The Fed’s Elusive Respite, Germany Rejects Investment Plan, & Lithium Inventory Cycle
MARKETS UPDATE
Pity those who planned to trade around the Fed’s Wednesday decision. The 50bp cut first sent the market up before seeing it crash and close in negative territory. Gold followed a similar pattern before being salvaged by overnight Asian trading. Ex-post cogitation points to the above-consensus quantum of the cut, indicating a sharper US economy slowdown than commonly assumed. Interestingly, while critical minerals equities in North America followed the broader market with the meh mode, the sector's Australian, Chinese, and Japanese equities enjoyed a solid day on the back of the Fed's move. Dollar losses have been uneven – with the Aussie dollar benefiting the most. It is too early to say if this liquidity injection redirects the downward trajectory of the critical minerals sector, as the flare-up lasted exactly one trading day. For now, the MVIS Rare Earths/Strategic Metals Index remains on track for its fifth (!) straight quarterly loss. (1)
GEOPOLITICAL INSIGHTS
Ripples are still spreading from Mario Draghi’s report to the European Commission on the continent’s competitiveness. Critical minerals, clean energy, carmaking, and defense constitute a vital subtext to this report. The former head of the ECB and his team have recognized that Europe’s loss of competitiveness against the bloc’s main rivals is partly due to the continent’s energy dependency and lack of raw materials.
Draghi urges the bloc to develop its advanced technologies, create a plan to meet its climate targets, and boost the defense and security of critical raw materials, labeling the task "an existential challenge." In this emphasis, his program differs somewhat from the plan's original blueprint – penned some six years ago in Le Nouvel Empire, a book by Bruno Le Maire, France's former Minister of Finance and a strong advocate of a Europe-wide budget. By comparison, Draghi’s report is more specific about emissions-intensive industries, such as metals and chemicals, which will require EUR €500 billion over the next 15 years to decarbonize. On top of that, transport investment needs will amount to EUR €100 billion every year between 2031 and 2050. In addition, the EU lacks economies of scale in the telecom and another critical minerals-intensive sector: defense.
The report stipulates that to remain competitive, Europe must boost investment by about 5% of the bloc’s GDP — a level not seen since the end of Les Trente Glorieuses period of high growth half a century ago.
The ambitious move will require the collaterization of debt throughout the bloc, an experiment applied only once, at the depth of the COVID pandemic. This is an anathema for Germany’s fiscal hawks. Germany's Minister of Finance, Christian Lindner, immediately rejected the idea of broadening the continent's credit markets. German politicians seem not to comprehend that the fragmented capital markets and the resulting lack of scale hold back green innovation and make Europe pay rather than profit from the energy transition. German policymakers apparently view a bond market-based solution as more damaging to their liturgy of austerity than reindustrialization on the back of China's investments.
But Chinese communists are too sly to replicate the past mistakes of Siemens, BMW, or BASF, who, in search of market access, transferred their technology to partners in the PRC. Just a week before, the CCP announced that Chinese EV makers could not transfer their cutting-edge battery technology to countries in Europe or other regions. If they are built by Chinese EV makers overseas, factories will, therefore, be nothing more than simple maquiladoras, assembly plants with minimum technological export. The admonition follows the explicit policy declaration from the Third Plenum meeting of Chinese policymakers last July, which tightened control over critical minerals. The readout pledged to “put forward a completely new policy goal of better coordinating the entire minerals value chain, likely reflecting the further heightened supply importance of ‘strategic mineral resources’ for both business and geoeconomic interests.”
Germany’s apparent inability to spot a strategic opportunity here must be distressing for the decision-makers in Brussels, Paris, and Rome. But there is something very Teutonic about this distaste for capital markets. Just as the British Empire fast-tracked the development of credit markets to build its colonial empire in the 18th and 19th centuries, Prussia's ruler, Frederick the Great, managed to conduct his innumerable wars without the use of leverage. Plus ça change…
SUPPLY CHAIN OBSERVATIONS
Besides gold, commodity markets are subject to the phasing of two cycles. One is the inventory cycle, which is not radically different from supply chain linkages in other markets. The second, more long-term commodity cycle reflects the phasing of investment into subsoil reserves. Unlike in other sectors, the investment cycle is only partly driven by demand fluctuations. Mineral reserves are wasting assets, and the inevitable reserve depletion underpins the cycle.
