First Analysis Lithium Update June 2014

Online Research: www.research-driven.
com
Research: (800) 866-3272 Trading: (800) 322-3272 (312) 258-0660
One South Wacker Drive Suite 3900 Chicago, IL 60606
Important disclosures and certifcations
begin on page 28 of this report
Table of Contents:
Lithium conference take-aways 1
Lithium project updates 9
A lithium primer 12
Market structure 12
Applications 18
Chemical properties 22
Sources and production 23
History 25
Defnitions 26
Lithium companies
Covered and monitored Ticker Price Rating
Chemical & Mining Co. of Chile SQM $30.83
FMC Corp. FMC $75.00 E
Galaxy Resources GXY.AX AUD0.06
Orocobre Ltd. ORE.AX AUD2.09
Rockwood Holdings ROC $73.43 O
Additional companies
Critical Elements
Li3 Energy
Lithium Americas
Nemaska
RB Energy
Reed Resources
Umicore
Western Lithium
Lithium still poised for signifcant future growth
We recently attended the 6th Lithium Supply and Markets conference,
providing an opportunity to hear from market experts, producers, and
consumers in the space. This report details our take-aways from that
conference and includes a refreshed version of our lithium primer. We
continue to view ROC as the best way to play growth in the lithium
market, though the to-be-spun FMC Minerals business will derive
roughly 25% of sales from lithium. Our favorite speculative play is Oro-
cobre, which should be starting up operations very soon.
We believe pricing for lithium carbonate and other commodity products
is trending stable to slightly higher thus far in 2014, and we disagree
with other market observers who expect signifcant long-term upward
pressure on pricing. Our view is that higher prices lead more projects
to appear economically attractive, encouraging new supply and keep-
ing lithium carbonate in a relatively stable range somewhat dependent
on the high-cost producer, subject to some short-term volatility and
highly dependent on HEV/EV uptake.
Batteries remain the most important long-term growth driver, and we
anticipate continued strong growth in HEV/EV demand could lead to
an infection point in 2017. We project underlying (excluding HEV/EV
applications) lithium demand CAGR of 5%-6% through 2020, with de-
mand for vehicle batteries boosting demand by a further 3% annually.
Lithium buyers have long desired an additional supplier, and should
have new options in the near future, as both RB Energy and Oroco-
bre are nearing commercialization. We see the potential for additional
entrants as directly related to uptake of HEV/EV, but in general, startup
projects are likely to be disadvantaged vs. existing producers ROC,
SQM, FMC, and Talison in terms of cost and/or technical expertise
(production and application).
LITHIUM CONFERENCE TAKE-AWAYS
We have attended the LSM conference four of the six times it has
been held, allowing us to see how the landscape has changed in some
respects and remained largely unchanged in others. Despite all the
talk over the past several years about development of new sources of
lithium supply, the vast majority of these junior suppliers are still strug-
gling to obtain fnancing and move their projects forward. Several par-
ticipants credited Elon Musk and his plan for supplying Tesla Motors
lithium battery needs with a gigafactory perhaps hundreds of such
factories for reinvigorating investor interest in the lithium sector after
a particularly rough ride over the past few years for junior miners.
Update: Lithium Fundamentals and Outlook June 18, 2014
Michael J. Harrison, CFA mharrison@frstanalysis.com
(800) 866-3272 2 First Analysis Securities Corporation
Lithium June 18, 2014
While supply and demand dynamics were key issues in the past (would HEV/EV de-
mand lead to a shortage, or would new projects lead to a glut?), we believe focus is
turning toward extraction and production costs, with several junior suppliers discuss-
ing novel low-cost methods to convert lithium raw material into commercial products.
Well be interested to see how these methods proceed, though we are generally
skeptical that new chemical processes will work as effciently at commercial scale as
in the lab, where real-world variables can be tightly controlled.
The conference allowed us to get updates on some startup companies, though as in
recent years was lightly attended by existing producers. We summarize the presenta-
tions below, with those we believe of greatest interest to lithium investors frst, and
project updates last.
More motion, less e-motion: Is 2014 the year lithium regains its traction?
David Merriman, Roskill
In setting the stage, David showed the following charts, noting the transportation
end market currently accounts for 5,000 tons of LCE, or about 3% of global lithium
demand in 2013.
EV/HEV accounted for 2% of global 2013 vehicle sales, 23% CAGR since 2007 off a
low base, around 1.7M units in 2013. Car sales do not indicate battery demand -- EV
and PHEVs were 12% of e-vehicles, but 67% of e-vehicle battery demand. Li-ion has
around 70% of EV/HEV market based on battery demand, with Prius the hanger-on
in NiMH (nickel-metal hydride, still 75% of e-vehicles sold).
Plug-in sales are gaining more momentum in 2013 into 2014, with Leaf the leader,
and tracking ahead of Prius HEV pace at corresponding time since launch. Chevy
Volt, Toyota Prius PHEV, Tesla Model S, and Mitsubishi Outlander PHEV round out
the top 5 in total vehicle sales. Panasonic is the leading battery supplier at 39%
share, helped by Tesla; NEC is 27% (supplying Nissan), and LG Chemical at 9% with
Chevy Volt supply. Auto battery supply chain is pretty concentrated, which is typical in
the industry.
CHART 1
Global Lithium End Markets, 2013
Ceramics and
Glass 35%
Rechargeable
Battery 29%
Lubricating
Greases 9%
Metallurgical
Powders 6%
Polymer 5%
Air Treatment
5%
Primary Battery
2%
Aluminum 1%
Other 9%
Source: Roskill.
What to watch in 2014:
BMW i3 and Mercedes B-class EV, as well as upcoming i8 PHEV -- BMW has
already increased production 43% and committed to tripling carbon-fber produc-
tion.
China incentivizing EVs (US$9,800 subsidy for EVs, targeting 5M on the road by
2020 but currently at ~30K), and other governments may also be subsidizing.
HEVs: In U.S., still dominated by Toyota/Lexus with 67% share in 2013; Toyotas
continued use of NiMH batteries reduces HEV impact on lithium demand.
Tesla gigafactory: Aim to reduce unit cost of Li-ion battery pack by 30%, allow-
ing a $35k vehicle to address broader market. Question marks around fnancing
(Tesla said it would provide $2B of the total $5B cost), technology/chemistry, will
there be other partners besides Panasonic, will there be U.S. government sup-
port? Gigafactory would have profound impact on global battery industry and raw
material needs.
See signifcant growth in 48v (upgrade from 12v) in mild/micro applications for
start/stop capability, but these use a relatively small amount of lithium (0.2-0.4kg
LCE per unit).
2-wheeled vehicles: Li-ion penetration only 5%-7% vs lead-acid and gas-pow-
ered. Asia-Pacifc market is mature, but switch to Li-ion would drive demand.
Predicting the infection point: Infection is not expected until costs fall, but should
see strong growth through 2017, accelerating from there as range increases and
costs fall. PHEV and EV expected to be the main drivers.
Roskills lithium demand forecast: Low case 200k tons LCE, high case more than
500k for 2020. For 2014, EV impact still pretty limited, expected to get more mean-
ingful in 2018 and beyond.
CHART 2
End Markets for Rechargeable Lithium Batteries, 2013
Consumer/
Comms/
Computing 79%
Transport
10%
Power & Motive
10%
Heavy Duty 1%
Source: Roskill.
Getting from the brine to the end product
Peter Ehren, Process and Environmental Consultancy
Peter is a consultant for Orocobre, has worked with BHP (Salton Sea project) and as
a process engineer and R&D manager at SQM.
Every brine deposit is unique based on a number of factors (refer to Table 4 for a
comparison of brine sources):
Composition: Variables include lithium concentration, Mg/Li ratio (tells how
much magnesium has to be removed at high cost), SO4/Li ratio (determines
sulfate or chloride deposit), Ca/Li ratio (calcium has to be removed as well),
and potassium concentration (potential byproduct). Concentration requirements
depend on the conversion process to carbonate. For example, SQM and ROC
require high concentrations (6%) in their process, while Orocobre will require
much lower (0.7%).
Climate: Variables include surface area, altitude, precipitation, evaporation rate
(a function of solar energy and wind).
Reservoir hydrogeology: Mature vs. immature salars (which have more layers
and behave differently). Porosity also a factor, as is the impact of pumping on the
dynamics of the salar.
Reserves: Determines project life, production rates; reservoir modeling critical to
prevent declining grade/concentration by overexploiting the deposit.
Fresh water and energy: Try to reduce water consumption given typical scarcity.
FMC adsorption process is water-intensive. Energy considerations include solar
for evaporation and availability of energy infrastructure (electricity/gas) for plant,
brine heating, and drying.
Infrastructure: Distance and time to port, for both export and import of reagents
(soda ash, lime, sodium sulfate, etc.)
Environmental management: Variables include regulatory framework, wildlife,
tourism, indigenous communities, protected areas, hydrogeological issues, waste
salt management, and end brine management (can you reinject into salar?).
Social responsibility: Working with indigenous and local communities, suppli-
ers, labor force.
Market requirements: Increasing purity specifcations, commercial inroads.
Cost drivers: Operational costs include reagents (soda ash, lime, sodium sul-
fate), energy, process, byproducts. Brines should have operational costs between
$1500 and $2800 per ton vs. minerals between $3000 and $3500 per ton. Invest-
ment costs include the resource, brine transportation, ponds, power supply, plant
construction, and other infrastructure (buildings, labs, camps, transportation).
During Q&A, Peter noted he sees several constraints to increasing production in the
Atacama, including regulatory issues, contract limitations, and environmental con-
cerns (note ROC has been working on getting approval for increased brine produc-
tion since 2009). Peter believes there are fewer production constraints in Argentina,
though we would note we consider political and economic risk higher there.
Lithium-ion batteries from a cathode point of view: Trends and challenges
Elewout Depicker, Umicore
Chart 3 shows Umicores expectations for growth in cathode materials, which are cur-
rently dominated by portable electronics, but expected to see signifcant growth from
EV/HEV through 2020, driving a 13% overall CAGR over that period. Performance
and price are critical to this growth.
Portable electronics: Devices are everywhere, still driving growth. Wearables an
emerging trend: Google Glass, ftbits, etc. Devices are changing, getting bigger,
brighter, better performance, but thinner and lighter this requires higher energy den-
sity, more lithium ions in the same volume. Smartphone, tablets account for ~60% of
battery demand now, likely grow to ~75% by 2020 as laptops market stable/declining.
E-mobility is happening: Regulations and incentives, lower prices, rising consumer
acceptance and popularity, and producers placing bets on EVs. Relatively small mar-
ket now, but Umicore sees it growing from 20k tons of cathode to 120k tons in 2020,
a 29% CAGR, driven primarily by EVs and other e-mobility applications.
Challenges: Reduce the cost, but maintain or improve the quality. Cost efforts have
led to an imbalance, where certain raw material costs as a percentage of total battery
cost are going to increase, which is likely to lead to a shift to lower-cost raw mate-
rial input and increased pressure on raw materials. This is already happening with
a shift from cobalt toward nickel and manganese, and cathode producers are likely
to choose the lithium material with the lowest total cost (carbonate vs. hydroxide).
Quality control -- specifcations getting tighter and customer screening getting more
sophisticated. Stability is important, and impurities can have detrimental effects on
performance.
Technologys double-edged sword: Lithium and the promise/threat of new
technology
Jon Hykawy, StormCrow
The rise and fall of laptops and tablets is an example of how quickly technology can
change markets. These changes can drive changes in raw material demand, but also
