“Those who fail to learn from history are doomed to repeat it”
The current challenges of Western Australia hard rock producers are better understood if one understands a bit of lithium history, past mistakes and how the market has evolved. At the present moment non-vertically integrated hard rock producers are attending the proverbial school of hard knocks. Some will graduate; others won’t – at least not in their present form.
A bit of background:
After grad school and stints in oil and gold, I began my lithium career in 1990 with FMC, a company that produced lithium chemicals from spodumene produced in North Carolina. So my experience with hard rock lithium goes back almost three decades. Prior to SQM’s market entry in the late 1990s the lithium world was controlled by two companies: FMC Lithium (now Livent) and Foote Mineral company (now Albemarle). China and Russia both had minor lithium production as a legacy of their nuclear arms programs but in the mid 1990s they did not have material share in the global lithium chemicals market.
I first visited Western Australia in 1995. In the span of 72 hours I was in Seoul, Auckland, Sydney and Perth. Lithium was a global business from the early years. My boss at the time sent me to Auckland to meet Pacific Lithium (PLL) a company you likely never heard of. They were one of the early in lithium “black box” technology attempts intending to produce lithium chemicals from seawater. They had raised money from the likes of Japanese trading company Nissho Iwai and the government of Singapore. They had a beautiful office in Auckland with a wonderful view. The top guys drove high end BMWs as their company cars.
After a meeting followed by a lavish dinner and drinks. I was told how “special” the PLL technology was. The whole story had the vibe of Buddhist meditation mantra repetition which isn’t normally a winning selling strategy to a small town US catholic. I asked about the plant and was told it was in one of the management team member’s garage. That certainly made an impression. I informed my hosts that is was late, let them know that I had an early Air New Zealand flight to Sydney and tried to make a graceful exit. Before I got to the door, I was reminded that PLL was a “great opportunity” and that FMC better “get in while there was still room”. It was my first but not my last meeting with PLL. They came to North Carolina a few months later to boast about the technology experts they were dealing with at MIT. After the meeting I drove them to Charlotte airport in my minivan (after folding up the built in child seats and tossing some toys in the back). Yes, they were likeable guys with a great office and VERY nice cars. Having lived in Texas, my cynical nature found them the embodiment of the “oil patch” saying: “big hat and no cattle” which for non-native English speakers means – “big talk but no substance”. My skepticism of lithium start-ups and promoters started with PLL. Driving back from the airport, I wondered if maybe I would have a better car if I worked for a company that only talked about producing lithium. FMC passed on the PLL “opportunity”.
I landed in Sydney the following day and met FMC’s Australian distributor near Kingsford Smith airport. The lithium market in Australia was limited: grease, glass and film emulsion but I am still friends with the agent to this day. I went back to the airport and flew to Perth. Thanks to the time change I was able to have dinner with Sons of Gwalia, owners at that time of what is still the world’s best hard rock asset, Greenbushes. Another great meal with some interesting people. Gwalia was planning to enter the carbonate market with a plant in Oz funded by Japanese trading company Itochu.
FMC was in the process of building a brine project in Argentina which would replace North Carolina spodumene production. A few drinks into the discussion of their carbonate project, Gwalia got slightly aggressive. I was told FMC would not be able to compete with the Gwalia carbonate plant even when we were producing from our new brine resource. They said they could "bury FMC". The “confidence” seemed a little forced. I was reminded of Nikita Khrushchev’s famous performance at the UN.
I smiled told them it was probably time for me to say goodnight as my Ansett (yes, that was an actual Australian airline in 1995) flight back to Sydney departed at 6am. I didn’t want to miss my connection to LA and onto Charlotte. Gwalia were the owners of the world’s best hard rock asset but had a surprising lack of understanding of the challenges of transitioning from selling lithium minerals to producing lithium chemicals.
Ultimately the Gwalia carbonate project failed. Gwalia had the right idea - vertical integration, but the wrong design and process. Second lesson from Oceania – even companies with great resources can and do struggle especially when mixed with high levels of arrogance. Remember this was 1995. Lithium ion batteries were hardly thing yet but FMC had 100% share and I was in charge of both carbonate and hydroxide on a global basis so I had a ground floor view. SQM was building their low cost brine lithium by product operation on the Atacama. Gwalia’s timing for entering the carbonate market couldn’t have been worse. Tianqi’s timing for their hydroxide project at Greenbushes is much better but the challenges of chemical production remain.
A couple years later SQM was producing carbonate and ultimately cut prices more than in half in an aggressive move to gain volume. FMC Corporate management didn’t really understand their own competitive advantages, panicked and temporarily shut down the new carbonate in Argentina and produced only chloride for a period of time. FMC Corporate did not think giving customers advance notice of the shutdown was necessary. The people who made the sudden decision didn’t have to face irate Japanese customers. I did. Depending on the customer I was asked, implored and/or begged to supply for 6 to 12 months while a competitor’s material was qualified. It was my role to find a solution for the customers.
After a conclave with FMC management, I was told I had to get what amounted to 100% premium to SQM’s price in order for FMC to “campaign” produce “transition” carbonate for the likes of Matsushita (Panasonic), Sony, and Toshiba. The point I am trying to make here is hard times and disruption are nothing new in the lithium business. I have the scars to prove it. Although SQM destroyed price, it took them years to get qualified in battery. FMC’s carbonate business in battery was taken by what is now Albemarle who had a much better cost position than FMC but a slightly inferior product at the time. FMC remained the “only game in town” in hydroxide based on quality for many years which is how I survived in the battery market.
What does this have to do with the current hard rock situation in Oz? Hang in there.