The two cycles are not directly related, given the long duration that separates the final investment decision from the actual production. But the phasing of the two cycles occasionally coincides, generating the coveted "hockey sticks" on the chart, attracting interest from financial investors and, eventually, causing overshooting on the upside, with significant damage to the longer-term health of the market, as this century has already proven multiple times, whether in uranium, nickel, or cobalt.
We have seen some short covering in the lithium space in the last couple of days. Producing or near-production companies have suffered market value losses of up to 70%. Albemarle ranked among the worst performers in the S&P500 in 2023 and is again among the year's losers.
After 18 months of pain in the lithium market and some 30 months of agony in the lithium equity market, it is understandable that investors are impatiently awaiting signals where exactly the volumetrically growing commodity is located on both sinudoids – inventory and investment.
Let us first take a look at the lithium inventory cycle. In China, there is a robust demand for end products (both in terms of EVs and storage). The country is selling one million EVs per month. But what does it mean for inventories upstream from the battery node, which suffers from chronic overcapacity? It appears that inventories of chemical precursors stopped rising in the 1st quarter of this year. They are not falling yet but remain balanced. The result is that the chemical processing levels are no longer exorbitant. However, at the commodity level (e.g., spodumene), the inventory overhang remains considerable for up to 3 months. It is unlikely to rise further at the current prices. Chinese refiners’ apparent preference to operate on a toll basis reflects this nervousness. Just last week, the drop in spodumene prices claimed its first high-profile casualty, CATL’s lepidolite production. The world’s largest battery producer announced last week that it is shutting down its mining operations, equivalent to about 8% of China’s demand. It is interesting because CATL is a systemically critical company in China. The survival of low-quality lepidolite production is possible only thanks to by-product credits, government support, or vertical integration. CATL ticks two of these three boxes. And yet...
Lithium inventory indigestion will take months to clear. But commodity prices usually pick up before a restocking wave begins. And if history rhymes, then recovery in lithium equities should foreshadow such a development by several months.
Outside China, we have seen a slowdown in the pace of downstream demand growth. It now appears that commitments to gigafactories were excessive. We have seen a staccato of delays and mothballing of projects previously announced by Umicore, Stellantis, Mercedes Benz, and BASF. LG Energy Solution's USD $2.3 billion battery storage facility in Arizona has also been put on hold.
Reduced orders for batteries and cathode translate into high inventories of chemicals (up to four weeks). At this node in the value chain, we have seen that Albemarle's USD $1.3 billion lithium refinery in South Carolina work has been suspended. The inventory build-up at the commodity level is also similar to China’s. And, here, too, mining closures have started as well. Last month, Arcadium Lithium announced that Mt Cattlin, a large lithium mine near Ravensthorpe in Western Australia, will be put on care and maintenance. This is still a far cry from the 2019 capacity closures.
One thing is certain: Current pricing (both spodumene and carbonate have slipped further 3% this month) is insufficient to stimulate Western capital into green fields mining development. This lies in the interest of China’s mercantilist policies. By maintaining overproduction at negative margins, the oversupply disincentivizes Western investment and prolongs the investment cycle. The Chinese Communist Party’s response to the post-bubble balance sheet recession has not been to incentivize consumption and borrowing but rather to boost supply into areas that were already overinvested – including electric batteries, electric cars, solar panels, steel, aluminum, and cement – and flood the global markets with these products. That’s from a country that already enjoys a record current account surplus vis-à-vis its main trade partners.
This could be an opportunity for traders with strong balance sheets who could plug the gap by establishing themselves as offtake intermediaries, potentially alleviating miners' financing stress, as they are overdependent on a minimal number of Korean operators. In fact, it is now that smart money should be building a book of future offtake and be able to arbitrage price differentials by the time the investment cycle turns. It's not a question of if but when.
MINING & EXPLORATION NEWS
ASX-listed Ioneer, the fully-financed developer of the lithium-boron Rhyolite Ridge project in Nevada, has finally seen a breakthrough on its permitting path to glory. The Bureau of Land Management (BLM) has published a Final Environmental Impact Statement (EIS). The Final EIS incorporates feedback received during the earlier public comment period and provides decision-makers and the public with detailed information related to the project. Following its formal publication in the Federal Register (as of today), the Final EIS is subject to a statutory waiting period through Monday, October 21, after which a Record of Decision (ROD) can be issued. In addition to the EIS, the US Fish and Wildlife Service has released a biological opinion that concludes that the project will not threaten the endangered Tiehm's buckwheat (a major stumbling block thus far) or adversely modify its critical habitat. The final investment decision is anticipated in December. Curiously, the stock was sold off overnight in Australia. Apparently, 30 days is too long to test the patience of mining investors these days.