note availability or lack of raw materials can be a driver of technology.
Clearly transportation is expected to be the main driver of lithium demand over the
next several years, but this presentation takes a look at some of the potential technol-
ogy-related drivers.
CHART 3
Cathode Material by End-Market, 2013 and 2020 (forecast)
2013 2020 forecast
Portable
Electronics
65%
EV/HEV
31%
Energy
Storage
Systems
4%
~35,000 MT LCE cathode material
Portable
Electronics
42%
EV/HEV
49%
Energy
Storage
Systems
9%
~80,000 MT LCE cathode material (13% CAGR)
Source: Umicore.
Consumer, communication, and computing (CCC) grows at least as fast as
electronics overall, but wrinkles include differences in laptops (40Wh battery) vs.
tablet (14.4Wh Samsung or 32.4Wh iPad). PCs down 11% to 178M units, tablets
up 51% to 217M units, and laptops should level off while tablets keep growing
thru 2018 at least (depends on whose projections you look at). Assuming laptops
keep shrinking and tablets grow, total power demand grows 12.1 GWh in 2013
to 14.2 GWh in 2018, or only 17% in 5 years (3.3% CAGR), not including other
electronics not adjusting for changes in battery requirements.
On the other hand, consumers are requiring more from batteries, leading to
changes in cathode and anode chemistry. In anode, shift from graphite to
lithium titanate leads to faster charge, but lower energy density -- this would sug-
gest additional 100,000 tons per year LCE of demand if all graphite in the cur-
rent battery market were converted (60% increase from current demand levels).
But clearly not happening overnight this is one piece of a complex evolution in
lithium battery chemistry.
Concentrated solar thermal working fuids: Crescent Dunes, NV project uses
32,000 tons of salt, which would include ~4,300 tons of LCE in the form of lithium
nitrate for its 110 MW system, which uses a different salt. Europe is looking at
630 GW of solar thermal by 2040, which would be 24.6 MILLION tons of LCE if
all used lithium nitrate in the salt mix. Again, not happening overnight, but even a
single large project could have a dramatic impact on overall lithium demand.
There are alternatives to Li-ion batteries for electric vehicles, including metal-air
batteries, layered super capacitors, and molten salt ZEBRA batteries. Similarly,
in grid storage there are solutions that don't use batteries, molten salt batteries,
lead-acid, fow batteries, Ambri batteries, etc. Ultimately, grid storage is probably
a hodgepodge of technologies, as size matters in some cases and not in oth-
ers, but in particular when the battery is close to the end user and needs to be
smaller.
In conclusion, technologies could swing lithium demand dramatically -- we could see
alternatives to Li-ion batteries lead to lower demand, or lithium could fnd applications
in anodes or solar thermal and drive huge growth. Expect lithium to remain battery
of choice for CCC and EV applications, maybe not for grid storage or heavy-duty, so
upside seen as better than downside.
Junior lithium mining: The harsh reality
Luis Santillana, Li3 Energy
In many ways, this is the presentation we have been waiting to hear for several
years, as it discussed the challenges facing startups in the space. Li3 noted its inter-
nal index of junior lithium miners (both brine and hard rock) is down around 75% from
2011 to present, though much of this is related to weakness in global mining over
that time, particularly junior miners. (This is to be expected as junior miners more
sensitive to the weaker commodity demand outlook out of China and other emerging
markets.)
Overview: Of a total of 16 companies Li3 is watching, only Orocobre and RB Energy
are under construction, 8 more are in some feasibility stage, Li3 in advanced explora-
tion, and 5 more are in early exploration. Some market analysts point to as many as
68 total projects, and very diffcult to say how many end up producing (First Analysis
editorial comment: probably not many). Lack of funds is hurting the sector. Prog-
ress on projects is not refected in market value, perhaps suggesting some room for
improvement if/when that happens. Asian investors had been rushing to invest in the
sector, but have turned more cautious. Juniors need to look for strategic partners for
money, support, knowledge, and potential offtake agreements.
Challenges: Include the macro environment and investor risk appetite, lithium still
a relatively unknown sector, reliance on EV/HEV for demand growth, high hard rock
operating expenses, country risk in Argentina and Bolivia, lithium-specifc regulatory
risk in Chile, and environmental concerns.
Is consolidation on the way? Galaxy/Lithium One, Tianqi/ROC and Talison, and
investments by big industrial groups like Samsung, Toyota, etc. are recent examples.
Consolidation of junior suppliers probably will continue as consumers look for an ad-
ditional supplier vs. incumbents. Consolidation could help lead to viable source, and
size/scale is important, maybe the only way for juniors to survive.
Juniors in the next couple of years: Likely to see 2-3 emerging mid-tier produc-
ers, backed by strategic partners, not a threat to existing producers. Other juniors will
need to get creative to raise funds, maybe drive consolidation. Tesla gigafactory a
big driver in bringing attention to the sector, but will it happen?
New technologies could improve economics and reduce environmental impact,
as Posco, which owns 23% of Li3, is attempting to do with its process technology.
Poscos process uses reverse osmosis to reduce lithium recovery time to 8 hours vs.
12-24 months with evaporation processes. Though the process has been tested at
Li3s Salar de Maricunga, we would note we have question marks around how much
pre-processing the brine would need, and how susceptible the process would be
to variations. We note Li3 had run out of money, but raised $8M from BBL (private
backer) in early 2014 that funds the Maricunga project through construction.
Cost structures for lithium carbonate production: A world view
Tim Johnston, Hatch
Hatch is a large engineering, procurement, and construction management frm with
signifcant experience in lithium plants worldwide.
In looking at differences in cost structure across geographies and geologies, Hatch
benchmarks with a standardized plant: 20,000 tpa lithium carbonate, assume 1.6%
hard rock grade or 550 ppm brine concentration. Other factors normalized (variations
by geography and geology).
Capital Costs: For a hard rock facility, the mine and concentrator account for 27% of
cost, the carbonate plant is 45%, utilities 11%, infrastructure 9%, and sodium sulfate
production 8%. For brine, evaporation ponds are about 51% of the cost, carbonate
plant is only 22%, plant utilities 10%, infrastructure 13%, and brine extraction wells
4%. Brine production typically requires higher capital cost in any geography.
Operating Costs: Reagents are 43% of the cost for hard rock, by far the largest
operating cost. These include sodium carbonate, sulfuric acid, natural gas, steam,
calcium carbonate, and other reagents. Mining accounts for 10% of the cost, concen-
trator 11%, labor 14%, and energy 7%. On the brine side, reagents account for 53%
of the cost, including sodium carbonate, calcium oxide, sodium hydroxide, carbon
dioxide, hydrochloric acid, and others. Salt harvesting accounts for 16% of costs,
labor 10%, and energy (natural gas) 8%. Hard rock operating costs are higher, but
there is not as big a difference in operating costs as might be thought between hard
rock and brine.
How engineering can unlock value from projects: Improve product quality using
bicarbonation to remove impurities, reduce pond construction costs and optimize, use
cheaper and simpler materials in construction, use pre-assemblies, etc. Preparing for
location-specifc risks is also important and plays into cost structure.
LiSX process: Maximize lithium recovery, minimize costs
Jonathan Lipp, Tenova Bateman Technologies
Bateman Technologies, part of Techint, has developed a number of solvent extraction
(SX) processes to address market needs, of which lithium is the most recent.
LiSX process involves a clean brine (no calcium or magnesium) that is run through
electrolysis to get a pregnant leach solution that is feedstock for the main process,
where the solvent is loaded, gets scrubbed of impurities, and is stripped of lithium
chloride using hydrochloric or other acid. Proprietary equipment is involved. The
fnished stream can be lithium chloride, reacted with soda ash to get lithium carbon-
ate, converted with hydrolysis to lithium hydroxide, or different acids can be used to
produce lithium nitrate or other products.
Advantages: Economics are independent of byproducts, high recovery, high purity,
lower capex and opex, low factory footprint, and weather-independent. Works even in
dilute solutions less than 100 ppm. Product ready in hours, and multiple lithium prod-
ucts can be produced. Waste stream can be reinjected into the salar. Process can
be used in main production, residual recovery with ROI of about 3 years, and waste
treatment. Assuming a brine concentration of 700 ppm, Tenova says a 20k tpa LCE
plant would cost $130M-$150M (vs. $230M-$250M using traditional extraction by
evaporation), have operating costs of $1.33/kg vs. $1.50/kg for traditional processes,
would be faster to market, and allow higher recovery.
Though this is interesting technology, we believe achieving consistent feedstock free
of calcium and magnesium impurities is a key challenge and could add expense.
Lithium in Quebec: Where to next?
Denis Raymond, Ministre de lnergie et des Ressources Naturelles, Qubec
Since 2011, there have been several developments in Quebec, including a new hard
rock mine, a new carbonate plant, other projects moving forward, exploration of new
metallurgical processes, some regulatory changes, and progress on the EV front.
Current activities include exploration in James Bay, RB Energys mine and plant
in fnal commissioning in Abitibi, and battery and processing activities in southern
Quebec.
Projects in the pipeline: Nemaskas mine in Whabouchi, Critical Elements Rose
lithium/tantalum project, and Gleneagle Resources Authier project (very close to RB
Energys resource), with Galaxys James Bay and Perilyas Moblan West projects
both on hold. By 2017-18, Quebec could be host to potential production of 48,000 tpa
LCE (~20%-25% of global total) as well as battery production and other R&D facili-
ties.
Quebec supports green and sustainable energy, including $516M Transportation
Electrifcation Strategy 2013-2017, set to increase EV uptake through incentives and
infrastructure.
Quebec advantages: Good fnancing resources for miners, tax incentives, good in-
frastructure, preferential electricity rates, proximity to R&D and commercial markets,
clear permitting process.
Matching exploration techniques to best practices for reporting resources and
reserves
Don Hains, Hains Engineering Company
Resource estimates allow for comparisons across projects, particularly important
in brine projects. Resource is the in-situ volume, reserve is what is economically
recoverable. Best practice guidelines help identify critical issues to examine, allow for
comparability between projects, and ensure relevant factors are disclosed.
Best practices can depend on the particular characteristics of the salar. Data quality
and confdence is more important than grade or fow rate in estimating the resource
-- lower confdence = smaller resource. Exploration methods need to match salar
characteristics in order to have confdence in the data.
There are a variety of techniques for surveying, understanding the hydrogeology of
the salar, drilling, estimating specifc yield, sampling, and modeling the salar hydro-
stratigraphically.
Reserve estimates require a dynamic model that refects changes in the reservoir
over time.
LITHIUM PROJECT UPDATES:
Whabouchi mine through feasibility, whats next?
Guy Bourassa, Nemaska Lithium
Nemaska claims the richest hard rock deposit in North America (1.53% grade), and
the 2nd largest in the world (27.3M tons of reserves). The recently completed feasibil-
ity study shows an even more attractive resource than assumed in the preliminary
economic assessment, suggesting a longer mine life and higher NPV ($924M).
The project has moved along to the mine permitting stage, and is now exploring
construction of a Phase 1 plant (500 tpa of hydroxide and carbonate) for marketing
