There has been a lot of discussion about “rare earth” or “critical” minerals in recent years. The Gold Report interviews Simon Moores, managing director of London-based Benchmark Mineral Intelligence, and the firm’s analyst, Andrew Miller. They explain how minerals like lithium, cobalt and graphite, all of which go into batteries, are evolving from commodities to specialist, niche, products. They also note that sustainability and “supply chain visibility” are becoming increasingly important in the critical minerals industry. “It’s not just about price anymore.”
It’s often difficult to understand the global markets for critical minerals so The Gold Report narrowed it to three—lithium, cobalt and graphite—and brought in Simon Moores and Andrew Miller of Benchmark Mineral Intelligence, a London-based consultancy and publishing firm, to provide more insight. Moores and Miller say these minerals need to shed their labels as traditional commodities and embrace their future as niche, raw-material solutions for a growing list of technology manufacturers. As Benchmark prepares to embark on its World Tour, Moores and Miller discuss supply chain visibility and the impact of disruptive technologies on these markets, as well as companies seeking to leverage lithium, cobalt and graphite into investable business models that will lure investors with a long-term outlook.
The Gold Report: In a recent Benchmark Mineral Intelligence report, “Mineral Supply Chain Visibility: Impact of Disruptive Technologies on Critical Raw Materials,” you make the case that supply chain visibility will become increasingly important in the critical minerals space. Please briefly explain why.
Simon Moores: We’ve noticed that during the rare earth element bubble in 2010–2011, people didn’t know what these niche minerals that go into everyday critical technologies were or where they were sourced. We’ve seen that knowledge grow in the last five years and downstream companies like Apple and Tesla Motors are now aware of what the raw materials are and where they come from.
Awareness in these niche minerals of growing importance, such as graphite, lithium and cobalt, is now occurring throughout the supply chain and not just in the upstream portion with the mining or processing companies. The downstream companies are paying attention and they buy the raw materials to manufacture these disruptive technologies. Supply chain visibility is rising.
Andrew Miller: Supply chains are going to become increasingly important. As these new technologies rapidly develop, both traditional industrial end users and newer high-tech buyers of these raw materials need to know more about the global supply pattern—factors that can impact their business. It’s basic risk management in today’s world.
They can’t just rely on their traders or distributors for intelligence. End users are now aware of the need for a more global, independent picture on supply, demand and prices.
People will start paying a premium for more ethically sourced raw materials
TGR: Is that happening?
SM: We haven’t seen companies completely change their raw materials buying patterns yet, but some are preparing for it. In the U.S., the Conflict Minerals Act was the first time specific political restrictions have been put in place for these minerals in the West for ethical reasons. Europe will introduce similar legislation early next year.
The industry will have to start thinking about buying from reputable suppliers that meet certain standards. That means that end users may no longer opt for the lowest-cost source of raw materials from places like China and Democratic Republic of the Congo (DRC) if producers in these regions don’t fall in line with environmental or ethical rules. And that is key. It’s not just about price anymore. It means people will start paying a premium for more ethically sourced raw materials.
TGR: In the same Benchmark report you suggest that disruptive technologies are the most important new market for critical minerals. What are disruptive technologies and what are two or three specific ways these technologies are changing the markets for critical minerals?
AM: Disruptive technologies are completely new markets that are creating new value chains, products such as smartphones, electric vehicles and different types of energy storage. Growth in these new markets is affecting not only their own supply chains, but also those of existing industrial markets that rely on the same raw materials.
In the longer term there will be a real need for new critical mineral supply to come onto the market. In many cases that’s also going to require suppliers to become more flexible. It’s not just the production out of the ground that’s going to have to increase; the refining and processing capabilities have to improve and expand too. The material required by traditional critical minerals markets is quite different and more tailored from the majority of product that is needed in these new high-tech spaces.
TGR: So companies developing these critical minerals projects not only have to get these elements out of the ground, but then they also have to process them in such a way to meet the specific requirements of these new end users, which can vary greatly.
SM: That’s right. The grades that the critical minerals sector has traditionally served up and that have become industry standards over the past few decades are now changing, and that’s why critical minerals like lithium, cobalt and graphite aren’t really commodities. They can’t be mined out of the ground in large volumes and directly used; they are tailored specifically for the end user.
With commodities it is more of a logistics game, with critical minerals is a processing game—this is where they are fundamentally different.
TGR: And that is often without any firm commitment from the end users. Is the traditional offtake deal dead in the critical minerals market, at least in specific cases?
