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10 February 2020

Resources Insider Issue 2

Robin Bromby

Lithium short-term weakness but still the go-to element for EV batteries

China may be stunned and reeling due to the coronavirus, but that country’s plan to control the supply chain for electric vehicles seems to be still on track. 

At the end of last week, Ganfeng Lithium confirmed it will pay US$16 million to boost its holding in a Argentinian project to the all important 51%, leaving Vancouver-based Lithium Americas as the minority holder. (Lithium America’s main project is a lithium deposit in Nevada).

The Canadians have become a little nervous about the new government in Buenos Aires (power has reverted to the Peronistas who favour heavy government intervention) and say they feel Nevada is a better place to spend their money.

Not that it matters all that much — Ganfeng is the largest shareholder in Lithium Americas.

What Ganfeng is signalling is that it is not fazed by the current nervousness about lithium stocks given the seemingly inexorable move to EVs — and last week even Boris Johnson buckled, bringing forward the planned date for banning all petrol and diesel cars in the UK (and, according to The Financial Times, causing an explosion of online searches in Britain for information about EVs).

Of course, we have read many reports about possible substitutes for lithium in those all-important batteries, but none of these has yet gained traction. Indeed, last week came the news that Mercedes-Benz is now working with battery metal specialist Hydro-Quebec to improve EV efficiency, the focus being on solid-state lithium metal batteries, considered by Mercedes to be superior to lithium-ion ones.

There was a report at the weekend, too, that the German government is alarmed at China’s strong lead in battery technology — after all, the battery accounts for 45% of the EV’s cost, according to the report.

 

 

The Berlin government has so far pledged €1 billion to help to get battery plants going, Germany wanting to capture 30% of global production.

However, it looks it will need to do more than that to get companies such as Bosch and Daimler to grapple with battery production.

 

Argentine brine projects get a second wind

Even with Argentine’s presidential election result knocking investor sentiment, London-based resources consultants Hallgarten & Co are backing Australia’s Lake Resources (ASX:LKE) in the lithium stakes.

Brines, as opposed to spodumenes, are seen by them as the safer and more reliable way to get into production. Plus, brine projects are less likely to have major capex blowouts.

Hallgarten analyst Christopher Ecclestone, who in 1991 founded the Buenos Aires Trust Company in the Argentine capital and ran it for 10 years, notes that, when it came to lithium, “Chile managed to again shoot itself in the foot with a degree of self-confusion as to whether it actually wanted development of its lithium potential”.

Now that has spurred interest across the border. “All of a sudden all the new projects are in Argentina and being backed by major players, irrespective of the political swings and roundabouts east of the Andes,” he writes.

Ecclestone is focusing on Lake Resources, which has the largest lease holding in the country — close to 2,000 sq km of lithium brine projects and all 100% controlled.

He narrows in on the 690 sq km Kachi project; in November 2018 Lake announced a maiden JORC at Kachi of 4.4 million tonnes on contained lithium carbonate (LCE), thus ranking the deposit as one of the world’s top 10 brine resources.

Ecclestone notes that Lake has appointed the London-based firm SD Capital Solutions to raise debt funding up to US$25 million to cover the definitive feasibility study, permitting and lithium pre-production.

He hopes that US$25m will allow Lake to “break free”.

 

Two views on short-term future for metals

Capital Economics of London is hoping for some better times ahead. Chief commodities economist Caroline Bain and her team say of the coronavirus impact that, as that virus is brought under control, the recent price drops for metals will reverse (although allowing that if China’s economy remains locked down for many months, prices could yet fall further). But Bain is picking a strong rebound.

Their picks are lead and nickel. The price of lead had already collapsed long before the virus outbreak; nickel should face supply constraints (mainly Indonesia’s new export ban) which will boost prices. But, on the other hand, the team is particularly bearish on iron ore and steel demand.