purposes. The plant is expected to use a patented conversion process to produce
lithium hydroxide and carbonate using electrolysis, drawing on the advantage af-
forded by low power costs. The process is relatively simple and fexible, produces
lithium hydroxide in solution, which can then be converted to carbonate or fnished as
hydroxide.
Expected production 28,000 tpa hydroxide and 3,250 tpa of carbonate for $448M
capex, most of which is the conversion plant. Cost of $3,105/ton for hydroxide and
$3,771/ton for 99.99% carbonate, and we note these costs have come down since
the preliminary economic assessment.
Nemaska expects to receive some government funding, but is in the process of fnd-
ing a strategic partner and investor.
Lithium Americas: Rebooting for signifcant positive change
Tom Hodgson, Lithium Americas
Lithium Americas (LAC) is developing a resource in northern Argentina, the Cauchari-
Olaroz salar, in close proximity to Orocobre.
Based on previous conference attendance, Tom noted every project seems to claim
a large resource, great chemistry and byproducts, great infrastructure, low capex and
opex, IRR over 20%, NPV around $1B. LAC is no different: Cash operating costs
$1332/ton for lithium carbonate, $269M capex for lithium, $45M capex for potash,
expected to begin generating revenue in 2015. And for good measure, IRR of 23%
and NPV of $738M.
New management team, focused on creating long-term shareholder value, develop-
ing a world-class lithium company partnered with Posco. The relationship with Posco
provides innovative extraction technology, a partner to build and operate the pilot
plant at Cauchari-Olaroz for which LAC provides the brine, expected to be opera-
tional 4Q14. LAC hopes to expand this to a commercial relationship. Poscos process
is said to be faster than evaporation (8 hours vs 18 months), lower capex and smaller
footprint, 80% recovery rate vs. typical 50%, minimizes weather risk, and is scalable.
LAC just raised $18.6m through an equity rights issue, paid off debt, and now has
$8.5m in net cash on the balance sheet, assuring funding through 2015. The com-
pany believes it should be able to raise more capital.
A diversifed industrial minerals company
Richard Clark, RB Energy
Formerly Canada Lithium, RB Energy is now commercial producing 99.95% lithium
carbonate, frst shipment imminent.
New management team and board. Recently raised $22.5M in equity to see busi-
ness through to cash-fow positive. Canada Lithium issues related to kiln that could
not meet Canadian standards, had to wait 6 months to get permitted. Weather also
led to some delays this past winter because equipment had not been winterized. Also
discovered the importance of using plastic piping vs. steel, as RB was getting iron
contamination in the product.
Val d'Or project in Quebec is integrated with ore production, concentration, and car-
bonate processing. Nameplate 20,000 tpa, cost of $3200-$3900/ton, sodium sulfate
byproduct. Also have Aguas Blancas iodine project in Chile, more of a mining process
than brine, a cash generator.
Cheap power and gas is key to hard rock projects. 17.1M tons of reserves at 0.94%
grade. Expect $50M-$75M EBITDA in 2015/2016 assuming $5500-5800/ton lithium
carbonate price; frst shipment selling at $5700/ton. Pricing seen stable to slightly
higher.
Orocobre Olaroz project update
We note Orocobre did not present at the conference, but felt it would be worthwhile to
include some of our commentary published in late November 2013 following investor
meetings with Chairman James Calaway.
We believe construction is more than 80% complete and the company remains on
schedule to begin lithium carbonate production in mid-2014. Initial volume should be
around half the 17,500 tons/year nameplate capacity, and ramp to full capacity could
take 9-12 months.
Orocobre's fagship lithium brine source is the Salar de Olaroz, located in northern
Argentina about 100 miles from FMC's resource at Salar del Hombre Muerto. While
the lithium concentration in the brine is lower than that of SQM and ROC (770 mg/
liter vs. 1800 mg/liter), the brine is relatively free of contaminants including magne-
sium, which are costly and time-consuming to remove. As such, Orocobre claims its
evaporation process will take only eight months and reach a lithium concentration
of 0.8%, as opposed to ROC's process that takes roughly twice as long and takes
lithium to a concentration closer to 6%.
Olaroz has options to produce byproduct potash and boron, which could further re-
duce Orocobre's estimated lithium carbonate production cost of $2,000/ton to $2,200/
ton. We believe variable costs are roughly $1,400/ton.
We point to Orocobre's relationship with Toyota as well as with a large Korean elec-
tronics manufacturer as suggesting the company has good baseload customers that
provide a head-start on commercial inroads.
The Rose lithium-tantalum project
Jean Sebastian Lavallee, Critical Elements
Tantalum byproduct makes the project unique. Located in Quebec, close to Nemaska
project. Still in feasibility stage, $268M capex, with focus on keeping capital costs
low. Preliminary economic assessment shows IRR of 25%, NPV of C$488M.
Expect to produce 26,600 tpa of lithium carbonate at cost of $2900/ton including tan-
talum byproduct credit, which would be toward the low end of hard rock producers.
0.89% lithium oxide grade, with low iron content.
Recently slowed the project to be sure the process would be optimized ahead of
environmental impact assessment.
Financing is an issue right now, and Critical Elements is talking to tantalum end users
about getting advance payments and exploring government-backed debt. Expect to
be producing by the end of 2016; focused on fnancing, off-take agreements, and
feasibility study during 2014.
New low-cost lithium supply in Nevada
Jay Chmelauskas, Western Lithium
Western Lithium (WLC) is still three years away from permits, now looking at produc-
tion perhaps by 2018. Recently completed a C$8M equity raise, and currently has
$15M in net cash on the balance sheet.
WLC has a static, shallow hectorite clay resource in northern Nevada, extends for
25km, has similarities to brine for processing purposes, with low impurities, pre-
dictable chemistry. Phase I 13,000 tpa LCE, Phase II would double 4 years later.
Planned process involves calcination followed by water leaching to produce a brine,
and a demonstration plant is planned to be up and running late 2014 in Germany,
where partners have good expertise, facilities already in place. WLC envisions cash
operating costs of $968/ton for lithium carbonate, adjusted for potassium sulfate and
sodium sulfate byproduct credits. Pre-feasibility study points to an after-tax IRR of
20% and NPV of $373M, at Phase I capital cost of $248M.
Jay points out that additional lithium demand in the high-growth EV forecast would
require 10 new projects vs. the two that are coming on stream, so there is room for
WLC and others. Also points out that Rockwood, the biggest and best brine producer,
has turned to hard rock for lithium molecules with its recent investment in Talison.
Incremental production is coming from Chinese mineral conversion.
Organoclay mine is permitted, and plant construction is nearing completion, with pro-
duction expected by late 2014, serving oilfeld drilling mud market. This will provide
some cash fow to help fund further development of the lithium project.
Electrolytic lithium hydroxide: The fnal frontier?
Chris Reed, Reed Resources
Reed Resources is 70% owner of the Mount Marion hard rock project in Australia.
Corporate strategy involves de-risking with strong partners, on the mining side (Min-
eral Resources), and the downstream processing side (to come after feasibility and
quality proven). Pre-feasibility study found pretax IRR of 94% and NPV of $321M.
Proof of concept on electrolysis process to get lithium hydroxide at a cost of $3900/
ton vs competitors at $5700/ton. The integrated hydroxide process is about 1/3 the
capital cost of a carbonate plant plus hydroxide processing plant. Still at pilot stage,
will have some funding needs on the order of $100M for capex.
A LITHIUM PRIMER
We continue to believe lithium represents a growth market with strong secular driv-
ers, and believe existing players are well-positioned in a market with relatively high
barriers to entry. Topics discussed below include lithium's market structure (includ-
ing cost structure and pricing), applications (including HEV/EV batteries), chemical
properties, sources and production, and history. A list of useful defnitions appears at
the end.
MARKET STRUCTURE:
Players: SQM, Rockwood, and FMC are the main producers of lithium carbonate
and lithium compounds (estimated combined 48% share of global production, the
vast majority being in South America, and an estimated 72% share of global sales),
with ROC and FMC having signifcant downstream production capability for higher-
value-added lithium compounds. Australia's Talison (now owned by a 51/49 JV
between Sichuan Tianqi and Rockwood) is by far the most prolifc hard rock producer
with its Greenbushes deposit, and its ore is converted into lithium carbonate by a
number of Chinese processors, the largest of which is Tianqi. Chart 4 shows the
breakout of production by volume.
RB Energy (formerly Canada Lithium) expects to begin commercial sales in 2Q14
from its hard rock project in Quebec, and Orocobre is in the fnal stages of construc-
tion of its brine project in Argentina. Numerous other startup projects (we estimate
more than 60) are in various stages of exploration or development; though some of
these sources may prove attractive, we believe startups face an uphill battle against
incumbent suppliers with signifcant expansion capability.
Production/capacity: Though production fell in 2009 as a result of the global
economic downturn, we estimate production recovered at a 14% CAGR between to
reach 168,000 MT of LCE (lithium carbonate equivalent) in 2013. We believe capac-
CHART 4
Global Lithium Supply, 2013
SQM
25%
Rockwood
14%
FMC
9%
Sichuan Tianqi
(Talison)
39%
Other Chinese
7%
Other Non-
Chinese
6%
Total: 168,000 MT LCE
Source: Roskill.
ity utilization was around 75% in 2013, which likely falls to around 70% by year-end
2014 with the gradual ramp-up of production at RB Energy and Orocobre.
Commodity vs. downstream capabilities: We note SQM has by far the largest
lithium carbonate production capability (25% of global supply), and is focused on
commodity products (lithium carbonate, lithium chloride, and lithium hydroxide), with
very little downstream production capabilities. However, we estimate Rockwood is
CHART 5
Estimated Global Lithium Market Share by Sales, 2013
SQM
16%
Rockwood
37%
FMC
19%
Tianqi (Talison)
13%
Others
15%
Source: Company reports, First Analysis estimates.
CHART 6
Global Lithium Demand by Product, 2013 (LCE Volume Basis)
Carbonate - BG
25%
Carbonate - TG
22%
Hydroxide -
BG 4%
Hydroxide
- TG 8%
Butyllithium 5%
Bromide 4%
Metal 2%
Mineral Direct
Use 20%
Other 10%
BG = Battery-Grade TG = Technical-Grade
Source: Roskill.
the global market leader when measured by total value of lithium compounds sold,
followed by FMC (only about 30% of ROC's lithium sales are commodity carbonate/
chloride/hydroxide; we estimate just under 50% of FMC's lithium sales are carbonate/
chloride/hydroxide). Chart 5 shows the global breakout of the lithium market in sales
dollars.
This speaks to the increased value-add of downstream products: For example, lithi-
um carbonate may sell for $2 to $3 per pound, while downstream products like lithium
metal and butyllithium can be more than 20x that price per pound. Chart 5 illustrates
this point: Compare our estimates of market share based on dollars sold with market
share based on production volume (in LCE - Chart 4). We believe gross margins are
highest for the commodity products (60% to 80%), but downstream products gener-
ate higher gross proft dollars per pound of lithium contained. Table 1 provides an
illustration of the wide array of lithium derivatives, and Chart 6 shows a breakout of
lithium volumes by product.
While we formerly thought of only ROC and FMC as having downstream capabilities,
we believe a handful of Chinese mineral converters have capability to produce lithium
metal and some other downstream products. We anticipate these converters will
continue to become more sophisticated in producing a wider range of products, and
higher-purity commodities.
TABLE 1
Lithium (Li) Production Tree
D
i
r
e
c
t
-
c
h
l
o
r
i
d
e