I still believe the first phase of the Gigafactory will be a pack assembly plant rather than a battery plant
SM: Offtake deals are familiar financing methods for resource companies, but it’s difficult to apply that model to these minerals, which are specialist products. Critical minerals are not usually traded in the volumes that offtake contracts often serve, like, for example, iron ore. If these markets grow to reach huge volumes in the future, perhaps then they will be traded in the same way as large-scale commodities.
TGR: Lithium supplies appear tight even before Tesla Motors’ Gigafactory and similar factories around the world start producing lithium-ion batteries. Please give us a brief lithium market overview.
SM: A lack of new supply coming onstream over the last three years in the face of steadily increasing demand from the battery sector, especially in Asia, has resulted in a lithium shortage. This lithium demand is not coming from a new megafactory like the Tesla Gigafactory or an expansion from LG Chem or Panasonic —it is coming from existing plants making more batteries for mobile phones, laptops, and power tools, which are all migrating toward lithium-ion. We’re seeing a natural increase in demand with a lack of new supply, which has caused carbonate “spot” prices to increase by 20% on average this year and hydroxide by even more.
Adding to supply problems are the well-documented political pressures in Chile where the government is revisiting the mining licenses of several operators in the Atacama Desert. It is an issue that Sociedad Química y Minera de Chile is dealing with at the moment, and one that has been well documented by Bloomberg.
There is one new plant in the Atacama, a 20,000 tonne per annum carbonate plant owned by Albemarle Corp that could provide some lithium to the market in 2015, but probably not enough to correct the market deficit.
Orocobre continues to ramp up lithium production at its Olaroz lithium mine in Argentina, but to ask any new plant to reach its full capacity within a 12-month period is probably too tough an ask. But there are not enough new players like Orocobre entering the lithium space; they can’t yet get the funding.
TGR: Has Tesla CEO Elon Musk said where the elements of these batteries are going to come from?
SM: Musk and Tesla have been very quiet on any deals they may or may not have made with suppliers. I do, however, expect Tesla to announce raw materials deals by the end of 2015 or the beginning of 2016. The Gigafactory will start production in some form in Q1/16.
I still believe the first phase of the Gigafactory will be a pack assembly plant rather than a battery plant.
Most of the initial manufacturing work will consist of taking lithium-ion cells from Panasonic and assembling them on a bigger scale in Nevada for Tesla’s Model S and the new Model X, which is out in September.
The key issue with cobalt is security of supply, particularly with the increased demand from the battery sector
At Benchmark, we believe the Gigafactory will evolve into a true battery producing plant in 2017 where the anode (graphite) and cathode (lithium, cobalt) components will be produced on-site. Therefore, raw materials suppliers have roughly another year to finish off supply deals, and Tesla will have to make a tough call on which ones to back.
TGR: What is China’s role in today’s lithium market?
SM: Essentially, Chinese companies buy most of the world’s hard rock lithium concentrates, mostly because the structure of its lithium industry is such that that’s the feedstock it needs—not the brine concentrate. Some Chinese players are buying stakes in external sources, the most active of which is Jiangxi Ganfeng Lithium.
Ganfeng has mostly been investing in hard rock projects but it has some brine investments as well. Ganfeng also produces a lot of downstream lithium products, including lithium carbonate, lithium hydroxide and lithium metal. It’s basically a raw materials-only consumer. It’s a good example of an end user doing deals with the junior space. Its recent deal with Neometals shows the hunger to secure the right type of lithium resources outside of China.
TGR: Cobalt is a component in lithium-ion cathode for batteries. Tell us about the cobalt market.
AM: Cobalt is similar to the lithium market in the sense that you have one or two large producers that dominate supply. The DRC (Democratic Republic of Congo) is where the majority of the raw material is produced. Outside of the DRC, cobalt is produced in a number of countries, but all of that production is limited and there’s little capacity for short-term expansion. The key issue with cobalt is security of supply, particularly with the increased demand from the battery sector. Over the past five years or so, cobalt demand from the battery sector has increased threefold, and 2014 battery demand made up 45–50% of the total market.
TGR: Cobalt prices have slipped some over the summer. Is that the beginning of a downturn in cobalt prices or a summer dip?
AM: It is more of a short-term trend than anything. When we look at the macro dynamics for the cobalt market, supply is tightening. In H2/15 and certainly into next year we’re going to see the market move into deficit, and that will obviously prompt rising prices.
TGR: Graphite is probably one of the most misunderstood markets that The Gold Report covers. Please dispel some of the common graphite market myths.
