wisdom [around production costs] is fundamentally wrong," said Ken Brinsden, Biddle's successor at Pilbara Minerals, during
a recent speech in Melbourne.
Perceptions about cost competitiveness are evolving quickly as changing demand dynamics play in favour of Australia's hard rock lithium miners.
While demand for lithium carbonate remains strong, the manufacturers of electric vehicle batteries are increasingly demanding their lithium in a different chemical compound: lithium hydroxide.
Phil Thick, the local boss of Australia's biggest lithium exporter, Chinese company Tianqi, said the trend toward lithium hydroxide was driven by car manufacturers' desire for their electric vehicle batteries to last longer on the road.
"Lithium hydroxide has become the go-to product ... players like Tesla are only buying lithium hydroxide. The advantages are it gives much better energy density and that leads to much better range, and power and range are the holy grail of electric vehicles," he told an audience in Perth in March.
"Range in particular, to be able to provide cars that go 800 kilometres rather than 200 kilometres is a game changer and everyone is working on achieving that."
For South American producers to convert their lithium carbonate into lithium hydroxide, they generally need to add an extra processing stage, which adds extra cost.
There is no extra cost for Australian hard rock producers, who already require a processing stage to convert their concentrates into lithium carbonate or lithium hydroxide.
"Once it is normalised to the battery grade specifications, the entire cost curve changes, and the perceived low-cost brine operations jump well up the cost curve and as a result, the low-cost hard rock operations become probably the lowest cost source of supply globally," Brinsden said.
"That gets to the heart of Australia's opportunity. We will have a series of large, hard-rock lithium raw material mines that will be ultra competitive and probably the lowest cost of supply for the battery market, and especially in the hydroxide category."
As the developer of one of the world's biggest hard-rock lithium projects near Port Hedland, Brinsden has a vested interest in the hydroxide narrative.
But it is becoming widely accepted; US company Albemarle produces lithium from both Australian hard rock and South American brine operations, and its chief executive Luke Kissam told investors a similar story at a briefing in New York in recent days.
"Because of the concentration at Greenbushes [a mine in WA] we are able to go directly from rock to lithium hydroxide. From Argentina brine you go from brine to carbonate and then carbonate to hydroxide. So [Greenbushes] would be cost competitive with that production and [Greenbushes] will get better as we expand that volume ... after 2021 we will have a cost advantage there because we will be spreading the cost of volume," he said.
Moving downstream
The shift toward lithium hydroxide has extra importance for Australia and could set the lithium boom apart from the previous commodity booms.
The nation has historically shipped its raw materials abroad, but lithium miners are increasingly focused on beneficiating their raw materials on Australian soil. Beneficiation refers to any improvement of an ore body by removing worthless minerals, which results in a higher grade product, known concentrate, and a waste stream, or tailings.
Virtually all of Australia's existing or aspiring lithium miners are now building or planning beneficiation plants in WA to upgrade their concentrates into higher value lithium hydroxide.
The most advanced is Tianqi,
which will complete the $400 million first stage of its hydroxide plant south of Perth at Kwinana later this year, and has already approved spending a further $300 million to double that capacity.
Albemarle, Kidman, Neometals and Mineral Resources have also announced plans to build their own domestic beneficiation plants, and if all of those companies deliver their plans, the construction bill would run into the billions of dollars.
"We have been very good at ripping rocks out of the ground and sending them to China or somewhere else to add value, our story is about adding the value here which is a plus for Australia," said Thick earlier this year, in reference to the Kwinana hydroxide plans.
A combination of factors look set to make downstream processing of lithium viable in a nation where industries that add value to raw materials, like steel making, have struggled in recent decades.
With 80 per cent of the world's beneficiation fleet located in China, customers in Korea and Japan are keen to support Australia facilities in a bid to diversify their supply of lithium hydroxide.
Mr Thick said having a hydroxide plant close to the Greenbushes mine will also have massive logistical benefits, despite the fact construction costs are up to three times higher in Australia than in Tianqi's home province of Sichuan, China.
"From a logistics point of view our current supply chain is probably as long as any supply chain in the world. We truck stuff from [the Greenbushes mine] to [port at] Bunbury, put it on a ship to China, it then gets barged and trucked for 1500 kilometres inland to our plant. There we turn it into product, it gets put in containers and goes back out to Korea and Japan," he said.
"Soon we will truck it [from the mine] to Kwinana, put it in containers in Fremantle and sending it straight to customers, so it will be a significant shortening of that chain ... it adds to the operational and ongoing cost savings we will get from doing it close to the mine."
Tianqi's Kwinana hydroxide facility is located just minutes away from where Kidman and SQM plan to build a similar facility, and a mere drop-punt away from
BHP's Nickel West smelter, which is spending $US43.2 million on refurbishments to enable it to produce a battery product called nickel sulphate hexahydrate.
Next stop, Lithium Valley
Throw in Kwinana's existing chemical industry and cheap gas from the state's domestic gas reservation, and excitement is building in the west about the potential to develop a battery hub that some have dubbed "lithium valley".
Thick is optimistic, but cautions against exuberant suggestions that Australia could become a globally significant manufacturer of batteries or electric vehicles.
"Everyone is getting very excited thinking we are going to build gigafactories of the scale of Tesla's in Kwinana to build batteries, I don't see that happening, it may happen a bit further down the track to some degree, but let's take steps before we run, we are not even currently producing any battery grade lithium chemicals in WA, so to be talking about producing batteries is a little ahead of the game," he said.
Brinsden agrees that the sector was "kidding itself" if it believed it could become a global leader in battery cell manufacturing.
But both men agree that Australia can realistically expand some way down the battery value chain, particularly into the manufacturing of cathodes, the positively charged part of a battery to which electrons are drawn.
"There is certainly the potential to go the next step downstream into precursors and even into cathodes, and batteries are not out of the question, but we need to take it a step at a time here," said Thick.
"A large window is open in WA, and it is only open for a very short period of time for us to take advantage of the boom in battery metals and become a world leader and if we don't do that in the next few years then somebody else in the world will do that and we will miss that opportunity. I am not just talking about mining, I am talking about downstream processing right through to potentially parts for batteries.
"We need serious support from both the WA and federal government to make WA really reach its potential in this space and those discussions are well underway."
Most pundits predict demand for lithium will quadruple or quintuple by 2025, and Brinsden says Australia should try to play as big a role as possible in the looming electrification of the global transport network.
"We should be aiming for the stars and there is a good chance we will hit the moon," he said.
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