Blackrock Mining, the ASX-listed developer of the Mahenge graphite project in Tanzania, signed an agreement for a USD $179 million loan and bank guarantee facilities to fund the future mine. The package is syndicated by the Development Bank of Southern Africa, the Industrial Development Corporation of South Africa, and Tanzania’s CRDB Bank. The package comprises USD $113 million of construction term loan for Mahenge Module 1 and the associated infrastructure, including the 220kV power line from Ifakara to Mahenge, which will be a boon for the entire region. Additionally, it includes USD $20 million in a revolving credit facility for working capital, USD $20 million in a cost overrun facility, and USD $26 million in a bank guarantee facility for a rehabilitation bond. These facilities add to the USD $50 million provided by Korea’s POSCO Holdings, leaving only a sliver to be raised for the total project financing. This is all excellent news for one of the best graphite projects out there. Market reaction? Up 3.9%.
Australia-listed Winsome Resources has published a scoping study for the Adina lithium project in the James Bay region, Quebec. Andina hosts 77.9mt at 1.15 Li2O in total resource, including 61.4mt at 1.14% Li2O in the measured and indicated category. Winsome had previously acquired an unused Renard processing facility, built originally by Stornoway, a diamond company, with sunken capital worth CAD $900 million, according to Winsome. Andina will use Renard’s dense media separation units for spodumene concentration production. The facility is also equipped with a complete dry comminution circuit (crushers, grinders, and ore sorters). The project is designed as an open pit operation with a life of mine of 21 years. The plant is expected to run at 1.7mtpa with 67.2% recoveries, producing 260ktpa of 5.5% spodumene concentrate. All-inclusive sustainable costs are estimated at USD $716 per tonne of concentrate – roughly the current level of prices in China. Development capex will amount to USD $259 million, net of USD $33 million in tax credits for "clean technology manufacturing." Incomprehensibly, the scoping study dared to use utterly unrealistic product prices (USD $1500/t for a 6% spodumene equivalent). You just can’t make it up. The market reacted accordingly.
Western Australian company Larvotto Resources has completed a prefeasibility study to restart and expand operations at the Hillgrove gold antimony mine. Since China’s decision to constrain antimony exports the other day, every other quartz gold producer with traces of antimony has tried to rebrand itself, but Larvotto is for real. The company is fast-tracking the project to target the first production by the end of next year on the back of a low-capex restart (AUD $75 million). The definitive feasibility study is apparently well-advanced. Hillgrove has installed plant capacity of 250ktpa and existing mine infrastructure with ready access to ore with a view to produce gold dore and two concentrates - gold and antimony, resulting in production of 80koz of gold and 5kt of antimony annually for the first seven years. Over AUD $200 million of capital had already been sunken by previous operators. Larvotto’s management seeks to double the capacity to 500ktpa, which will require upgrades to the flow sheet, including a gravity circuit, a secondary crusher, re-grinding, additional flotation cells, and storage for fines.
ASX-listed Encounter Resources has published high-grade niobium results from extensional aircore drilling at the Green and Crean carbonatites, part of the 100%-owned Aileron Project, West Arunta region of Western Australia, not far away from WA1’s Luni deposit. Separately, Encounter’s first pass drilling at Joyce Green has identified 2% niobium pentoxide material over mineralized carbonatite extending over a 2km long strike. The discovery happens to be close to surface, with some intersections reaching over 4% of Nb2O5. Aircore drilling will be followed up by reverse circulation drilling to test depth extensions. West Arunta is among the (few) memorable critical minerals stories of AD 2024.
Weak graphite markets have negatively affected results from Syrah Resources’ Balama mine in Mozambique. The demand for graphite fines remains weak, and the mine’s sold volumes suffered. Balama sold 29.8kt of graphite in the first half of this year, down from 56.3kt in the same period of 2023. The company recorded a post-tax loss of AUD $67 million and a net cash outflow of AUD $40.4 million. Syrah’s Vidalia graphite active anode material (AAM) processing facility in Louisiana, which had previously received a loan from the US Department of Energy, continues to ramp up. However, the company notes that commercial AAM sales have been delayed due to a two-year transition period granted to OEMs in the US for sourcing graphite from Foreign Entity of Concern countries.
