Tesla deal shows wall of demand coming at Australian lithium producers
Tesla’s commitment today to buy lithium which it won’t get for three years, and from a project still subject to feasibility studies, speaks volumes about the demand set to hit WA lithium producers. Plus, Sipa’s cracking JV with Rio Tinto highlights the immense potential of its base metals project.
Doubts expressed by some big name investment banks and others that over-supply would kill off the lithium boom have been swept aside in fine fashion by Kidman (KDR) and the leading marque for electric vehicles and battery storage of renewable energy, Elon Musk’s Tesla.
Having said that, the point of difference here is we’re talking about battery grade lithium which sells for anywhere between $US12,000 and $US20,000 at the moment, not the direct ship ore and spodumene concentrates being shipped out of Western Australia by others for $US100/t and $US900/t respectively.
Kidman has just signed a binding take-or-pay, fixed price, three year lithium hydroxide supply deal with Tesla, with two three year term options.
The other commercial terms are “strictly confidential’’ but it has got to be assumed Kidman has retained the right to negotiate the price in the last year of the first three year contract.
If it doesn’t like the price, it would presumably get the right to shop the volumes around the market, giving Tesla a first right of refusal.
So much for the mechanics of the deal. More interesting is what it says about the wall of demand coming at Western Australia’s lithium sector from the world’s auto makers, and lithium battery makers in general.
How come? Why else would Tesla agree to a take-or-pay and fixed price deal where first production of both mine product (Mt Holland) and lithium hydroxide (Kwinana) are still subject to feasibility studies.
Mt Holland is clearly a Tier 1 resource so it will be developed. Same goes for the Kwinana refinery proposal where margins on all-in sustaining costs of say $US6,000/t for a $US12k-$US20K/t product are as tempting as things get.
But the point here is that it will probably be 2021 before Tesla gets its product from the Kwinana plant. So it is concerned enough now about securing future (non-Chinese) supplies of battery grade material to be signing for fixed price supply, three years out. That says something about just how tight things are in the battery grade material space.
The Tesla agreement was said to be “less’’ than 25% of Kidman’s 50% share of the planned 44,000tpa Kwinana refinery, a 50:50 joint venture with Chile’s lithium king SQM, with the 50:50 arrangement mirrored at Mt Holland. Kidman kept the rights to market its share of lithium hydroxide separately, the Telsa deal being its first.
On the basis that it secures offtakes covering another 50% of its share of planned output by year end, and floats in the spot market with the remaining 25% share, Kidman is now in a much stronger position to secure financing for its participation in the planned refinery. It is not easy to make battery grade material but having SQM involved – it accounts for 20% of current global lithium supply – is something else which will relax lenders.
Forming the 50:50 integrated project with SQM was all about ensuring Kidman was at the high end of the value chain. Tesla’s arrival validates that, as does Kidman’s share price out- performance compared with the less integrated lithium players. Its shares have risen from 40c a year ago to $2.22 this week.
The pressing need for the mining majors to get cracking on finding their next Tier 1 deposits – wherever they may be – hit home during the week when Rio Tinto struck an earn-in deal with exploration junior Sipa Resources (ASX:SRI).
The deal could, potentially at least, result in Rio funding $US57m in exploration and paying Sipa $US2m to earn a 75% interest in Sipa’s Kitgum-Bader base metals project in northern Uganda.
Given Rio’s recent dramas in Guinea (iron ore) and Mozambique (coal), it’s a credit to Rio that it has not been scared off from doing new African deals all together. It goes to the group’s long-held strategy of maintaining a pipeline of early stage projects that could make the big time and its understanding it has to go where the opportunities are.
Enough on Rio. The deal is cracker for little Sipa with its 1.1c share price and $12m market cap. Not that you would come to that conclusion on the market’s lacklustre response to Monday’s announcement of the Rio coup.
Sipa briefly ran to 1.4c before coming back to the princely price of 1.1c. That’s seriously weird given one of the world’s biggest miners and best explorers has just endorsed Kitgum-Bader’s potential to shape up in to a major base metals province.
Up until Monday’s deal, the Ugandan play was viewed by the market as Sipa’s second-ranked project to its advancing copper-gold exploration project in WA’s North Paterson, an area which apropos of nothing, is also an area targeted by Rio in its own right and in a joint venture with another junior.
So on that basis, news on Thursday that Sipa’s 2018 exploration program is about to kick off in the North Paterson is enough in itself to create some interest in the months ahead for a stock trading at 1.1c.
Kitgum-Bader is going to be slower burn. But if Rio thinks it’s worth a shot, the wait could be worth it. Initially, Rio can earn a 51% interest by spending $US12m on exploration within five years, including a minimum commitment of $US2m.
So it’s framed for Rio to have a look-see and then step up big time should it think Kitgum-Bader has legs as a new base metals province.
Previous work by Sipa – it will initially manage the exploration activities – suggests it could well have that sort of potential.
Sipa has previously notched up two discoveries in 2014 and 2015 - Akelikongo (nickel-copper) and Pamwa (lead-zinc-silver).
On Sipa’s reckoning, the intrusive-hosted nickel-copper sulphide mineralisation at Akelikongo is “one of the most significant recent nickel sulphide discoveries globally, exhibiting strong similarities to major intrusive-hosted nickel orebodies such as Nova, Raglan and Voisey’s Bay”.
Presumably there is agreement on that from Rio. The initial focus of exploration will be detailed gravity surveying over several prospective ultramafic intrusive complexes on a regional basis, followed by drilling later in 2018.
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One of Australia’s leading business journalists, Barry FitzGerald, highlights the issues, opportunities and challenges for small and mid-cap resources stocks, and most recently penned his column for The Australian newspaper.
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