The Biden victory suggests that America will be more favorable towards electric vehicles moving forward. The UK also recently announced that they were going to phase out and ban the sale of fossil fuel cars by 2030. What’s your outlook for the key battery metals? And which metals give you the most optimism?
I think the outlook for battery or EV metals is really positive, and we make sure that these metals are included as a core part of our resources portfolio. If you look back at the EV metals mini-boom from 2016 to 2018, this was essentially driven by demand in China, because they were so far ahead of the rest of the world in terms of the production and use of electric vehicles. The real beneficiaries at that time included lithium, rare earth elements, nickel, cobalt, etc.
We like to spread our risk. It’s very difficult to pick a winner in the pack because the factors that are contributing to demand are quite different for the different metals and they’re quite fluid in terms of change. We see a really good opportunity in the near term for copper. There are not many really good direct copper-exposed companies, but we see a real surge in demand there, similarly to lithium and rare earth elements.
Rare earth elements are a bit tricky because there are so few players to actually get in, in terms of production, and there are all sorts of technical risks that are associated with those potential producers in the rare earth space. The same thing applies with cobalt in that cobalt was something that people loved a couple of years ago and were scrambling to get on top off. But, it was actually very difficult to pick a company that had good cobalt exposure without taking enormous amounts of technical risks.
Given that cobalt is usually linked with nickel and copper, do you really need to look for a cobalt play? Can you just play the copper or the nickel side?
Because cobalt is pretty much a byproduct in other projects, those projects need to stack up as nickel producers or copper producers for us to make money on the cobalt credits. So, it’s not something that we look for on its own, but if we can look at a good project that includes a really strong cobalt credit, then that would be of interest to us. So cobalt probably falls to the bottom of the list, just because of the difficulty of actually finding that exposure. At the end of the day, it’s a Glencore which is really the cobalt producer, but no one would go and buy Glencore just for its cobalt exposure.
Some of these metals, such as rare earths, are quite technically challenging to process. Looking at lithium, how do you weigh up a project’s technical risk?
This is something we spend a lot of time thinking about at Acorn. My analyst, Karina, and I are both geologists by background, so we think very carefully about the technical aspects.
The lithium deposits, the pegmatites, are some of the most complex mineral systems on the planet. In terms of the magmatic evolution, the process that actually generates those deposits can be considered like the kitchen sink where you have material left over in the magma chamber that is spurted out to become the pegmatite. It has all sorts of junk in there. So when you hear about these minerals, you hear that there’s tantalum, there’s tin, there’s lithium, and there are all these other elements in there too. We find that there are different minerals, different percentages, and different continuity in terms of how those different zones or phases grow. What that means is, just because someone has a learning from one deposit, doesn’t mean it can be applied 100% to another one, because there is incredible complexity in those mineral systems.
This makes resource evaluation, mining, processing, and getting to the end product incredibly complex. When we go and look at these projects, we’re acutely aware of all those potential pitfalls. We think about that and how it’s actually going to cascade through that process.
In the last boom, I can remember the companies that were going around saying that they expect to achieve recoveries of 70, 80, or even 85%. Almost no one is getting recoveries of greater than 60% today. So how can there be this enormous disparity between the forecast recoveries of years ago, compared to the reality of what they’re achieving today? They’re trying to achieve higher recoveries and so higher concentrate grades, which means you drop your recovery. But even if we return to the concentrate grades of a few years ago, the recoveries would never be anywhere near that. And that just reflects the complexity of those mineral systems.
To what extent has there been technical advancements made in the last few years which can hopefully de-risk some of these projects going forward?
There has obviously been a lot of work done, even with the falling price and the capital strain. Companies have put a lot of work into ore sorters. This has been one area that they’ve concentrated on where they can actually crush the material and sort out a lot of the problematic material. Take the spodumene producers for example. Spodumene is one of the most common lithium bearing minerals to mine. It’s a white mineral in a white rock, but it often occurs within a system full of basalt, which is a blue, green rock. And so, the ore sort should be quite simple, just reject the dark material, keep the light material.
But, the basalt actually contains a reasonable amount of iron in it, and it has a similar density to the spodumene. So when you run it through the processing circuit, you actually concentrate up, not just the spodumene, but the basalt too. So you enrich the rock in iron relative to the overall composition. So, you start with an overall rock with maybe 0.5% iron in it, you run it through the processing circuit, but you actually concentrate up both spodumene crystals and basalt, and you can end up with over 1% iron, which is problematic for the refinery. So, there’s a double-edged sword in terms of their processing circuit. That was one of the real challenges that a lot of the spodumene producers faced in the last boom. And so, a big focus has not been on how you can more efficiently separate some of that gang material, the iron-bearing material, like the basalt and other things. There have been advances in terms of reducing other minerals, like the markers that get locked up in the circuit, and just working on running the circuits more efficiently overall.
You’re looking for class one nickel – that’s used for batteries. When you’re thinking about investing, what do you look for in a good nickel project?
