It’s other peoples’ supply that matters here
For me to say that E3 Lithium’s (OTCQX:EEMMF) prospects depend upon your view of the lithium market is both clearly true – it’s a miner, of course prospects depend upon the market – and also not very helpful. Because it’s a miner so of course its prospects depend upon the market for the material it produces.
But there’s a little more here than just that statement of the blindingly obvious. E3 is a currently non-producing lithium miner. There’s no real technological reason why it shouldn’t become a producing one. But whether it will depends upon what people think about that market in the near and middle-distance future. Once the decision is taken to produce, and financed, then we get a slightly different set of questions but the answer still depend – but differently – upon that future marketplace.
The mining basics
E3 Lithium is to use direct lithium extraction from underground brines. So we’ve an obvious technological question here, will this work? The answer to that is yes. Not just – for me at least – because the company tells us so. Nor only that their test plants seems to work. I’ve also that special secret sauce of a bit of market detail. People developing DLE techs have come to me for my advice. No, not upon lithium, my knowledge of the subject isn’t that deep. But as to whether the same sorts of membranes and extractions might be of use in rare earths. The answer is maybe but they hadn’t really understood the original question (extracting REs from solution isn’t the difficult bit, it’s extracting each RE separately from solution which is). But, obviously, such discussions gave me the chance to find out whether DLE works for lithium – yes.
Sure, of course, it’s still possible for any one implementation to go wrong, but the tech itself, yes, this works and it’s ready for prime time.
The other technical mining bits
Yes, there’s lithium in the aquifer E3 wants to extract from, the chemistry of what they do then all makes sense and so on. I wouldn’t say “I approve” because as I say, I’m not expert enough to be able to do so. But there’s certainly nothing there which makes me suck my teeth or think that more explanation is necessary.
So, in this sense, I’m left with only pondering E3 on the basis of the market for their production, that lithium market. Their claimed costs, tech, source mineral and so on all look good, or at least reasonable enough, to me.
E3 Lithium’s accounts
Well, there’s not a great deal to go on.
They’ve done the test work, have as far as I can see a reasonable claim to the resource they want to mine, seem ready to roll. But they’re clearly not producing here. So, the question is whether they will make that next step. Be able to finance the cash/capital to go into full production. I tend to think they probably will be that’s not really the question that faces us. It’s whether we want to be part of that ride.
And, well, I’m hesitant.
Clearly, as part of their planning to raise the money to go into production they’ve an estimate of market price for what they will produce:
That is, as the cool kids say these days about old white guys like me, problematic. Now, whether that’s the price they require to gain a positive NPV, or that’s their actual production price isn’t wholly clear. But that also doesn’t matter. Because:
As we can see the futures price for this lithium is below the E3 Lithium price assumption – or need, whichever.
Now, it is true that this futures price is very boring, entirely static for a couple of years out. That’s almost certainly because it’s not a very liquid contract. We should also think about the fact that there are different lithiums – the 6% concentrate from a spodumene mine, the hydroxide as here and so on. But this is the same lithium salt as E3 Lithium intends to produce.
So, the output price is below their assumption. Whether that’s the assumption that gives the NPV, or their actual production cost. So, that doesn’t look good. Maybe they’re not going to gain their finance and therefore it’s pretty much a bust from here on in.
But that’s not the way to think of it. For we’re all really very aware that lithium consumption is going to rise in the years to come. So, we might think the price will rise. Which gives us this, again from E3 lithium:
OK, so lithium is currently oversupplied, which is why the price is down 85% and more over the past 20 months. But it’s really going to be in short supply in the years to come. Therefore the price is going to soar again.
This could be true, but…
For us to find the E3 Lithium story to be interesting this is what we’ve got to believe. Not just that lithium demand is going to rise – and I think that’s obvious enough – but that lithium is going to be in undersupply. Which is what is going to drive the price up. After all, E3 does need a higher price than now as they themselves say.
