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Green Growth Giants’ Owen Clendenin shares where most lithium comes from (0:30), whether investors should be in lithium refining or lithium mining (2:00), and Owen’s top junior and producer stock picks (3:40).
This is an abridged version of our recent conversation, Lithium 101 And The Best Run Lithium Company With Owen Clendenin (Green Growth Giants)
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Transcript
Daniel Snyder: Where are these companies like Tesla (TSLA) getting all of their lithium from?
Owen Clendenin: So, when you’re looking at a company like Tesla especially, it’s usually pretty diversified. But the largest producer or largest country for lithium production — raw lithium production or lithium extraction I should say, because it gets a little nuanced here as well, is Australia. About half of the lithium production in the world comes from Australia.
However, Australia doesn’t actually produce any battery chemicals. So, Australia produces pretty much exclusively 6% spodumene concentrate. There are a couple of companies now that are investing in refineries in Australia to try to produce that hydroxide on-site. But right now, all of that is shipped to China. And so when you hear people talking about China having this huge grip on the lithium market or the battery market, that’s really what they’re talking about.
So, China itself doesn’t have too many natural lithium resources, and the ones that they do aren’t really that great. It’s usually low concentration brines or lepidolite, which is another hard rock ore. But they own the refining. They have pretty much a complete monopoly over it, and so that’s most often where Tesla is getting their battery production, especially because they rely on lithium hydroxide for their NCA battery chemistry. But if you’re looking carbonate, most of that’s coming from Chile.
Daniel Snyder: For investors looking at this space, say they want — should they be investing in the refining process companies, or should they be more investing in the discovery and mining of lithium?
Owen Clendenin: Yeah. Great question. So, at the moment I prefer integrated production sites. I think that’s where you get the most bang for your buck. So the companies that are mining it and refining it, but if you had to choose one, the mining business right now is stronger. I put out an article recently actually looking at Tesla in some of their comments about the lithium space or Elon Musk’s comments about the lithium space. And being in the refining business right now, isn’t too bad. Right? Everyone in lithium right now is making fair bit of money.
But your margins there, even at the peak we’re looking at about, 20%, 30%. Again, not half bad. But for mining, you’re looking at, you know, 90%, 80%. Because we’re so — we’re very much ore limited rather than refining capacity limited. And so at the moment — and that’s what I kind of foresee for the next, you know, the foreseeable future I suppose. The lead times for mines is just significantly higher than the lead times for refinery. So, it’s much easier for the refining business to respond to fluctuations in demand than it is for the mining industry to do so. And so if you had to choose one, I’d go with mining, extraction.
Daniel Snyder: So we’ve been talking about the general overall sector of lithium so far. What about, like, some individual names. Right? Like, I personally don’t know any. I’m sure some listeners don’t know any as well. Where should they start looking at companies that you have kept an eye on.
Owen Clendenin: Yeah. I think this is where you can kind of break it down between your producers and your juniors. Right? So on my coverage universe, I cover a lot of juniors as well, which are companies that aren’t yet producing, but they own a lithium asset, and they’re currently in the process of developing it.
In terms of the producers, though, I think, you know, your big names, obviously, Ganfeng (OTCPK:GNENY), Albemarle (ALB), Allkem (OTCPK:OROCF), SQM, even Livent (LTHM), you could throw in there. But all of them kind of have certain compromises.
So Ganfeng, biggest lithium company, I really like their business plan. They have a lot of really great assets. Unfortunately, they are located in China. Right? So that obviously carries a certain geopolitical risk, especially as you see countries like the United States trying or even limiting the amount of Chinese investment that they’re allowing within the country for these critical supply chains.
And now with the Inflation Reduction Act, the new EV tax credit is based on what percent of your battery minerals are sourced from countries that we have a free trade agreement with. Right? So U.S. producers are obviously going to start trying to diversify away from China. And at the moment, when we’re supply limited, producers don’t really have the luxury of picking and choosing, but down the line that could be an issue.
Allkem, I think, is another solid company, but something they struggle with is they tend to be pretty sluggish. They have a slow response time. They shut down their Virginia mine in 2019, which at the time was probably the right decision. Pricing wasn’t great for them. And it made sense, but it took them a couple years to get that back into production. And they missed out a lot of the huge rise at the start. They’ve also just been slow in their expansions. They’ve been trying to expand their production in Chile for probably half a decade now. No such luck there yet either.