At the moment only about 3% of the nickel produced actually goes into the batteries, but that’s an area that’s expected to grow substantially over the next few years. When we think about nickel, we’re thinking about the nickel deposits that can actually be used in that part of the market, as opposed to just any nickel project. There are companies like BHP that are big enough, and have got the capital that they’re modifying their processing circuits so they can take some of these deposits that traditionally haven’t been able to access that part of the market, that they can actually create a product that can. So there are exceptions to the rules, but generally speaking, there are deposits that are suited to the battery market and those that aren’t.
In Australia, the best deposits are the nickel sulfide deposits – the classic deposits you see around Kambalda. Those are the ones we look at. It’s all about going in and understanding the issues with those deposits in terms of the scale, mineability, and ultimately what that’s going to mean in terms of the costs and the volumes that they produce.
The type of ore that they’re mining makes a big difference in terms of the method that is required to process that into a high grade nickel end product. Do you select ores with technical processing in mind?
We think this is really important in terms of ability to sell the product. If you’re aligned too closely with steel production and there is a pull-back, you’re going to get hit quite badly. If the battery market is booming, the companies who are looking for nickel can’t just switch to the dirty product, because of all the contaminants that can get locked up in the batteries. This then touches on another interesting aspect of the discussion, which is scale. When these refineries are producing this material, they don’t just want teaspoons of different material from all over the place. What they’re looking for is a large supply of material of consistent quality over long periods of time. That consistency is really important for the battery manufacturer. They end up paying a premium for a product that they know is reliable as opposed to getting it cheaper from somewhere else, but not being sure about the quality. You just can’t take that risk. And that’s not just for nickel – it’s right across the board.
From the suite of the rare earth elements, which ones do you think have the most promise for use in EVs and will benefit from growth in the EV market?
There are a number of rare earth elements, but Neodymium and Praseodymium (NdPr) are the two that have a really large market potential. Take a 1-megawatt wind turbine, for example, which will require about 200 kilograms of NdPr. Moving forward, we are going to require large amounts of these rare earth elements. And within EVs, they have a multitude of different uses. This is why they’re a real focus at the moment.
The thing about rare earths is they’re not that rare, they’re actually quite common. But the ability to extract them is the real trick because there are differences in minerality of these deposits that are creating issues. It’s not just about grade. It’s some of the other risks in terms of the minerality and the byproducts that come with processing that ore.
There aren’t many companies around who’ve been successful so far at processing.
One company that has been outstanding is Lynas. They benefited from a perfect storm almost a decade ago, when suddenly there was a trading ban with China. Lynas couldn’t send their rare earths there, so they had to look elsewhere. There was a great deposit in West Australia, Mount Weld, for them to start up. And they built their processing plant in Malaysia. But anyone that has been on the journey with Lynas since then has seen the difficulties they’ve faced, not just with the downturn in the commodity price for rare earths, but also the real challenges in terms of starting up that circuit and processing it.
Lynas didn’t have a problem with the asset. It’s just that it is very difficult to actually commission those types of operations and get them up and running. There are other deposits out there, but they’re either lower grade or they may have monazite, which is a mineral that contains the rare earths, but it also contains elevated concentrations of uranium and thorium. So when you split off the rare earths that you want, you’re left with a product which is enriched in uranium and thorium. That is what has caused some of the problems that Lynas has recently faced in terms of that byproduct, which is partly why they’re moving their cracking plant to Kalgoorlie.
Given the long journey and the ups and downs they’ve had, it must be quite intimidating for investors to get into a potential new project.
That’s right. Any company that crosses the line has the potential to go on to be a $3 billion plus company. I’m sure they’d all love to do that. There are a few exceptions, but most of these companies are smaller, with around $50 or a few hundred million market cap. To make that gigantic leap is something that they all aspire to, but it’s very difficult. So then you have to look at other aspects like what China is producing. China produces 75% of the rare earths today, though a lot of that is because they do the back-end processing. But they actually mine around 30% of all rare earths as well.
One of the large reasons for that is that China has a unique type of deposit, which is in these ionic clays, where the rarer elements actually sit as elements or ions on the outside of clay particles. So it’s quite easy for them to strip those metals out, because they’re just sitting as irons on the actual clay particle, and it’s a reasonably simple process to mine and strip those metals off. Whereas others, if it’s in monazite, requires a far more sophisticated and much more capital-intensive process to actually extract the metal.
There are very big differences in deposit types. You can’t just lump them all into one basket and say that every single one of them needs a billion or $2 billion to mine. Some of them can be done cheaply, but there are very few deposits of that style that are recognized around the planet. So, maybe there will be a rush to identify new deposits of that style, which I think would be interesting.
Do they exist outside China?
There are a few examples of companies, like Ionic Rare Earths, but you need to understand the grades, the continuity, whether it actually works, the extraction, etc. So these deposits are actually quite rare. But maybe they’re rare because no one’s ever looked for them? If you’ve never looked for them, you’re not going to know that they exist. There are also companies like Iluka, who are a big mineral sands producer. They have large deposits that are full of monazites.