p
r
o
c
e
s
s
(
a
l
u
m
i
n
a

a
d
s
o
r
p
t
i
o
n
)
Reaction with calcium
hydroxide
Raw materials from salars / brines
(impure LiCl)
~60% of global production from brines
Li hydroxide (LiOH: used in
greases, Li-ion battery
electrolytes, polymerization
catalysts)
Li carbonate (Li
2
CO
3
: main RM, also
apps in battery, pharma, glass,
ceramics, construction)
Li chloride (LiCl: big raw material,
used in welding fluxes and for
humidity control)
Li iodide (LiI: used in organic
synthesis, iodination, other
reactions),
Li perchlorate,
Li bis(oxalato)borate, and other
electrolyte salts for batteries
Li acetate (LiCH
3
COO:
polymerization catalyst,
pharma RM),
Li benzoate
(LiC
6
H
5
OO:
polypropylene catalyst,
pharma RM),
Li citrate,
Li salicylate (agent for
pharma synthesis)
Li peroxide
(Li
2
O
2
: plastics
hardener, air
regenerator),
Other CO
2
absorption
products
Li borohydride (LiBH
4
: used for selective reduction
in reactions), Li zeolites (for oxygen production
through adsorptive air separation)
Li foils and anodes
(key battery products)
Li sulfate (Li
2
SO
4
: used in pharma, special glasses),
Li nitrate (LiNO
3
, used in cement curing and rubber vulcanization),
Li phosphate (Li
3
PO
4
: additive for special glasses and enamels,
polyurethane stabilizer),
Li silicate,
Li tetraborate (Li
2
B
4
O
7
: fluxing agent for RFA sample prep; used in
special glasses and greases),
Li chromate (Li
2
CrO
4
: corrosion inhibitor),
Sabalith
Butyl-lithium (BuLi)
(LiC
4
H
9
: catalyst for reactions in
pharmaceuticals and elastomers)
Potash and Bischofite
(sold as byproducts)
Li bromide (LiBr, used in pharma,
Li-ion battery electrolytes, air
conditioning)
Li nitride (Li
3
N, a superbase fast
ion conductor and potential hydrogen
storage medium)
Reaction with soda ash
Reaction with HCl
(thicker box = key material)
Electrolysis with
molten KCl
Melted down, filtered, cast into ingots, and extruded
Reaction of
butyl bromide or
butyl chloride
with Li metal
Li hydride
(LiH: reducing
agent and high-
density hydrogen
source)
Li amide
(LiNH
2
: used for condensation and
alkylation reactions)
Reaction with
ammonia
Reaction with
hydrogen
Li aluminum hydride (LAH)
(LiAlH
4
: a strong reducing agent that
generates a controlled release of hydrogen )
Li tri(t-butoxy) Al Hydride (LTTBA)
(selective reducing agent for organic synthesis )
Li Diisopropylamide (LDA),
Li Hexamethyldisilazide (LHS), and
Li Bis(trimethylsilyl)amide (LHMDS)
(strong low nucleophilic bases)
Methyl-lithium
(LiCH3: alkylating and
metalating agent)
Phenyl-lithium
(LiC
6
H
5
: reagent for
introducing phenyl
group)
Li acetylide
(synthesizer)
Li methoxide
Li tert-butoxide
(auxiliary products for
organic synthesis)
Li fluoride (LiF, fluxing agent, used
in aluminum electrolysis, RM for
optical lenses and prisms)
Lithium metal
(reduction and deoxidizing
agent; RM for organic Li
compounds; apps in
primary batteries and
alloys)
Source: Rockwood, SQM, First Analysis research.
Market size and growth outlook: We estimate the global market for lithium and
lithium derivatives at roughly $1.2B in 2013, up from around $900M in 2009, a ~7.5%
4-year CAGR, which is lower than the 14% volume growth CAGR in LCE terms due
to mix (faster growth in lower-priced commodity lithium products). Future growth rates
are uncertain given signifcant components of lithium demand are driven by industrial
production as well as the question mark surrounding uptake of HEV/EV and its infu-
ence on the battery market. We assume underlying (non-HEV/EV) demand growth
around 6% (similar to historical levels), and assume annual production of HEV/EV
will grow to 8M vehicles by 2020 from ~1.7M in 2013 (25% CAGR). Our estimates
assume this is roughly evenly split among Li-ion HEV at 1.5 pounds LCE per vehicle,
PHEV at 15 pounds LCE per vehicle, and EV at 30 pounds LCE per vehicle, yielding
additional 2020 LCE demand of ~57,000 MT (see Chart 7). Assuming prices similar
to current levels, we would estimate global lithium sales of more than $2.5B in 2020,
roughly double 2013 levels.
Cost Structure: Brine-based production is signifcantly lower-cost than ore-based
production, though we believe the gap has narrowed over the past few years. Based
on our prior conversations, we believe ROC is the low-cost producer (followed
closely by SQM), with production costs in the Salar de Atacama falling in the $1,400
to $1,800 range per ton of lithium carbonate. FMC's costs are believed to be slightly
higher, in the $2,300 to $2,600 range per ton. ROC's costs at its operation in Silver
Peak, Nevada, are higher still, but below the lowest-cost production from ore, which
we believe is around $4,000 per ton but lower than in the past as mineral converters
have improved their processes. In general, we believe ore-based producers focus on
industrial markets (primarily glass and ceramics), leaving mostly brine-based produc-
ers to compete in the battery and other specialty downstream markets, though we
acknowledge this is changing as mineral converters improve product quality. Chart
8 provides some detail on relative costs, based on companies public commen-
tary, which may or may not be based in reality (note these differ from our estimates
above).
Cost drivers for brine-based production include brine quality (lithium concentration
and impurities, particularly magnesium), evaporation rates, technical expertise in
CHART 7
Estimated Global Lithium Demand, 2000-2020e
0
50,000
100,000
150,000
200,000
250,000
300,000
L
i
t
h
i
u
m