SM: First, it’s not just about volume. Graphite is a niche market, so if a firm is trying to develop a graphite mine, it is going to have to examine the volumes end users use, the growth in those areas and whether it can tailor a specific grade for that customer. Saying that, if a company is going down the volume route and wants to produce in excess of 50 Kt annually, then it needs a unique deposit. Not every graphite deposit can yield 100 Kt per year that can be sold into multiple end-use markets.
TGR: Is grade overrated?
SM: High grade obviously helps project economics but grade isn’t necessarily king. You can have high-quality graphite at a low grade. A lot of the deposits that are commercially active grade 3–7% graphite. But what we’re seeing now in the graphite industry is the result of five years of intensive modern-day exploration that has uncovered some of the best graphite deposits the industry has ever seen. The industry can really choose which one to bring to market—it’s a very strong position to be in.
TGR: Do you believe in graphene from natural graphite?
SM: Graphene is one micro layer of graphite and isolating that one layer from a flake source is proving too difficult at the moment. Three layers is the accepted standard for now and end users appear to be happy with this new form of nan-graphite. I believe that graphene has great long-term potential. The question is when. I think we’re looking at in excess of 10 years.
Critical minerals are niche products at this stage that require a long-term outlook
TGR: Have batteries overtaken refractories as the major market for graphite?
SM: The significant demand growth in graphite is all about batteries. For an article in our Battery Special, the second issue of our magazine, Benchmark took production and export numbers from China since 2009, and the average growth rate in battery-grade graphite production has been 27% compounded for the last five years, which surprised us considering that for the majority of that time people have assumed that it’s been a down market.
At Benchmark, we also like to crosscheck our data and analysis with other mineral industries used in batteries.
If you take cobalt’s threefold demand increase in the last five years or the fact that lithium is now in shortage, it’s clear that batteries are no longer a prospect but an immature industry that is here now and growing.
TGR: East Africa hosts some of the world’s greatest graphite deposits. What are some companies you’re following there?
SM: Over the last two years East Africa has become a hub of graphite exploration activity. The most active company in that region is Syrah Resources, which has recently impressed the market with its fund raising activities for its Balama deposit in Mozambique.
Canada’s Energizer Resources has done a lot of exploration work on its Molo deposit in Madagascar. Other companies active in East Africa include Kibaran Resources, Metals of Africa, Triton inerals and IMX Resources. Of note, the vast majority are Australian companies, not Canadian. It seems that the Australian investment market is more open to having mines in Africa.
TGR: Syrah has the massive Balama graphite-vanadium project in northern Mozambique. It plans to supply end users all over the world. Tell us about that.
SM: The first major challenge for Syrah was to raise significant funds. It has achieved that goal. The next is to now execute the grand plans for Balama and what is a huge flake graphite deposit.
The company has always been straightforward with its plans to completely change the graphite landscape. The management has traveled the world to build relationships with end users, whether it’s in batteries or refractories. The company has been ticking the boxes to take Balama to the next stage. The other interesting thing about Syrah is that its plan to make Balama a graphite volume play has put the company on the radar of financial institutions. That can only be a good thing for the industry.
TGR: Syrah also plans to build the world’s largest coated spherical graphite facility. What’s the strategy behind that?
SM: From what I understand, the company plans to build a coated spherical graphite facility in America to serve the domestic market. With both LG Chem and Tesla looking to build battery plants in the U.S., in addition to Johnson Matthey, Syrah is positioning itself to be smack bang in the middle of the North American market.
TGR: You’re about to embark on the Benchmark Mineral Intelligence World Tour. Tell us about it.
SM: We will offer a series of free seminars that examine the battery supply chain and the raw materials that fuel it. We start our World Tour in London on Sept. 11 and continue in New York, Toronto, Vancouver, Hong Kong, Tokyo, Sydney and Melbourne. These are the world’s mining investment hubs and places that have shown interest in the battery supply chain. People can find more information by visiting Benchmark Minerals and clicking the World Tour tab.
TGR: Please share one tidbit for investors to keep in mind as they conduct their due diligence on critical minerals equities.
SM: Don’t treat critical minerals like commodities. The basic process of analyzing commodities has relevance to specialist minerals but they’re not entirely the same. Critical minerals are niche products at this stage that require a long-term outlook. It is no surprise that the people that invested in the critical minerals supply chain in the past—namely Japanese and Korean companies—are long-term thinkers. These companies now control the majority of these supply chains. A longer-term way of thinking is crucial.
Source: Brian Sylvester of The Gold Report, reproduced with permission. This is a shortened version of the original article, which contains additional investment information on individual companies. Please check original source for Full Disclosure notice.