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Why You Should Be Watching Lithium And A Company Worth Keeping An Eye On

By Samuel RaeStock MarketsNov 11, 2016 10:57AM ET
Why You Should Be Watching Lithium And A Company Worth Keeping An Eye On
By Samuel Rae   |  Nov 11, 2016 10:57AM ET
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Lithium companies are attracting a lot of attention right now. The surge in demand for lithium carbonate, the raw material that goes into the production of lithium ion batteries, has already boosted the price of the metal, but this is only the beginning. Big name automakers are taking steps to ensure that they claim a stake in the electronic vehicle (EV) market while it is still young (and in turn, has plenty of potential to expand), and companies like Tesla Motors Inc (NASDAQ:TSLA) are focusing solely on the EV sector, with the goal of dominating the space as and when it matures towards capacity.

The latter expects to get its so-called GigaFactory under way early next year, and this Nevada based EV factory alone will consume close to 100% of the global lithium carbonate supply if it is to meet its targeted annual 500,000 vehicle production rate.

With so much demand, and such a narrow (relative) supply, there are going to be winners and losers in the space. Companies like Tesla will have to pay more for the lithium they require to build the batteries that power their EVs (although the average price of constructing a lithium ion battery should reduce through economies of scale over time). Consumers are likely to remain neutral, as the big producers are already battling to deliver low priced models, and will likely absorb high raw material costs while they carve out market share. Lithium producers – the miners, processors and explorers – will benefit from a higher margin on each unit of raw material they output.

If EVs required gold, or silver, or even something like copper, for their batteries, this situation would serve up an opportunity in the commodities space. Investors could pick up a direct exposure to a rise in the price of gold, for example, by buying bullion. The same applies to silver and copper – take a position through delivery or on the futures market.

With lithium, however, the opportunity, while clear in concept, is not clear in execution.

There's no open market for lithium; no spot price or physical (or electronic) exchange. Prices are tallied on the back of word of mouth reports, primarily out of China, and it's virtually impossible for an investor to take delivery of any substantial amount of the metal, with the same being true for a futures contract.

Exposure to the price rise is available by way of an allocation to one of the big names in the space, Albemarle Corporation (NYSE:ALB), for example, but there are only really four big players, and each has only a limited portion of its operations dedicated to lithium production. As an indirect, risk off exposure, these might make a good option.

For a direct exposure, however, investors need look closer to source.

Tesla is already buying up rights to lithium that has as yet not seen the light of day, and investors wanting to benefit directly from the coming rise need to do the equivalent – take a position in companies that have the rights to as-yet unmined lithium, and hold through mining, processing and, eventually, sale.

Nevada is where Tesla is building its factory, and so far, it's Nevada that the EV giant is staking its claims. A number of companies are battling to pick up lithium claims all over the state right now, and it's going to be these companies that attract the interest of the big EV manufacturers, be it through an early claims agreement or as entities to which early explorers and producers sell raw their resources to.

One company that just picked up some fresh Nevada claims is Horizon Minerals Corp (OTCMKTS:HZNM).

Horizon Minerals is headquartered in Las Vegas, but its claims are spread across Nevada, specifically, within Nevada's Great Basin region. The company acquired the claims as part of an agreement signed early last month, which saw it pick up 1,003 claims covering 20,600 acres of land in the just mentioned Great Basin from an entity called Gold Exploration Management Inc. ("GEM"), which is a private entity controlled by geologist and natural resource exploration expert Mr. David Bending.

As part of the deal, Bending joined Horizon as a member of its board of directors, and Horizon issued GEM 30 million restricted shares of the common stock. Additionally, Bending received (through his controlling interest in GEM) a 2% carried gross production royalty on any mineral production at the claims that transferred to Horizon.

So why is this important?

The claims are broadly broken down into four distinct regions, and each has a United States Geological Survey record suggesting they hold a lithium resource just under the surface. Lithium isn’t like other metals, in the sense that miners and producers don't have to drill through rock to pull it out of the ground; well, not in many cases. Some of it is rock mined, but a large portion can be extracted from just below the surface as part of a lithium brine, which is essentially just a mixture of lithium carbonate, salt water and a few other minerals. A producer can take this lithium brine, pump it into brine pools, and let the sun evaporate the water and separate the various components. A quick pump through what is essentially a large sieve separates the components in question, and the lithium carbonate is ready for sale.

The claims that Horizon picked up as part of the GEM deal are all reported (by way of USGS reports) to contain lithium accessible through this brine extraction method, and that makes the company and its claims attractive for a number of reasons.

First, it reduces the cost of extraction. When early stage natural resource speculators take a position in an explorer like Horizon, they expose themselves to the potential for some pretty substantial dilution. Gold explorers, for example, will generally spend hundreds of millions of dollars tooling and permitting a production facility, mining the target rock formations and then processing what is often nothing more than tons of rock with tiny amounts of gold interspersed in its layers. Shareholders, of course, shoulder this cost by way of accepting dilution (and in turn, value loss) when the company in question raises capital through equity issue.

With brine extraction, the cost demand from claim holder to end product seller is far lower, because the method of extraction is far simpler and – by proxy – cheaper. This reduces a large portion of the risk of an early stage holding, as an investor isn’t exposing themselves to massive dilution by taking a position in advance of the company achieving production capability.

Horizon has a solid management team, and is fleshing out is board with a couple of recent hires to complement Bending's appointment.

Specifically, the company just added Gilberto Arias, a legal executive, to its director roster, with the remit of serving as special negotiator and advisor to the company regarding the acquisition and development of the its lithium assets. Additionally, the company just announced the appointment of Mr. Francisco Alfonso Flores Aguirre, who served as the Mining Minister of the State of Chihuahua, Mexico, to its board of advisors.

The takeaway here is that Horizon is young, but active, and there are a large number of big names circling the space looking for rights to claims. The company is building out its leadership team, suggesting expansion is just around the corner, and backing up this suggestion with the Nevada rights acquisitions announced last month. The risk is rooted in the cost required to develop claims through to production, but this risk is mitigated somewhat by the reduced cost of lithium brine extraction when compared to both rock mining in lithium, and raw material processing in other metals and minerals.

Why You Should Be Watching Lithium And A Company Worth Keeping An Eye On

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Why You Should Be Watching Lithium And A Company Worth Keeping An Eye On

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Arun Lama
Arun Lama Feb 16, 2017 8:16AM ET
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The company expects to release NI 43-101 geological report before this month (Feb) ends and if the report shows that there is the higher availability of lithium in their real estate, then the Horizon Minerals would automatically look attractive. But to be honest, no one knows what the outcome of the report will be.
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Robert Stewart
Robert Stewart Dec 07, 2016 10:39PM ET
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With the growing electric car market, Tesla wants to build 500,000 electric cars by 2018, and they are building massive battery “Gigafactories” to make that possible. China predicts that there will be five million electric cars with lithium-based batteries by 2020. Lithium is preferred by the electric car manufacturers because it has the higher energy density than any other type of batteries. ..Macquarie Research estimates that the demand for lithium already outnumbered the supply in 2015 and the lithium output fell short of demand in 2016. The U.S. Geological Survey concluded that the world has enough known reserves for about 365 years of current global production of about 37,000 tons per year. While 365 years of reserve supply sounds comforting, the demand for lithium will shoot up as the electric vehicles and stationary storage market climbs. There will be a lot of companies producing lithium batteries. In that case, reserve might not last for 365 years. .
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