C
a
r
b
o
n
a
t
e

E
q
u
i
v
a
l
e
n
t

(
t
o
n
s
)
HEV/EV Battery
Underlying
2010-2020 CAGR:
6.4% Underlying
8.8% Including HEV/EV
Source: Company reports, First Analysis estimates.
the production process, costs for inputs like soda ash (roughly 2 tons required for
every ton of lithium carbonate produced) and energy, and the market price of potash
and other byproducts. We believe the main cost drivers for ore-based production
include ore quality and accessibility, and the cost of capital equipment. (Please see
our above notes from the presentations entitled Getting from the brine to the end
product and Cost structures for lithium carbonate production: A world view from the
Lithium Supply and Markets conference for more thoughts on cost drivers.)
Pricing: Pricing information for lithium carbonate, a key lithium compound and raw
material for the metal and other downstream products (accounting for more than 45%
of demand) is relatively diffcult to obtain. Lithium metal pricing data is even more
diffcult to fnd and of dubious utility, given most end uses of lithium are in compound
or mineral form. As noted above, pricing for lithium carbonate, lithium chloride, and
lithium hydroxide can be well below $10/pound, while lithium metal and downstream
products are multiples of those prices. Chart 9 is based on semi-annual updates from
supplier SQM on sales and tonnage in the company's lithium and derivatives seg-
ment; the pricing thus represents a shifting basket of primarily lithium carbonate and
other lithium compounds that provides some insight into recent trends.
SQM began producing lithium compounds from brine in 1997 (at relatively low cost),
and dramatically reduced market prices in order to gain market share on commer-
cialization in the early 2000s (from roughly $4,000/ton down to $1,400/ton). In light of
CHART 8
Estimated Lithium Carbonate Production Cost by Producer
E
s
t
i
m
a
t
e
d
C
o
s
t

p
e
r

T
o
n

o
f

L
i
t
h
i
u
m

C
a
r
b
o
n
a
t
e

(
U
S
D
)
Estimated Capacity (Tons per Year Lithium Carbonate Equivalent)
Source: Orocobre, Roskill.
falling demand and growing capacity, SQM in October 2009 announced a 20% price
cut on lithium carbonate and lithium hydroxide, though we believe pricing has shown
a gradual recovery over the past few years. Chart 10 shows U.S. Geological Survey
data based on U.S. imports and exports that give another window into the histori-
cal price trend of lithium derivatives (and captures the collapse in pricing as SQM
entered the market).
Pricing for downstream products tends to be more stable than pricing for the com-
modity products, in part because sales tend to occur under longer-term contracts
(typically one year). Because of these contracts, we do not believe downstream pric-
ing fuctuates in step with commodity fuctuations, but is instead based on value-add-
CHART 9
SQM Average Price for Lithium Carbonate and Derivatives (2001-2013)
$5,366/MT
(~$2.44/lb)
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
1
H
0
1
2
H
0
1
1
H
0
2
2
H
0
2
1
H
0
3
2
H
0
3
1
H
0
4
2
H
0
4
1
H
0
5
2
H
0
5
1
H
0
6
2
H
0
6
1
H
0
7
2
H
0
7
1
H
0
8
2
H
0
8
1
H
0
9
2
H
0
9
1
H
1
0
2
H
1
0
1
H
1
1
2
H
1
1
1
H
1
2
2
H
1
2
1
H
1
3
2
H
1
3
P
r
i
c
e

p
e
r

m
e
t
r
i
c

t
o
n
Methodology: Revenue / tonnage = price per ton
Source: SQM semi-annual reports..
CHART 10
Annual Average Price for U.S. Lithium Imports and Exports (2000-2012)
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
P
r
i
c
e

p
e
r

m
e
t
r
i
c

t
o
n
Source: U.S. Geological Survey.
ed, and suppliers like ROC and FMC work to move prices gradually higher regardless
of commodity fuctuations.
To some extent, we view the long-run price framework for lithium as behaving like
any other commodity, in that the average price is set by the cost of the incremental
producer. What makes the lithium market different (somewhat more tiered in nature)
is the presence of low-cost brine production vs. higher-cost ore production, and the
wide variety of applications (some requiring more purifed or higher-quality product
vs. some needing industrial grades or simple mineral concentrates).
Long-term, we think lithium carbonate pricing is likely to range between roughly
$4,000 and $6,000 per ton. Below $4,000, we would expect marginal ore-based
producers to begin to curtail supply, while above $6,000 we would expect increased
ore-based supply from large producers like Talison (which we believe is currently
operating around 50% capacity) and potentially from new projects. Short-term spikes
are likely, as even ore-based producers take a few months to ramp production; brine-
based producers take much longer.
New entrants have their challenges: Existing suppliers have the best resources,
with the lowest-cost production technology, downstream capabilities and existing
customer partnerships, and expansion capabilities that require less capital than a
startup. We believe brine production is equal parts science and art (similar to wine-
making), and existing producers have an advantage over new entrants because they
have had years to improve the quality and effciency of their operations.
Many customers have demanding specifcations for even commodity-type products,
and existing suppliers have the capability to produce to these specifcations; new en-
trants will have to develop this capability with cooperation from customers. Nonethe-
less, we note lithium users would clearly prefer to see more geographic diversifcation
in supply, as most existing and potential brine production sources are concentrated
within a 200-mile radius of each other in South America, where earthquakes, political
unrest, or even a severe rainstorm could knock out production for an extended period
of time.
APPLICATIONS:
Please refer back to Chart 1 for an illustration of global lithium end markets.
Batteries:
Currently use ~52,000 tons of LCE/year, primarily for consumer, communica-
tions, and computing. Growth in the battery end market for lithium since 2000 has
been signifcant (we estimate a 19% CAGR through 2013), driven by growth in
smartphones, laptops, tablets, power tools, portable devices like digital cameras
and MP3 players, and more recently by growing demand for electric vehicles. As
recently as 2000, the rechargeable battery end market accounted for less than
10% of lithium demand (now 29%).
Lithium-ion batteries (LiB) account for roughly 75% of the rechargeable battery
market (and growing), and we believe ROC and FMC account for the majority of
lithium carbonate and hydroxide used in the production of battery cathode materi-
als (primarily lithium-cobalt-oxide (LCO)). Newer-generation rechargeable bat-
teries will likely move away from the LCO cathode chemistry, substituting other
materials for cobalt (such as nickel, manganese, aluminum, and iron), but lithium
will likely remain a key component.
Primary (non-rechargeable) batteries using lithium are best for long-life applica-
tions (pacemaker batteries using lithium can last 8 to 10 years, compared to 1
year for a conventional battery).
Hybrid electric vehicles (HEVs) and electric vehicles (EVs) offer a signifcant
growth opportunity for LiB, as the Toyota Prius (the best-selling HEV in the world)
still uses a nickel-metal hydride (NiMH) battery, which has lower performance,
but is less expensive and safer than earlier LiB technology. LiB has emerged as
the leading technology for PHEV and EV vehicles, and we note transportation
applications accounted for ~3% of global lithium demand in 2013. We believe
many of the trade-offs between safety, performance, durability, and cost have
been addressed, and manufacturers are now focused on increasing scale to
reduce the cost of battery systems (a la Elon Musks Tesla gigafactory). As Chart
11 shows, the amount of LCE in a HEV/EV battery (we assume 1 Kg/kWh) is
several orders of magnitude higher than that in a smartphone; one Tesla Model S
requires roughly the same amount of lithium as 2,000 iPads.
Given the uncertainty around how many HEVs and EVs using LiB will be pro-
duced in the coming years (though estimates for 2020 have crept higher over the
past few years, now in the 5M to 10M vehicles/year range), estimates for future
growth of the battery end market are all over the map. For example, indepen-
dent analysts Roskill project around 50,000-60,000 tons but perhaps as much
as 250,000 tons of LCE demand for HEV/EV by 2020. Variables include HEV/EV
penetration rates, mix of HEV vs. PHEV vs. EV, assumptions around LCE used
per battery, and annual vehicle production.
A small but essential component: We note the cathode is the main use of lithium
in LiB, and accounts for around 20% of the total battery cell cost; lithium is less
than 10% of the cathode cost, meaning it is only ~2% of the cost of the cell, and
less than 1% of the cost of the fnal battery system.
CHART 11
Estimated Lithium Carbonate Equivalent Used in Common Battery Applications
5
42
48
54
592
1,400
4,400
16,500
24,000
85,000
1
10
100
1,000
10,000
100,000
Smartphone
(5.45 Wh)
iPad 3
(42.5 Wh)
Laptop
computer
(48 Wh)
Power tool
(54 Wh)
Wisper
e-Bike
(592 Wh)
Ford Fusion
Hybrid
(1.4 kWh)
Toyota
Prius Plug-
in Hybrid
(4.4 kWh)
Chevy Volt
(16.5 kWh)
Nissan Leaf
(24 kWh)
Tesla
Model S
(85 kWh)
L
i
t
h
i
u
m