By May, 2009 Galaxy announced they would build a plant in a free trade zone in Zhangjiagang, China. I was living in Shanghai and one of my responsibilities was getting an FMC butyllithium plant built nearby in the Zhangjiagang free trade zone. The FMC plant was almost completed when I first met Iggy Tan in at Galaxy’s big party to kick-off construction of their plant. I was very curious about the Mt Cattlin mine associated with Galaxy’s carbonate plant. The asset was clearly a bit of dog especially when compared to Greenbushes. I saw Iggy from time to time in and out of China. Iggy had a lot of great ideas with respect to building a vertically integrated hard rock lithium business but unfortunately his business was saddled with a substandard resource at a time when carbonate sold for $4500/MT in Korea, just over $5,000 in Japan and about $6,000 in China. Galaxy’s plant made excellent product so quality wasn’t the issue. Cost (and volume) was. By 2013, I had left FMC and was able to get Galaxy’s product qualified in multiple countries. I often asked Iggy how long he thought it would be before he gave up on Mt Cattlin and acquired feedstock from Greenbushes. In the end Iggy’s lithium aspirations hit a hard rock wall. The combination of high costs and the fallout of tragic industrial accident led to the Zhangjiagang plant ultimately being sold to Tianqi and using feedstock from Greenbushes.
I still consider Iggy Tan a friend, an innovator and someone who might have been a great success in the industry if his entry point had been a few years later. That said, Iggy has clearly moved on.
Which leads me one of the most underappreciated Aussies in the lithium space. While Iggy Tan was promoting Galaxy with a fair bit of flash, Chris Reed of Neometals was quietly setting his lithium plans in motion. Chris leveraged his “mining smarts”, took time to understand the global lithium chemicals market and found larger partners to orchestrate the development of Mt Marion and ultimately make a profitable exit while keeping his offtake options for future downstream development. When Chris speaks, I listen and so do a lot of Global Lithium Podcast fans. Our episode with Chris and Mike Tamlin is the second most listened to episode.
The “second coming” of Galaxy was orchestrated by Anthony Tse who certainly experienced the lithium school of hard knocks before making several insightful moves to put Galaxy back in the lithium game. Within a relatively short time, Anthony sold the Zhangjiagang carbonate plant to Tianqi for what can only be described as a “frothy” valuation reinjecting cash and life into a dying company. He followed this up with the 2016 Mt Cattlin restart timed well to benefit from the market shortage that began to play out in late 2015. Last but not least Anthony engineered the sale of some Sal de Vida tenements to Posco for a very attractive valuation. Unfortunately, all of these successes now seem prelude to another fall as Galaxy continues to waffle on developing their world class brine asset and Mt Cattlin looks to be a shutdown candidate as the current glut of spodumene potentially drives price to levels where Mt Cattlin can’t sustain operations for long.
It is not just Aussies that are learning “hard knocks” lessons. Luke Kissam of Albemarle blundered into WA only to fall prey to Chris (“Heads I Win; Tails You Lose”) Ellison at Min Res with the Wodgina deal. Only time will tell the full magnitude of the ALB screw-up but I am not in the camp that believes that ALB made smart long term strategic purchase. Well played Mr. Ellison. Luke is scrambling to keep skeptical ALB shareholders on his side. Listen to the last ALB earnings call.
It seems it helps to have “Chris” for a first name if you want stay on the right side of hard rock lessons. Or maybe just have a first name that begins with a “C”. In my opinion Cam Henry who runs the engineering firm Primero is someone who has developed a long term sustainable business that will ultimately prosper as the global lithium market grows. Primero has developed a knowledge base in hard rock that will likely provide a sustainable position as a “go to” firm to help design, operate or fix hard rock projects in WA and around the globe. If you haven’t listened to Cam on the podcast, check out Episode 40 “Ready for Prime Time”.
From the above examples you can see the “School of Hard Rocks” has graduates who learned lessons and prospered. Unfortunately, others, such as Mr. Kissam from ALB, either get incompletes and are required to do extra work or flunk out entirely. From my perspective the failure rate is highest among those who chose “blind squirrel investing” as their major. Rather than doing honest research many simply take to Hot Copper or Twitter and look for positive posts on their favorite company often written by people as clueless as they are. A couple of years ago the “Twittersphere” was all a buzz when juniors signed offtake agreements. It was quite obvious to those in the industry that many deals were with Chinese companies that had never produced lithium chemicals and even as new mines were preparing to start-up some of these “off takers” were yet to break ground on their conversion plants. There was a definite Dot.Com vibe in the lithium business “down under” in 2016 and 2017.
Most in the industry agree that by 2025 demand for lithium chemicals will be in the 1,000K MT range up from 270K MT in 2018. Ultimately market demand will create a need for all the spodumene WA can produce but it is going to take time. From my perspective, spodumene price will drop until capacity comes offline temporarily – pretty much econ 101. I ran a poll on Twitter regarding who would go out first. Many people didn’t like the list. My response is twofold. Look first at the assets themselves and then look at the “partners”, “off takers” and purchase commitments associated with each of these assets. I think I got a right but everyone is entitled to his or her opinion.
The current mess in WA spodumene was self-inflicted. Too many mines coming on at once and some without the financial strength to weather even a small storm let alone the typhoon the non- vertically integrated hard rock players are currently experiencing.
Stay tuned for “part 2” where I will talk more specifics about the recent entrants to the hard rock space. As usual I have a theory about how all this plays out.
Spoiler alert, I am still optimistic on the long term future of lithium in WA. I currently own no shares in WA lithium stocks; however, as market caps head to the basement, I will likely buy soon. DYOR.
For more on Pacific Lithium click here: https://www.academia.edu/1510450/Pacific_Lithium_C_Flight_of_the_Phoenix