And, well, I’m not sure.
Yes, obviously, the lithium price does move around. I’ve written here about Altura, which went bust having been financed during the last lithium boom. As I’ve pointed out elsewhere this was also the mine that made Pilbara’s fortune. From bust to 50% net margins on a couple of billion $ a year. Riding the price cycles is vital in these minor metals.
But that just means we’ve got to be as careful as we can about what we believe those future prices are going to be.
So, if demand rises, then why won’t price?
This is where I get a lot more handwavey. Even, start to display my prejudices about how markets work. If you don’t agree with this bit then that’s fine, don’t do so.
I’ve written here about Core Lithium. As it turned out, I was right, but perhaps not for quite the right reason. Perfectly respectable spodumene mine that went into production. It’s now on care and maintenance – because the Li price has fallen so far that mining is a loss making enterprise for them.
The thing we’ve got to understand about mines is that there are two sets of costs. There’s building the mine, capital investment. Then there’re operating costs. Altura did just fine on operating costs, it was paying back the financing of the capital costs that busted them.
More normally we think of the capital costs as influencing the decision to finance and open the mine. But once that has happened they’re sunk costs. We’ve spent it, we can never get it back whatever we do about keeping the mine open or not. So, capital costs influence the decision to open the mine but not to keep it running, or not. Whether, having opened, we keep running it depends upon the operating costs only.
This is an entirely standard economic view of corporate decision making by the way. Nothing odd about this at all. Once we’ve dug the hole then what matters for the decision about production is whether we lose money, leaving aside those hole costs, by continuing to mine. Again, Altura. Pilbara didn’t close the mine, it was just that those who had financed the hole lost their money.
OK, so Core Lithium was financed to open, is now on care and maintenance. If the lithium price rises in any substantial manner then clearly that mine will reopen. It’ll do so on the basis of Opex, not Capex too.
Now my contention – which is hugely arguable, I agree – is that there’s a lot of that potential lithium production in this situation. Somewhere between ready to finance and go into production and as at Core, actually capital financed and currently idling. Which means that while I am willing to agree that while lithium demand will rise (my disbelief that it’s going to rise as much as some think is another conversation for another time) I don’t think the gap between that and supply is going to be as large as some are predicting. Which, logically, means that I don’t think we’re going to have another price surge.
To put this another way. Sure, OK, EVs are going to mean much more lithium usage. Which means we need more mines, etc. But the necessary work to have more mines has already been done. This price surge of the past few years – followed by this decline – has already done all that work. Now, because I’m a resolute free marketeer, that accords with my prejudices and it’s even possible to say that that’s why I think this way. So, you know, you can do so if you wish.
But what if it is actually true? There’s a laddie around here who has been tracking lithium juniors (i.e., companies looking for Li) and last time I looked at his list there were 300 of ’em. That vast surge of exploration, technological experimentation, tapping rocks with hammers, that was necessary to boost lithium production to meet EV demand has already happened that is.
At very minimum, my position would be that the supply/demand mismatch being predicted by E3 is very much overstated. Therefore, so is any implication about price.
Why I could be wrong
Sure, I might have that supply/demand imbalance entirely wrong. It is my opinion, nothing else, that E3 are grossly overstating it. The lithium price, therefore the margins from mining it, depend on exactly that point. So, who’s right makes, or breaks, the case.
My opinion
I think – think only – that estimates of Li demand are overblown. I think battery tech is going to demand less material, don’t think EVs are going to take the entire market and insist that recycling is going to be important real soon now.
But none of those are the base of my worry here. The potential lithium mining already baked into the system makes me between think and insist that we’re not going to see another price boom because of the claimed here mismatch between demand and supply.
The investor view
Well, that depends upon whether you believe my view of E3. Or something in between and so on. As to advice from me about E3 – or any other lithium miner to be honest – I’d simply suggest going and doing something else. I think the sector has had its day and that’s that.
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