C
a
r
b
o
n
a
t
e

E
q
u
i
v
a
l
e
n
t

(
g
r
a
m
s
,

l
o
g

s
c
a
l
e
)
Source: Manufacturer data, First Analysis estimates.
Ceramics and glass:
A major end market for lithium minerals derived from spodumene and other ores,
as well as for lithium carbonate; in many applications lithium need not be purifed,
and is used as a mineral concentrate.
Lithium improves durability and performance of ceramic and glass products
(including viscosity, thermal expansion, chemical durability, density, and workabil-
ity), and also reduces the melting point of glass, improving plant effciency. Also
allows production of lighter-weight, thinner-walled glass containers.
In ceramics applications, lithium is valued for its ability to reduce thermal expan-
sion, which is critical for applications such as heat-shock-resistant cookware. As
in glass applications, lithium can improve plant effciency by reducing fring time.
Other applications include photochromatic glass (for eyeglass lenses that darken
when exposed to light), vitreous enamels (for corrosion resistance or decoration),
high-performance optical glasses (for use in telescopes, for example), and high-
temperature refractory materials.
We consider this a GDP-growth end market, with construction being one of the
main drivers.
Lubricating greases:
Lithium greases can be used over a wide range of temperatures, have good
water resistance, high shear stability, and last longer than many other types
of lubricants. Lithium compounds are used in an estimated 60% of lubricating
greases worldwide, particularly in machines operating at high speeds and under
heavily loaded conditions (i.e. high shear and high temperature). Multi-purpose
properties of lithium grease lend to use of a single grease across a wide range
of applications rather than multiple specialty non-lithium greases in the same
machine.
Should grow slightly faster than global industrial production, driven by increasing
substitution and use in high-performance machines.
Pharmaceuticals and polymers:
Pharmaceuticals remain a key end market for ROC, which is the market leader
in high-value-added organic lithium compounds. These compounds are used as
reagents in the production of active ingredients used in a wide range of products,
including anti-cholesterol drugs, contraceptives, and even agricultural fungicides.
Polymers are the key industrial application for organic lithium compounds, which
are typically used to initiate polymerization in the production of polyisoprene,
polybutadiene, and copolymers. Lithium initiators allow polymerization at higher
temperatures, improving effciency, and also improve the ability to control the
reaction, allowing manufacture of custom products to tighter specifcations and
with superior properties. Key applications for these polymers include footwear,
packaging and consumer goods, adhesives and coatings, tires, and construction.
Looking specifcally at butyllithium, we believe polymerization accounts for
the largest portion of sales for ROC and FMC, followed by agrochemicals and
pharmaceuticals. While polymerization has seen some weakness due to slower
growth rates in China and is generally a more cyclical/GDP-driven market, we
believe pharma shows steady, secular growth, driven by active R&D partnerships
and a strong pipeline of potential projects. On the agrochemical side, we note key
customer Bayer recently began using a new process that does not use lithium,
which has had a negative impact on butyllithium volumes for both ROC and FMC.
Air conditioning: Lithium bromide and chloride solutions are used in dehumidifca-
tion of air and other gases, which also has a cooling effect. These lithium compounds
are used in large building air conditioning systems, as well as refrigeration systems,
heat pumps, and in dehumidifcation/desiccant applications. We believe industrial and
commercial construction growth is the main driver of this application.
Aluminum:
Lithium carbonate is introduced in the aluminum production process to lower the
electrolytic cell's temperature and improve conductivity. Lithium also reduces
fuorine emissions.
Most applications are in older plants, where introducing lithium can reduce en-
ergy costs by 5% to 10%. In newer plants, effciency gains are smaller, making
lithium less cost-effective.
Though aluminum production fell during the global economic downturn, we note
the industry is experiencing something of a resurgence driven by increasing use
in automotive applications, driven by fuel effciency standards.
Lithium can also be alloyed with aluminum to reduce density, improve elasticity,
resist corrosion, improve tensile strength, and improve performance at high tem-
peratures. However, these alloys are 3x to 6x more expensive than conventional
aluminum, which limits their use to critical applications (primarily aerospace).
Continuous casting: Lithium provides thermal insulation and lubrication in the con-
tinuous casting of steel and iron. It also reduces the number of defective casts. Main
drivers are automotive and steel markets, and industrial production.
Other applications:
Bleaches, sanitizers, and swimming pool conditioners: Lithium hypochlorite once
held one of the largest markets for lithium compounds, for use in commercial
laundries and as a bacteria and algae reducer in swimming pools. The market
today is smaller due to the high cost of lithium relative to competing products.
Pharmaceutical: Completely separate from the use of organic lithium compounds
in pharmaceutical production is the direct use of lithium carbonate or other lithium
compounds as the active pharmaceutical ingredient in the treatment of psychiat-
ric disorders.
Metallurgy: Lithium metal acts as an oxygen scavenger for aluminum, copper,
bronze, germanium, lead, and other metals, improving purity and conductivity.
Lithium chloride can be used as an additive or fux for dip brazing, open hearth
soldering, and welding rods.
Construction: Lithium compounds are used as additives in cement, adhesives,
and quick-curing mortars.
Dyes and pigments: Lithium compounds increase solubility and brilliance.
Carbon dioxide adsorption: Lithium hydroxide canisters remove carbon dioxide
from the atmosphere in submarines, mines, and space vehicles.
Future applications: Lithium isotopes for nuclear fusion, molten lithium as heat
transfer medium for solar thermal applications.
Key lithium compounds and their applications:
Please refer back to Chart 6 for a breakdown of global lithium demand by compound
or product type.
Lithium carbonate:
Primary raw material for lithium compounds
Glass and ceramics (reduces melting point, viscosity, and thermal expansion)
Aluminum (reduces melting point and air pollution in electrolysis process)
Cement (improves stiffness and reduces drying time)
Batteries (used to manufacture rechargeable lithium-ion battery cathodes)
Lithium hydroxide:
High-performance greases
Carbon dioxide absorption
Catalyst for organic reactions
Batteries (used to manufacture rechargeable lithium-ion battery cathodes and in
electrolytes)
Lithium chloride:
Key raw material for lithium metal
Humidity control and air conditioning
Welding fuxes
Lithium metal:
Raw material for pharmaceutical production and other organic compounds
Primary lithium batteries
Aluminum and other metal alloys
Butyllithium:
Pharmaceuticals (used as a reagent in the production process)
Elastomers (for polymerization initiation)
Agrochemicals (a newer application, used as a fungicide)
Lithium bromide:
Air conditioning (industrial absorption-based systems)
Pharmaceuticals (dehydrobromation reactions)
Lithium-ion battery electrolytes
CHEMICAL PROPERTIES:
Lithium is an alkali metal, and under standard conditions the lightest and least dense
of all solid elements. Like other alkali metals (including sodium and potassium), it
does not appear in nature as a pure element due to its high chemical reactivity. Be-
cause metallic lithium is soft, it is not used as a structural material, though it is used
in alloys to improve properties. Most applications make use of the unique properties
of lithium ions and compounds.
TABLE 2
Advantages and Disadvantages of Lithium-Ion Batteries
Advantages:
High power storage per unit volume and weight
Higher open circuit / cell voltage
Lower self-discharge rate (power lost when not in use)
Rapid recharge
Operation in relatively wide temperature range (low better than high)
Low memory effect (no need to fully discharge before recharging)
Disadvantages:
High cost
Need for overcharge/overdischarge protection system
Safety concerns and thermal runaway
Limited life span; capacity declines with time, temperature, charge
Source: American Chemical Society, Argonne National Laboratory, Woodbank
Lithium is highly reactive (with water, oxygen, and a host of other elements and
compounds) and requires special handling, as do many compounds such as lithium
hydride and butyllithium; other lithium compounds, including lithium carbonate, are
more stable.
Lithium's natural properties make it an attractive battery material: Lithium's atomic
structure includes a nucleus of three protons and either three or four neutrons, and
three electrons orbiting in two shells; the outer shell contains only one electron. Lithi-
um tends to donate this electron, leaving the resulting lithium cation with a +1 positive