London-listed vanadium miner Bushveld Minerals registered significant losses due to lower sales and depressed metal prices. Sales in the first half of the year totaled 949mt (down from 1,428mtV a year before) on the back of lower production at Vametco amid capital constraints and maintenance shutdowns, and less destocking was recorded. The lower sales, in turn, negatively affected all-inclusive sustainable costs, which jumped from USD $30.8/kg in 2023 to USD $42.9/kg. Revenues amounted to USD $25.6 million (vs USD $55.1 million in 2023), reflecting both lower sales volumes and realized vanadium prices. Realized ferrovanadium prices averaged $26.9/kgV ($38.6/kgV during the first half of 2023), depressed by a slowing outlook for steel demand in China and continued material leakage from Russia. Lower volumes are also affected by Vametco operations with Vanchem and are now classified as discontinued assets “held for sale." As Bushveld struggled with liquidity, capital spending was cut significantly to USD $1.9 million. For the entire group, net loss came in at USD $45.0 million (compared to a loss of USD $12.5 million a year before).
London-listed and Namibia-focused Andrada Mining saw its high-grade Lithium Ridge project attract the attention of SQM, Chile’s lithium producer. The Chilean company is earning an initial 40% interest in the project, having spent an initial USD $0.5 million 'participation fee' followed by an additional USD $1.5 million with an "option to invest USD $20 million over three and a half years, in different stages to earn a 40%” interest. SQM’s spending of the initial US$7m over 18 months will earn it a 30% interest with an additional 10% interest secured by “additional funding of USD $13 million for exploration over a further 24-month period”. Subsequent funding of the DFS will enable SQM to attain up to 50% ownership. Andrada will continue to operate the project during the earn-in period. This is an interesting move by SQM, geographically speaking. The company knows one or two things about operating in the Southern Hemisphere’s dry environments.
London-listed Empire Metals has started diamond drilling at its Thomas and Cosgrove prospects at the Pitfield titanium project in the midwestern part of Western Australia. The core from 1000m will be used both to understand the weathered cap's geological structure and for metallurgical test work. The weathered cap contains anatase, a form of titanium dioxide known for higher CO2 photoreduction than rutile. Empire has identified it as a high-purity, higher-value feedstock potential. The company is exploring the potential for various mineral processing and hydrometallurgical options for processing both the anatase and other titanite ore at Pitfield.
London-listed Atlantic Lithium’s Ewoyaa lithium project in Ghana has seen a 3% addition to its mineral resources, with some increase in confidence (more measured and indicated resources). The update incorporated an additional 30,000m of drilling since the previous update. The fall in lithium prices led to abandoning the plan to conduct early ore processing via modular dense media separation circuit. In other news, the Environmental Protection permit for Ewoyaa has now been approved and granted by Ghana's ‘Environmental Protection Agency. The company is awaiting the Ghanaian parliament's ratification of the mining lease.
London-listed Premier African provided an update on its Zulu lithium project in Zimbabwe. The company has installed a flotation plant whose larger footprint will reduce production costs at the mine gate to USD $500/t, still significantly below the current depressed prices for spodumene. The project was previously thwarted by technical problems, but the management is optimistic about the flotation plant's future performance and counts on revenue derived from tantalum by-product.
London-listed 80 Mile Plc (formerly Bluejay Mining) reported the detection of high concentrations of helium "at surface in selected drill holes" on its Outokumpu licenses in Finland. The company identified the presence of 10.7% helium in the Perttilahti Area of the license, with surface sampling using a portable helium detector yielding results at the surface directly from the historical drill holes. 80 Mile Plc will start a ‘proof of concept’ study to look at the potential for future commercial recovery of helium and hydrogen using the existing deep drill holes.
SOURCES: (1) Market Data from Bloomberg as of 10:00 AM ET, 12 September 2024, in the local currency. (2) Additional data courtesy of Arcadium Lithium Corp. (ALTM US), Contemporary Amperex Technology Co. Ltd. (300750 CH), Chengdu Chemphys Chemical Industry Co. Ltd. (private), Galan Lithium Ltd. (GLN AU), IGO Ltd. (IGO AU), Lithium Americas Corp. (LAC US), Lynas Rare Earths Ltd. (LYC AU), Mineral Resources Ltd. (MIN AU), MP Materials Corp. (MP US), Perpetua Resources Corp. (PPTA US), Piedmont Lithium Inc. (PLL US), Viridis Mining and Minerals Ltd. (VMM AU), and Zijin Mining Group Co. Ltd. (2899 HK).
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