So you have these existing producers. Allkem, I’d say is probably my favorite producer at the moment. But you have all these producers that are great. They’re able to take advantage of the money on the table now. But the juniors, I also think are really exciting. So a couple of juniors, Lithium Americas has been my favorite for quite some time. They’ve got a project in Nevada, two in South America, or — yeah, two in South America, recently acquired Arena Minerals to enlarge their Sal de la Puna project. And with juniors you have the ability to capitalize on the attractive financing environment.
In most other junior mining industries, whether that’s gold, iron, whatever you have, whatever metal you’re talking about, financing is one of the hardest things to orchestrate. You can call that a failure of management or whatever other factor, but really the crux of the issue is financing. And right now, because of the extreme demand for lithium and the extreme growth of that industry, financing is cheaper than it is in any other junior mining sector. It’s more readily available than it is in any other junior mining sector and that can help supercharge your returns.
And obviously you have the added benefit of mining a metal that I think has quite a long runway in terms of price upside that they can lock in down the line. So, I like Lithium Americas (NYSE:LAC), great management, great projects; Green Technology Metals (OTCPK:GTMLF) an Australian company, but with a mine in Canada is another good one I think, much earlier on, but again good management and looks to be a pretty solid project there as well.
Daniel Snyder: So to unpack all of that, two questions for you. One, how far of a runway do you see this having? And two, you said management. I imagine management is a huge key in this space, which company would you say has the best management? And how they operate?
Owen Clendenin: Yeah. Both good questions. So, the first one, I think the runway it’s hard to say. S&P actually has a good visual on this. Right now, you have about 53 lithium projects under development in a pipeline projected to come online before 2030. If all of those projects make it online before 2030, you’re looking at a shortfall of about 680,000 tonnes per year of lithium carbonate. For context, the market for lithium carbonate, 2 years ago wasn’t even that big. So you’re looking at a shortfall that was bigger than the lithium market was 2 years ago.
The other thing too is, it’s unlikely that all those projects will make it to production by then. There tends to be a lot of delays in this industry. Sometimes mines just don’t even — aren’t able to make it either. So it’s – that of course is contingent on-demand being there. As I see it, I don’t think there’s much that could get in the way of demand. I think, obviously, right now, there are recession fears that could impact the demands, but what that does, in my opinion, is really just push back the investment horizon.
So you might have dead money for a while, and some of your juniors might have to go under or force themselves to be sold. But because lithium projects have such a long lead time, usually you’re looking at least 7 years from initial discovery. We kind of have a pretty good idea of what the best case scenario could be 7 years from now. And if there’s a recession, financing dries up, investment dries up, and so then the investments that we need now for demand 7 years from now aren’t there. Right?
So I think we probably have at least another seven or so years of this very volatile market where price or supply demand is constantly swinging back and forth, but I think more often than not, we’ll be in a supply deficit.
Now, in terms of management, on the junior side, I talked about them already. I think Lithium Americas has the best management of any junior mining company at the moment. Incredibly intelligent base and something that a lot of juniors don’t have, which is experience. Obviously, this is a very young industry, right? So you don’t have a lot of the same workforce that you do in other industries. Right? You don’t have experienced executives, you don’t have a whole pool of talent to pick up from schools because no one’s really teaching lithium refining, lithium extraction.
But Lithium Americas has been able to piece together a pretty solid management team that has experience in the lithium industry, building companies, building exploration, from exploration to production. So in terms of juniors, I probably have to lean towards Lithium Americas. And then for existing producers, I would have to probably give that one to Allkem. Again, they’re much more agile than most producers are, which right now I think you have to be, again, because of that volatility, they’re consistently demonstrating, they have — how they’re able to take advantage of swings in the spot market by hosting price auctions for their spodumene concentrate.
And things like that it’s — they recently also it was about a month or 2 ago, unveiled this new tolling agreement where their spodumene price is linked to what their refiners’ hydroxide final selling price is, which is kind of a convoluted pricing mechanism. But again, it demonstrates their willingness to innovate within not just on the production and mining side of things, but also on the pricing side of things, their commercial strategy as well, I think has proven to be very, very intelligent.
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