charge. As a result of its electron structure, lithium is a good conductor of heat and
electricity, and possesses a high specifc heat capacity. Lithium-based batteries have
a high energy density, which is a key battery property (see Table 2).
SOURCES AND PRODUCTION:
Lithium appears in nature as a compound mineral or as a component cation in brines.
It is consumed as compounds, metal, or mineral concentrates, depending on the
application. Due to production economics, we estimate 60% of global lithium supply
comes from brines, and 40% from minerals (~20% mineral concentrates used directly
in applications such as ceramics and glass, and ~20% minerals converted into other
lithium compounds).
TABLE 3
Satellite View of ROC's Lithium Production Ponds in the Salar de Atacama
Source: Google Earth, Rockwood, First Analysis estimates.
To produce lithium metal, mineral concentrates or brines are converted to lithium
carbonate, then lithium chloride, then to lithium metal through electrolysis with molten
salt. (Please refer back to Table 1 for a more detailed look at the numerous lithium
compounds, their applications, and the processes by which they are produced.)
Mineral (also known as hard rock or ore) production is primarily from spodumene
ores (LiAl(Si2O6)), which typically contain 1.5% to 7.0% lithium oxide (0.7% to 3.3%
lithium). Ore is mined, crushed, ground, and put through foatation to concentrate
the lithium oxide. While there are multiple processes to get lithium carbonate from
mineral conversion, they generally involve taking concentrated ore through a kiln/
calciner, reacting with sulfuric acid, dissolving in a leach tank, and reacting with soda
ash. Most lithium production was from minerals until 1997, when SQM entered the
market with additional brine production; since then, brine production has accounted
for the majority of global production.
Brine production requires a unique geological and climatological circumstance that
yields a concentrated deposit (a salar) where water containing salts including lithium
chloride forms an underground pool of brine. In order for lithium to be recovered
economically, the brine in the salar must contain lithium in high enough concentration
and with minimal contamination from magnesium and other salts, and the geography
must have a relatively high evaporation rate -- high altitudes with little or no precipita-
tion, low humidity, low barometric pressure, high winds, and high temperatures.
To purify and concentrate lithium, the brine is pumped to the surface and water is
evaporated in a series of ponds with a residence time of 12 to 18 months, where
other salts are precipitated out and the concentration of lithium increases from (in the
case of ROC's operation in the Salar de Atacama) 0.2% lithium to 6.0% lithium. Table
3 shows an example of a brine-based lithium operation.
Recycling is also a potential source of lithium, particularly as battery size increases
(for vehicle and grid storage applications, for example). We believe ROC continues to
pursue lithium-ion battery recycling partly funded by a grant from the German govern-
ment, and cathode producer Umicore currently has some Li-ion recycling capability.
Battery recycling would provide additional lithium carbonate supply that could be rein-
troduced as feedstock into battery or other applications, and we believe ROC's costs
for recycled lithium carbonate would be competitive with its brine-based production.
TABLE 4
Comparison of Brine Sources
Producers Est. ann capacity
(tons LCE)
Avg. Li conc
(ppm)
Mg:Li
ratio
Evaporation
Rate (mm/yr)
Avg. Rainfall
(mm/yr)
Salar de Atacama (Chile) SQM, ROC 48000 + 27000 1800 6.4 ~3200 ~10
Salar del Hombre Muerto (Argentina) FMC ~20000 740 1.4 ~2700 ~100
Silver Peak (Nevada) ROC ~6000 240 1.4 ~1300 ~130
Salar del Olaroz (Argentina) Orocobre 17500 (planned) 770 2.8 ~2000 ~50
Salar del Rincn (Argentina) Rincon Li 10000 (planned) 330 8.6 ~2600 ~100
Salar de Cauchari (Argentina) Li Americas 20000 (planned) 620 2.9 ~2000 ~50
Salar de Maricunga (Chile) Li3 1040 8.0 ~2400 ~125
Salar de Uyuni (Bolivia) 320 20.0 ~1800 ~170
Qinghai Lake (China) QSLI ~5000 320 0.5 ~900 ~350
Taijanier Lake (China) CITIC ~3000 260 61.5 ~2800 ~30
Zhabuye Lake (Tibet) Tibet Zhabuye ~3000 680 0.03 ~2300 ~150
Seawater 0.17 7588
Source: Rockwood, Meridian International Research, Donald E. Garrett, Process and Environmental Consultancy, company
reports.
Notes on selected brine locations:
Table 4 provides a list of selected brine sources, with key statistics:
Salar de Atacama: Highest lithium concentration, highest evaporation rate. Second-
largest brine deposit in the world (behind Salar de Uyuni in Bolivia), but largest in
terms of economically recoverable lithium. Annual production capacity is 48,000 tons
of LCE at SQM's facilities and around 27,000 tons at ROC, though we note a new
lithium carbonate processing plant should increase capacity by another 20,000 tons.
ROC began operating in the Atacama in 1984 (13,000 tons/year LCE), and SQM be-
gan in 1997 (18,000 tons/year). Lithium concentration in some areas of the salar can
be as high as 7000 ppm (vs. average of ~1800 ppm).
Salar del Hombre Muerto: Exceptionally clean (Mg:Li ratio is 1.4:1), but still higher-
cost (due in part to lower lithium concentration) and a smaller reserve. FMC began
operations in 1997-98, using direct extraction system (alumina adsorption) rather
than relying solely on solar evaporation. Salar is relatively small in surface area,
but deeper than the Salar de Atacama (brine can be extracted from lower depths).
Lithium concentration where FMC works is ~700 ppm. FMCs capacity is around
20,000 tons of LCE following a recent expansion.
Salar de Uyuni: No production yet. High Mg:Li ratio (roughly 3x that of the Salar
de Atacama) makes it more expensive to produce lithium, because lithium chloride
doesn't form in ponds unless magnesium is removed. The brine must be pre-treated
with calcium hydroxide (to remove magnesium), then with sodium sulfate (to remove
calcium). In addition, the evaporation rate is less than half that at Salar de Atacama.
Lithium concentrations in the most attractive portions of the salar range from 500
ppm to 4700 ppm.
Salar del Rincn: We believe development plans are on hold. As in the Salar de
Uyuni (and Salar de Atacama to a lesser extent), brine would have to be pre-treated
to remove magnesium.
Salar del Olaroz: Orocobre aiming to start production here mid-2014. Relatively
small resource, but Li concentration around 800 ppm with relatively low Mg:Li ratio.
Potential production of 17,500 tons/year, and Toyota Tsusho holds a 25% stake in
Orocobre's project.
Silver Peak/Clayton Valley: Li concentration was 360 ppm when production began
in 1966, now down to 200 ppm (corresponds to a decline of about 1.4% per year, as-
suming the rate is linear). Evaporation rate is ~40% that of Salar de Atacama.
HISTORY:
1817 - Lithium is discovered.
1855 - Lithium is frst prepared as a free metal (in meaningful quantities).
1879 - Lithium compounds frst used in specialty glass.
1886 - Lithium salts used as additives in aluminum electrolysis.
1923 - Industrial production of lithium carbonate, lithium chloride, and lithium metal
begins.
1940s & 1950s - Lithium's properties are investigated and exploited for wartime use,
including use of lithium hydride as a source of hydrogen for emergency sig-
naling balloons, grease using lithium stearate for high- and low-temperature
applications, and lithium-containing ceramic (pyroceram) used later in rockets
and spacecraft.
1953 - Lithium hydroxide used to make lithium-6 isotope for the hydrogen bomb;
government is largest consumer of lithium until roughly 1958.
Late 1950s - Signifcant overcapacity and new technology (read: cheap lithium) leads
to increasing civilian applications for lithium, including ceramics, lubricants,
aluminum reduction, and pharmaceuticals. FMC and Chemetall (was Foote,
now owned by ROC) are key U.S. producers of lithium carbonate and other
derivatives, using purchased lithium minerals and spodumene mines in North
Carolina.
1966 - Chemetall begins Silver Peak brine operation.
1984 - Chemetall begins brine operation in Salar de Atacama.
1995 - FMC purchases Salar de Hombre Muerto.
1996 - Lithium-ion battery sales exceed $1B and account for 1/3 of the global re-
chargeable battery market (up from less than $500M and 1/10 of the market
the prior year).
1997 - SQM begins operations in Salar de Atacama, eventually supplying the market
with 9,000 tons of lithium carbonate at sharply reduced prices, as incremental
production is now brine-based rather than ore-based.
1998 - FMC and Chemetall close North Carolina spodumene facilities.
2004 - Lithium carbonate prices (and quality requirements) begin to increase in re-
sponse to demand for lithium-ion batteries.
2007 - Lithium-ion battery sales exceed $5B, now accounting for 75% of the global
rechargeable battery market.
2014 - Tesla announces long-term plans to build a $5B gigafactory with partner
Panasonic capable of producing 50 GWh of batteries to supply 500,000 Tesla
vehicles by 2020. The company expects to deliver 35,000 Model S EVs in
2014.
Defnitions:
EV: Electric Vehicle. These vehicles have no internal combustion engine, and must