There are companies out there with large sources of this material, but there is some work to be done in terms of really understanding the processing to efficiently extract the rare earths from those monazites. You might have two monazites, but one can be more enriched in uranium or thorium versus the other. Not all monazites are the same. There are companies that have monazite deposits, but they have relatively low levels of uranium and thorium and others have relatively high levels – it’s a relative thing. So if you pick it up and hold it in your hand, you’re not going to get irradiated or get cancer from it, but in that processing circuit those levels of concentration become important.
And how does the current supply of these metals compare with the forecasted outlook?
The projections now are for a big ramp up. When we think about the wave of demand that’s coming for these metals, it’s not just for electric vehicles, which people can visualize. It’s also for energy storage, wind turbines, and more. Biden’s presidential win will help the U.S move towards more green energy, and Europe already is pushing on that transition to the low carbon economy. And Boris Johnson just announced that the UK is looking to add about two gigawatts of low carbon power generation to the mix. So just think about how many wind turbines that means, and how much Neodymium and Praseodymium that you need for the UK alone in the next five years, before 2025.
At Tesla’s Battery Day, there was a lot of talk from Elon and his team about mining and Tesla looking to have their own primary supply of certain minerals. How do you think this trend of car manufacturers buying mines and controlling their own supply chain will affect the market and the fragmentation of the supply chain? What opportunities does this create for miners and investors?
I’m not too sure where it’s going to go, because you should never doubt Elon Musk. To put their plan in perspective, the biggest mining company in the world is BHP and their plan will make them more than five times the size of BHP. If Musk wants to go and spend a lazy hundred million investigating something, it’s just loose change to him, it’s not important. He continually has these opportunities to go and do something outrageous, which is what he’s got a history of doing. He’s moving into areas where no one would traditionally go and actually being successful.
People love to be part of a winning team, and Tesla, certainly is a winning team at the moment. Tesla actually has the ability to attract quality people to come in and help them in this vision to become a lithium producer. It’s not as crazy as people are suggesting. Now having said that, I still think there are all sorts of risks and challenges. People have started to become a little bit cynical and ask why is Musk doing that? Is it just a way to control the price on an important commodity? No one knows where they are, but he’s picked up tenements in Nevada and is looking to have these very simple environmentally-friendly methods for extracting the minerals. So like I said, if anyone on the planet can do it, it’s Elon Musk. But there are definitely enormous challenges too.
The interesting thing is a week or so after Battery Day, Tesla and Piedmont signed a five-year off-take with a five-year option. So one minute he says, there’s oodles of lithium, we don’t need any more. Then he goes and signs a five, call it 10-year off-take. So, I don’t know whether it’s just all part of his negotiating and trying to keep control on the price. The cynic in me thinks that maybe there’s a little bit more to it. But never write-off Elon Musk. If anyone’s going to move in to that space, it will be him.
There are other car manufacturers who are now also saying that they’re looking to control the supply chain. I know Ford made an announcement recently along those lines.
This just creates more opportunity, and it’s quite an exciting opportunity for investors. Going back to the 2016 to 2018 boom, there were a handful of small producers, then suddenly a sea of explorers and developers appeared. A couple of them crossed the divide and actually started producing some metal.
There has been pull-back over the last couple of years, but I think we’re just getting started again, because this time it’s more of a global phenomenon rather than the China-centric one we saw a couple of years ago. So, that’s what excites me. And it’s not just the car manufacturers getting involved, it’s the energy storage market too. There will be so many other players seeking these metals, which is why we’re quite excited about the opportunity and how it plays out.
The EV market has matured a lot since 2016, where the range of cars is now comparable with a lot of petrol cars. So, whereas before, a lot of the boom was built on hype, now it’s actually built on a potential reality. How long do you expect this next boom to last?
We’re not in the process of calling those sorts of booms or commodity prices. We look at the demand outlook and we look at the supply that’s available. There is quite a bit of mothballed production sitting there, particularly in lithium. And even a few large nickel operations are sitting there mothballed or running under capacity. These could start up very quickly and fills some of those gaps. With the demand outlook that is being forecast, it won’t take too long to reach those levels. And you then have to go back and look at the innovations.
When humans went from using horse and cart to motor vehicles, the adoption rate was very quick, in terms of that initial growth rate that within a decade, that went from 20% to 80%. Everyone wants to be part of a bright new idea, particularly if it’s more economical. So if it is easy to access your power, it’s more economic to have an electric vehicle than a combustion engine vehicle, then that’s it. We’re seeing a number of drivers recognizing climate change risks and wanting to do something about it. There are also government policies coming in, in terms of emission standards, that are helping this adoption.
In the UK, petrol and diesel vehicles will be banned UK from 2030. And from 2035, hybrid vehicles will be banned. So originally, that ban was just in London, but it is now being brought out for all of the UK. So if they’re going to do that, what’s California going to do? What about Sydney, Melbourne, and all these other big cities? They don’t want to be left behind. And so, there will be a real race to do it. And particularly, if it becomes more economical, if you can buy one of these vehicles for a similar or lower price than what your existing vehicle is, it becomes an easy choice.
