Introduction

Lithium (chemical symbol: Li) is the lightest of all metals. It does not occur as a pure element in nature but is contained within stable minerals in a range of rock types or in solution in brine bodies within salt lakes, in sea water or geothermal brines. The contained concentration of lithium is generally low and there are only a limited number of known resources where lithium can be economically extracted. These are currently lithium rich brines contained in salt lakes and hard rock mineral deposits.

A variety of factors drive the economics of lithium production. In the low cost brine sector in which the Company seeks to operate, the key drivers are:

• the amount, or grade, of lithium and other valuable co-producers such as potassium and boron found in the brine (expressed in mg l-1),
• the ratio of contaminants that must be removed relative to the grade of the desirable products (the magnesium/lithium ratio being the most important),
• the evaporation rate to concentrate and purify the brines in solar ponds, and
• the availability and quality of infrastructure in proximity to the resource.

Lithium can be processed to form a variety of different chemicals depending on its end use. According to Roskill Information Services Ltd. (“Roskill”), the author of  “The Economics of Lithium”, Eleventh Edition, 2009, lithium carbonate represents approximately 40% of the total global consumption of lithium chemicals. The next most common chemicals are lithium hydroxide and lithium chloride, which together represent approximately 20% of total consumption.

Lithium and its chemical compounds exhibit a broad range of beneficial properties, including:

• the highest electrochemical potential of all metals,
• an extremely low co-efficient of thermal expansion,
• fluxing and catalytic characteristics, and
• acting as a viscosity modifier in melts.

As a result, lithium is used in numerous applications including ceramics and glass, batteries, greases, aluminum, air treatment and others.

Roskill estimates that overall lithium demand increased at a compound annual growth rate (“CAGR”) of 5.5% from 2000 to 2009, even after accounting for the global recession which suppressed overall consumption in 2009 by approximately 15% compared to 2008. However, future demand is expected to grow at an annual rate of 6.4% between 2010 and 2020 from existing market applications, and as high as 9.5% annual growth, depending upon the rate of uptake in demand from the electrification of the transportation sector.

The use of lithium in the portable battery market has been growing by more than 20% per year since 2000. This historic rate of growth is entirely related to small format batteries used in a variety of electronic applications. The advent of lithium-ion hybrids, plug-in hybrids and all electric vehicles will require large format batteries. These batteries will require kilos of lithium, rather than the grams used today in portable electronic applications.

Roskill estimates that global production of lithium increased from approximately 13,050 tonnes (“t”) (69,465t of lithium carbonate equivalent (“LCE”)) in 2000 to approximately 22,800t (121,364t LCE) in 2008, and fell approximately 25% to a low of approximately 18,786t (100,000 t LCE ) in 2009.

Lithium Demand

Demand Overview

Roskill estimates that total consumption of lithium in 2009 was just under 100,000t LCE) and that between 2000 and 2009 the CAGR for lithium demand has averaged 5.5%, with the largest growth application being the secondary (rechargeable) battery market, with a 22% CAGR between 2000 and 2008. According to Roskill, during the global economic crisis of 2009, lithium demand decreased by approximately 15% due to general weakness in the industrial sectors of the market. Demand is forecasted to recover and grow by 6.4% CAGR until 2020, based largely on current applications. If battery application growth accelerates, demand could increase to 9.5% CAGR, as illustrated in the chart below.

Roskill also estimates that the largest consumer of lithium in 2009 was the glass/ceramics market, which accounted for approximately 31% of lithium consumption. The second largest market segment was batteries, with an estimated 23% of total lithium consumption, followed by greases (9%), aluminum (6%), air treatment (6%) and casting (4%), as illustrated in the graph below.

Major Factors Affecting Forecast Demand

Roskill has estimated base case demand growth for lithium of 11% in 2010, 13.4% in 2011, 7.4% in 2012 and 7.9% in 2013, with 147,000t of LCE consumption in 2013. Roskill believes that the major growth sector will continue to be the secondary battery market, which it forecasts will have base case demand growth of approximately 14.4% per annum between 2008 and 2013. Roskill expects that portable consumer goods, such as cell phones and laptop computers, will provide some growth in demand for lithium secondary batteries; however, Roskill anticipates that the start of mass production of electric vehicles using lithium secondary batteries by major automotive manufacturers presents the most significant upside potential for lithium demand. They project the beginning of significant use of lithium for the auto sector to begin in 2012, and then quickly increasing thereafter. At a 5% penetration rate for lithium in vehicles, incremental lithium demand in 2020 is expected to be approximately 60,000t of LCE. With a 10% penetration rate, incremental demand from vehicular applications would be approximately 120,000t of LCE.