be recharged via external electricity. Typical battery capacity is 20+ kWh.
HEV: Hybrid Electric Vehicle. These vehicles use internal combustion engines and
also have an electric motor drivetrain, usually for low-power situations. Typically
these vehicles can recharge the batteries with regenerative braking, and can shut
down the engine while idling to reduce emissions and conserve fuel. Typical battery
capacity is 1 to 2 kWh.
kWh: Kilowatt Hour = 1000 watts for 1 hour. 1 kWh is enough power to light a 100-
watt light bulb for 10 hours (or 10 such bulbs for 1 hour).
LCE: Lithium Carbonate Equivalent. 1 pound of lithium carbonate equals 0.19 pounds
of lithium (i.e. lithium carbonate is 19% lithium).
LiB: Lithium-ion Battery.
Mg:Li ratio: Ratio of magnesium to lithium in a brine source. The higher the ratio, the
more diffcult (and therefore costly) the brine is to process into purifed lithium prod-
ucts.
PHEV: Plug-in Hybrid Electric Vehicle. These vehicles have an internal combustion
engine solely for charging the battery pack during longer trips. The battery is also
charged by plugging into a charging station. Typical battery capacity is 10 to 20 kWh.
We consider the term HEV/EV inclusive of PHEVs.
ppm: Parts Per Million. 10,000 ppm = 1%.
Primary battery: A non-rechargeable battery, manufactured in a charged state and
discharged, then discarded.
Secondary battery: A rechargeable battery, in which charge can be restored after
discharging.
IMPORTANT DISCLOSURES AND CERTIFICATIONS
PRICE, RATING, AND TARGET PRICE HISTORY*
FMC Corp.
Key Date Close Target Rating
1 3/30/2012 $52.93 E
Rockwood Holdings
Key Date Close Target Rating
1 8/2/2012 $43.84 $60.00 O
2 10/25/2012 $47.35 E
3 2/25/2013 $58.85 $75.00 O
4 8/6/2013 $66.34 $78.00 O
5 11/13/2013 $70.94 $82.00 O
6 3/4/2014 $81.65 $93.00 O
*12-month price targets, if any, are effective with respect to the dates on which they are issued. First Analysis
Securities Corp. does not provide 12-month price targets for stocks rated equal-weight or underweight. It usually
provides 12-month price targets for stocks rated overweight. The data in this chart are current as of the last
trading date prior to the date of this report.
ANALYST CERTIFICATION:
I, Michael J. Harrison, attest the views expressed in this document accurately reflect my personal views about
the subject securities and issuers. I further attest no part of my compensation was, is, or will be, directly or
indirectly, related to the specific recommendations or views expressed by me herein.
SPECIFIC DISCLOSURES:
Chemical & Mining Co. of Chile: None.
FMC Corp.: FASC expects to receive or intends to seek compensation for investment banking services from
this company within the three months following the publication date of this document.
Galaxy Resources: None.
Orocobre Ltd.: FASC expects to receive or intends to seek compensation for investment banking services from
this company within the three months following the publication date of this document.
Rockwood Holdings: None.
OTHER DISCLOSURES:
The compensation of the research analyst(s) principally responsible for the preparation of this document is
indirectly based on (among other factors) the general investment banking revenue of FASC. FASC considers all
the companies covered in its research reports to be potential clients.
RATINGS DEFINITIONS*:
Overweight (O): Purchase shares to establish an overweighted position: Stock price expected to perform better
than the S&P 500 over the next 12 months.
Equal-weight (E): Hold shares to maintain an equal-weighted position: Stock price expected to perform in line
with the S&P 500 over the next 12 months.
Underweight (U): Sell shares to establish an underweighted position: Stock price expected to perform worse
than the S&P 500 over the next 12 months.
*Stock target prices may at times be inconsistent with these definitions due to short-term stock price volatility
that may not reflect large-holder/buyer valuations of the security.
DISTRIBUTION OF RATINGS:
The following was the distribution of ratings for companies rated by FASC as of 3/31/2014: 38% had buy
(overweight) ratings, 61% had hold/neutral (equal-weight) ratings, and 2% had sell (underweight) ratings. Also
as of 3/31/2014, FASC had provided, within the prior 12 months, investment banking services to 13% of the
companies rated that had buy (overweight) ratings, 0% of the companies rated that had hold (equal-weight)
ratings, and 0% of the companies rated that had sell (underweight) ratings. For purposes of the FINRA ratings
distribution disclosure requirements, our stock ratings of overweight, equal-weight, and underweight most
closely correspond to buy, hold, and sell, respectively. Please refer to "RATINGS DEFINITIONS" above for an
explanation of the FASC rating system.
USE OF THIS DOCUMENT:
Investors should consider this document as only a single factor in making their investment decision. Past
performance and any projections herein should not be taken as an indication or guarantee of future
performance. With the exception of information about FASC, the information contained herein was obtained
from sources we believe reliable, but we do not guarantee its accuracy. As a subscriber or prospective
subscriber, you have agreed not to provide this document in any form to any person other than employees of
your immediate organization. FASC is a broker-dealer registered with FINRA and member SIPC. It provides
research to its institutional clients as a service in connection with its other business activities. This document is
provided for informational purposes only. Neither the information nor any opinion expressed constitutes a
solicitation by us of the purchase or sale of any securities. More information is available on request from FASC
800-866-3272. Copyright 2014 First Analysis Securities Corp.
To residents of Canada: The contents hereof are intended solely for the use of, and may be only be issued or
passed on to, persons to whom FASC is entitled to distribute this document under applicable Canadian
securities laws.
To residents of the United Kingdom: This document, which does not constitute an offer of, or an invitation by or
on behalf of any person to subscribe for or purchase, any shares or other securities in any of the companies
mentioned in this document, is for distribution in the UK only to persons who fall within any one or more of the
categories of persons referred to in Article 8 of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) (No. 2) Order 1995 (SI 1995/1536) or in Article 11 of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 (SI 1996/1586).
ABBREVIATIONS AND ACRONYMS: The meaning of the following abbreviations and acronyms has been
identified as not common knowledge, and we therefore provide these explanations. DCF: Discounted cash flow
(model). DSOs: Days sales outstanding. EBITDA: Earnings before interest, taxes, depreciation, and
amortization. EV: Enterprise value. G&A: General and administrative (expense). OEM: Original equipment
manufacturer. R&D: Research and development (expense). SG&A: Selling, general, and administrative
(expense).
If you want to be removed from our distribution list entirely, please e-mail to optout@firstanalysis.com. If you
want to modify your preferences for which e-mails you receive, please e-mail djs@firstanalysis.com.
Online Research: www.research-driven.com
Research: (800) 866-3272 Trading: (800) 322-3272 (312) 258-0660
One South Wacker Drive Suite 3900 Chicago, IL 60606
First Analysis Securities Equity Research
Health Care Productivity
Broadband Enabled Businesses -
IT Applications
Broadband Enabled Businesses -
Outsourced Services Clean-Tech / Chemicals
Health care IT
Frank Sparacino
fsparacino@frstanalysis.com
Life science technology
Tracy Marshbanks
tmarshbanks@frstanalysis.com
Steven Schwartz
sschwartz@frstanalysis.com
Clinical research organizations
Todd Van Fleet
tvanfeet@frstanalysis.com
Animal health
James Macdonald
jmacdonald@frstanalysis.com
Transaction processing
Lawrence Berlin
lberlin@frstanalysis.com
Network security
Craig Nankervis
cnankervis@frstanalysis.com
CRM optimization
Craig Nankervis
cnankervis@frstanalysis.com
Business intelligence
Frank Sparacino
fsparacino@frstanalysis.com
Education / HR technology
Corey Greendale
cgreendale@frstanalysis.com
Wireless / infrastructure
Howard Smith
hsmith@frstanalysis.com
Lawrence Berlin
Internet of things / M2M
Howard Smith
Education / knowledge services
Corey Greendale
HR & accounting services
James Macdonald
jmacdonald@frstanalysis.com
Accounts receivable management
Lawrence Berlin
Contact center services
Howard Smith
Digital media, marketing services
Todd Van Fleet
tvanfeet@frstanalysis.com
Workforce planning and optimization
Corey Greendale
Resource management
Corey Greendale
Energy related
Michael Harrison
mharrison@frstanalysis.com
Steven Schwartz
Water
Michael Harrison
Steven Schwartz
Specialty chemicals
Michael Harrison
Steven Schwartz
Tracy Marshbanks
Renewable chemicals
Tracy Marshbanks
Michael Harrison

First Analysis Lithium Update June 2014

Enviado por

Dados do documento

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

First Analysis Lithium Update June 2014

Enviado por

Direitos autorais:

Formatos disponíveis

Online Research: www.research-driven.

Você também pode gostar