Capital’s forecasts are reasonably benign, comparing the price on February 6 with those expected in the December 2020 quarter (US$/tonnes):

                                                February 6                                         Q4

 

Copper                                             5,726                                     6,600

Cobalt                                            34,064                                   35,000

Iron ore                                               83                                          70

Lead                                               1,844                                      2,100

Zinc                                               2,205                                       2,200

Nickel                                           13,010                                     15,000

But, before you get too comfortable and relaxed, listen to the always provocative economics columnist at London’s Daily Telegraph, Ambrose Evans-Pritchard.

“The workshop of the world is closed … Make GDP forecasts if you dare,” he wrote at the weekend. “China is on total-war footing”, he adds, likening it to 1937 when Japan declared war on China.

More than 80% of Chinese manufacturing is closed, and he accuses the markets of being “badly unhinged”, as he characterised the market euphoria on Wednesday at reports of two new wonder drugs from Zhejiang University. These anti-virals, even if they work, could not ready in time to avert serious economic upheaval.

He argues that the scale of disruption in China is already staggering: Hyundai closing its South Korean plants for lack of components from China, Apple’s supplier Foxconn stopping production and the price collapse in crude oil the worst since the implosion of Lehman Brothers. (There is news early Monday that Foxconn may be allowed to reopen soon.)

“I can only marvel at analysts suggesting that the infection rate may be tailing off based on each day’s official data,” Evans-Pritchard continues. “Are they aware of the astonishing accounts of Kafkaesque reality in Wuhan, Huanggang, and soon no doubt the 35-million strong megapolis of Chongqing where Britain has just closed its consulate?”  (The British have also closed their consulates in Shanghai, Wuhan and Guangzhou.)

“We are in treacherous waters. The People’s Bank can no longer flick its fingers and ignite instant growth,” he adds.

 

Gold miners go for old

With so much of the remaining gold in the ground now way down deep or in jurisdictions that are a bit iffy, what do juniors do?

Well, it seems they are dusting off old files and looking for what the old-timers left behind. And not just the old-timers, as a couple of players find that the change in the gold price has made them want to go where earlier explorers felt they could not afford to tread.

Take Magnetic Resources (ASX:MAU). Its most recent presentation points out that some parts of its HN9 gold zone in the Leonora-Laverton district were drilled by previous companies between 1986 and 2001. But prices were a lot lower then (averaging US$367.53/oz in 1986 and US$278.98/oz in 1999). But in Aussie dollar terms the price has gone through A$2,330/oz. It’s a whole new ball game now.

Likewise with 3D Resources (ASX:DDD). It recently took an option over the old Adelong gold field near Gundagai, NSW. The historic late-19th century operation was drilled extensively in the 1980s without leading to further mining. It’s another possible revival story.

Similarly with Kula Gold (ASX:KGD). It has applied for the Airfield project near Marvel Loch in Western Australia. They did a file search and found that the former Sons of Gwalia explored the tenements in the 1980s, but anomalies located then were never followed up. The Marvel Loch gold mining district has seen many historic mining operations.

Another Perth outfit, Hawkstone Mining (ASX:HWK) has picked up the ground in Nevada hosting the old Lone Pine mine — last worked in 1907. It was assessed in 1935 by an explorer who reckoned that he had a resource grading an average (and impressive) 18.06 grams a tonne.

Nothing much since then. But keep in mind two factors.

One, there was a huge flurry of gold prospecting in the 1930s depression in the US as unemployed workers tried to scrape a living. But not that much new mining followed.

When the war began, the US mining industry did ratchet up gold output: by 1942 gold was being mined at peak rates and taking labour, equipment and shipping space needed elsewhere. Time magazine harrumphed that the British Empire had 500,000 workers employed producing gold, while the United States had 55,000.

As to the latter, President Roosevelt would soon see to that: in 1942 he ordered closed all gold mines in the country on the grounds that mining gold was not a war priority. It took a long time before gold output recovered and no doubt much information about exploration was forgotten.

 

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