Electric Vehicle Outlook

According to Roskill, the introduction of lithium-ion battery-powered, mass produced hybrid electric, plug-in hybrid electric and electric vehicles has the potential to significantly increase the future consumption of lithium.

Electric vehicles can be grouped into three main categories:

• Hybrid Electric Vehicles (HEV): whose power-train is a combination of electric power and gasoline engine. Hybrid electric vehicles come in two variants: (i) the mild hybrid electric vehicle uses a battery pack to supplement the gasoline engine either during acceleration, when the vehicle is at rest or low speed driving, and (ii) the full hybrid electric vehicle allows the car to be propelled in full electric mode and the batteries are recharged by regenerative braking. Hybrid electric vehicles consume approximately 0.5-2 kg Li per vehicle.
• Plug-in Hybrid Electric Vehicles (PHEV): which allow batteries to be recharged by plugging the vehicle into the electric mains system. Plug-in hybrid electric vehicles consume approximately 1.8-4.2 kg Li per vehicle.
• Electric Vehicles (EV): fully electric vehicles whose main propulsion mode is electric, but which may also have a small gasoline engine to either assist in recharging the batteries or provide power to the engine if the battery charge is depleted. Electric vehicles consume approximately 10-20 kg Li per vehicle.

Sources: Meridian International Research, December 2006, Electric Power Research Institute, December 6, 2006 and Roskill.

Given the increasing political and consumer focus on climate change, car producers are looking for ways to lower both carbon emissions and fuel consumption in transport applications. Hybrid electric vehicles have been on the market for a number of years, with Roskill noting that annual sales in the United States have increased from approximately 20,000 in 2000 to almost 350,000 in 2007. To date, most mass produced hybrid electric vehicles have incorporated nickel metal hydride batteries, although many automobile manufacturers are now starting to develop electric vehicles incorporating the lithium-ion battery as the electrical power source for their vehicles. The differences between electric and gasoline powered cars are illustrated below.

Source: www.hybridcars.com

There are a number of parameters on which battery technologies are compared, with the key parameters being specific energy density and specific power density. Specific energy density is a measure of the amount of energy that can be stored by a battery in comparison to its weight. Specific power density compares the rate at which energy is delivered relative to the weight of the battery, which is related to the acceleration and top speed of a particular vehicle. The faster the delivery of energy, the quicker a vehicle can get to top speed.

The figure below shows the three main battery types for vehicle applications, lead acid, NiMH and lithium-ion, and how they compare on these parameters. The horizontal labels demonstrate the in-principle power and energy requirements of each electric vehicle category based on its functional capabilities. Lithium-ion batteries are optimized for high specific energy density and are the only battery technology that can achieve the energy storage capacity required to match the performance of traditional fuel vehicles, without excessive weight compromising vehicle performance. Consequently, as illustrated in the below chart, demand for lithium is expected to increase as vehicle electrification moves toward full electric vehicles from hybrid electric vehicles and plug-in hybrid electric vehicles.

Determining the future growth in electric vehicles is difficult to predict and there are a wide range of forecasts as to the number of electric vehicles that will be on the road within the next decade and the resultant additional potential lithium consumption requirement. However, there have been a number of government stimulus packages recently announced to advance the development and production of electric vehicles including:

• the United States Government’s announced funding of US$2.45 billion in grants for battery makers, automakers and suppliers for vehicle electrification with the objective of having one million plug-in hybrid electric vehicles/electric vehicles on the road by 2015,
• the German Government’s National Development Plan on Electric-Drive Vehicles to have one million plug-in hybrid electric vehicles/electric vehicles on the road by 2020, and

While recognizing the difficulty in determining future growth in the electric vehicle market, Roskill has undertaken an analysis of the potential growth in lithium consumption to 2013 from transport applications. The base case is shown in the figure below.

