Small Caps | Dec 03 2015
This story features LITHIUM AUSTRALIA NL, and other companies. For more info SHARE ANALYSIS: LIT
-Demand for lithium is rising
-Access to key processing technology
-Geographical spread important
By Eva Brocklehurst
Lithium is a specialty metal with a bright future. Think lithium, think batteries. Big batteries. The price of this metal has moved against the current trend. Not only is the price resilient in an otherwise sobering commodity scene but demand is rising.
Lithium Australia ((LIT)) – formerly Cobre Montana – holds a lithium mica processing technology licence from Strategic Metallurgy, designed to extract and recover battery-grade lithium carbonate and potassium sulphate fertiliser from lithium containing mica.
The company is involved via joint venture with European Metal Holdings (EMH) in a Czech tin project, Cinovec, with the intention of processing lithium as a by-product, and is now reaching into Mexico, in joint venture with Alix Resources at Electra.
Mining equity researcher, Hallgarten & Co, has zoomed in on Lithium Australia through its analysis of tin, lithium and resource strategies as well as a revival of interest in mining on the Frankfurt Stock Exchange.
Lithium Australia draws the threads together, in the analyst's view, given it is is trialling the L-Max technology at its third project, Lepidolite Hill in Western Australia, a joint venture with Focus Minerals ((FML)) as the junior partner with 20%.
Lepidolite Hill is not far from the gold mining town of Coolgardie. The deposit has large masses of lepidolite, from which lithium carbonate can be produced. This exists currently in waste dumps from prior mining of the site, so extraction is speedy. Active mining, of petalite, beryl and lepidolite, ceased in 1973 and the site contains a large abandoned pit.
Lithium Australia is not limiting itself to Lepidolite Hill but has a project in the Pilbara for lithium and tantalum, and a tungsten mining venture as well as a prospect at Ravensthorpe.
To put Australian lithium in perspective, the partly Chinese-owned Talison mine in Western Australia, source of the world's highest-grade lithium, is next door to ground where Lithium Australia has applied for permits. Talison supplies more than 30% of global lithium requirements and 75% of Chinese demand.
Lithium is frequently encountered in saline lakes (salares) and spodumene (hard rock) but also in clay. Lithium is liberated through degrading of micas and as a result of weathering carries it away in solution. Hence the micas are considered carriers and, as they are fine grained, need to be extracted. This is where the unique technology comes to the fore.
A company called Lepidico was established by Strategic Metallurgy this year to develop the technology and several commercial applications are emerging. The main advantage is that production occurs in one facility and the lithium contained in waste dumps and tailings can be retrieved – a cheaper alternative to mining. It is an energy efficient process with a unique configuration of conventional techniques.
In return for participating in developing the L-Max process, Lithium Australia has been granted an exclusive use of the process for up to 26 years in Western Australia and in two other nominated precincts internationally. The process is not revolutionary, Hallgarten & Co notes, but is innovative in its application to lithium mineral processing. Lepidico will receive a royalty based on gross revenue.
Where the Cinovec project fits in is that Lithium Australia in April signed a heads of agreement to process the tin tailings and produce lithium carbonate. The project is one of the largest undeveloped hard rock tin projects globally.
There is a weak spot here. EMH still needs to raise the funds to develop its mine, and Hallgarten's analyst observes that EMH has recently been stressing lithium more so than tin. The analyst contends the Australian company appears to be the stronger in terms of expertise and funds and postulates whether a merger of the two might be the way to go. After all, without EMH's tin mine in production, processing operations for Lithium Australia will be out on a limb.
Meanwhile, the Mexican concession at Electra adjoins another lithium project, Sonora, in clay mineralisation. The analyst notes the attraction in this project – owner Bacanora Minerals has reportedly signed an offtake agreement with electric car manufacturer Tesla – and suspects Lithium Australia considered the opportunity to leverage its work with micas in Australia and partner on a deposit with similar mineralogy in Mexico as too good to pass up.
The analyst describes the lithium business as divided into three parts: salares, clay and hard rock. Salares are largely in South America – another ASX listed player Orocobre ((ORO)) is a player with its Salar de Olaroz project – while hard rock content is scattered globally, with a focus on spodumene. Lithium Australia has exposure to two of the three – clay and mica rock deposits.
In the intervening years since a high point in 2010 the number of participants in the market has been reduced and projects are coming to market in a more orderly fashion, the analyst observes. Specialty metals have a danger of wide price oscillations compared with larger volume traded minerals.
Nevertheless the main issue for Lithium Australia, from Hallgarten & Co's perspective, is access to finance. The current financing environment for miners is tough. This can be alleviated in some circumstances with financing support from an offtaker. Still, the broker does not underestimate the potential speed at which the environment for miners can turn around in in Australia.
With lithium deposits in Europe being scarce, Cinovec is a front runner but now there is the Mexican prospect, and Lepidolite Hill. The analyst believes the projects all fill the mid-size spot in the lithium supply segment. Hallgarten & Co has a Long rating on the stock with a 34c target. The company acts as a strategic consultant to Lithium Australia but does not hold stock in the company.
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