Despite near-term uncertainty as to the growth of lithium-ion batteries in the electric vehicle market, the Company believes the increasing drive for lower carbon emissions by governments and consumers, significant investments by a number of governments globally in new battery technology for transport applications, and technology improvements within car manufacturers themselves, will provide future growth opportunities for the lithium industry.

Lithium Supply

Current global production of lithium is highly concentrated, both geographically and in corporate ownership. As illustrated in the charts below, over 85% of world production comes from Chile (Sociedad de Quimica Minera de Chile SA (“SQM”) and Chemetall GmbH (“Chemetall”)), Argentina (FMC Corporatioin (“FMC”)), and Australia (Talison Lithium Limited (“Talison”)). SQM and Chemetall’s production are both sourced from one salar called Salar de Atacama, which currently represents the largest and lowest cost production in the world. FMC’s primary production comes from the Salar de Hombre Muerto, and Talison is from the Greenbushes hard rock mine.

Commercial lithium production currently comes from two sources:

• Brines: lithium rich brines from salt lakes; and
• Minerals: pegmatite rock deposits containing lithium bearing minerals.

Minerals

Lithium can be contained within hard rock minerals. There are three lithium minerals commercially mined today: spodumene, petalite and lepidolite. Spodumene is the most important commercially mined lithium mineral given its higher inherent lithia content. Both open pit and underground mining methods are used to extract lithium minerals. Typically, the mineralized rock contains approximately 12% to 20% spodumene, or approximately 1% to 1.5% lithium oxide.

Once extracted, the lithium mineral ore is crushed and subjected to a number of separation processes to upgrade the lithium content by removing waste materials. Different separation processes will produce concentrate with differing levels of lithium content, which can be used in either the technical or chemical-grade markets. Chemical grade lithium concentrate sold to chemical producers undergoes additional processing through the sulphate route process to convert the chemical-grade lithium concentrate to a variety of lithium chemicals including lithium carbonate, lithium chloride and lithium hydroxide.

Talison produces the vast majority of lithium from minerals and accounted for 23% of total global lithium production in 2008.

Brines

Lithium brine bodies in salt lakes are formed in basins where water which has leached the lithium from the surrounding rock is trapped and concentrated by evaporation. The process of extracting the lithium from brines involves pumping the brines into a series of evaporation ponds to crystallize other salts, leaving a lithium-rich liquor. This liquor is further processed to remove impurities before conversion to either lithium carbonate or lithium chloride for further upgrading to lithium hydroxide. The majority of the products from the brine operations are destined for the chemical application markets, with the remainder consumed in technical applications.
Over two-thirds of the world’s lithium production comes from lithium brines in an area of the Andes mountains encompassing parts of Argentina, Chile and Bolivia (no current production). This area is often referred to as the “Lithium Triangle” and the primary brines are illustrated below.

Prices

There is no exchange traded market for lithium chemicals, as prices are set by negotiation between producers and customers. Prices for lithium concentrates used for conversion into chemicals are correlated to, and tend to follow the same trend as, lithium carbonate prices.

According to Roskill, prices for lithium carbonate were in the range of US$4,000/t in the early 1990s until SQM entered the market in 1996. SQM adopted an aggressive pricing policy which resulted in lithium carbonate prices falling to as low as US$1,600/t. Prices remained low into the early 2000s resulting in FMC suspending production at its Salar del Hombre Muerto operation in Argentina.
Prices started to rise again in 2004 as consumption increased, leading FMC to recommence production at Salar del Hombre Muerto.

In 2005, continued growth in demand and delays to the “Lithium Triangle’s” brine producers’ expansion programs resulted in aggressive price increases for lithium chemicals in China until 2008, when new capacity from brine producers entered the market and Chinese prices flattened. Prices from the “Lithium Triangle” supply increased steadily through 2008 until a general stabilization of prices across all markets in 2009. However, in October 2009 SQM announced a 20% reduction in lithium chemical prices on renewal of its existing contracts. At the same time, FMC announced a 7% to 8% price increase for its butyl lithium products. Although prices vary by exact product and contract, Roskill has compiled a historical pricing graph of estimated average prices as illustrated below.

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