Rock Tech Lithium — Processing hub for European lithium supply

RCK’s strategy is to leverage its novel proprietary processes, robust European network and PEA-stage Georgia Lake lithium project in Canada to become a fully integrated, low-cost and reliable supplier of lithium chemicals to the European electric vehicle market.

Since our last note on the company (see Georgia (Lake) on my mind, published on 12 June 2020), RCK has made a number of announcements including, most significantly:

In 2018, RCK announced a mineral resource estimate at Georgia Lake of 13.29Mt at a grade of 1.09% lithium oxide (at a relatively conservative 0.65% cut-off grade), of which 49% was in the measured and indicated categories. Later in the same year, it announced the results of a PEA at Georgia Lake. Compiled by international mining consultant DMT, the PEA envisaged producing 1.1Mt of 6.2% Li2O chemical-grade spodumene concentrate over 11 years at a rate of 96,000tpa. However, it excluded any production from additional inferred resources on other areas of the property, which could have increased the mine’s life further. Within this context, the PEA estimated pre-production capex of C$65.3m, annual steady-state EBITDA of C$64.2m, an 11-year mine life, a pre-tax IRR of 62.2%, a 3.5-year payback period and a post-tax NPV8 of C$210m.

In 2020, RCK engaged Wave and DMT to update the PEA, using the economic outputs of the original piece of work, to include a lithium hydroxide converter to create a fully integrated mining and processing operation. Operating at nameplate capacity, the converter would consume Georgia Lake’s production over 10 years at an average rate of 105,000tpa to produce 15,000tpa of battery-grade lithium hydroxide monohydrate (LiOH.H2O) via the conventional sulphate processing route. An alternative case also considered a 24,000tpa converter that would operate over 20 years and would require RCK to supplement the available raw material feedstock from Georgia Lake with imported materials from existing and established spodumene concentrate producers and also possibly via a consolidation of lithium assets in northern Ontario. Within this context, RCK has announced that it has entered into a Letter of Intent with Avalon Advanced Materials to assess the technical and economic feasibility of a jointly operated lithium sulphate processing facility in Thunder Bay, which would be designed to accept lithium mineral concentrates from both Rock Tech’s and Avalon’s 100% owned hard rock lithium deposits and convert them into lithium sulphate as a precursor to subsequent lithium hydroxide production.

On 4 November 2020, RCK announced the results of its updated PEA, which may be summarised as follows with respect to the original:

Note that, within the industry, a 16,000tpa plant is generally considered to be entry point capacity for a western plant, based on capital cost intensity, as well as operating cost efficiency and the ability of the plant to pay back initial capex in an acceptable time frame. Above this, the alternative plant capacity of 24,000tpa is considered to provide optimal capital cost intensity given that, above this level, a second calcination kiln is required.

For the purposes of the study, capital and operating costs were estimated to a Class 5 level of accuracy (on a scale of 1–5, where 1 is most accurate), which is consistent with a PEA, as opposed to a higher (eg pre- or definitive feasibility) level of study.

The results of the updated PEA were based upon an earlier trade-off study conducted by Wave for RCK, which considered seven potential processing options for the company. While the majority of the potential options can probably be discounted for the purposes of this report, three are worth highlighting:

One other, rather innovative scenario considered the production of lithium sulphate in Canada and its export to Germany (as per the last option), but then its conversion into lithium hydroxide via an alternative nitrate (rather than the conventional sulphate) processing route. This option requires further technical work, especially into the economics of global reagent pricing. However, its specific advantage is that it removes the need for impurity removal and ion exchange at the point of lithium sulphate production in Canada and therefore reduces the complexity of its synthesis.

The updated PEA is based upon the second (all-Canada) option, which offered the most competitive capital and operating costs. However, RCK’s preferred option is the last one (lithium sulphate to Germany). Although it had neither the lowest capex nor the lowest opex of all of the options considered, it was considered globally competitive as well as achieving the strategic aim of accessing the European lithium hydroxide market, as opposed to the North American one. More analysis of this (preferred) option is provided in the section below.

Globally, the majority of lithium produced from hard rock sources is derived from the mineral spodumene (LiAlSi2O6), the lithium content of which is approximately 3.7%. Conventional processing of spodumene involves froth flotation and/or gravity separation to generate a concentrate of c 6% lithium content followed by either roasting and acid leaching (typically) or carbonate leaching (less typically) to form lithium sulphate, from which either lithium carbonate or lithium hydroxide may then be synthesised.

In contrast to the conventional process flow route, RCK’s concept is to use its Georgia Lake project in Ontario, in the first instance, to provide technical-grade feedstock for its battery-grade lithium hydroxide production plant in Germany or Europe. The immediate advantages of such a ‘dual location’ strategy are the availability of subsidies in the EU for such value-added manufacturing, and the materially reduced transportation costs and emissions engendered by completing significant raw material upgrading close to the mine site. Conceptually, lithium sulphate would then be transported to a refinery in Western Europe for onward processing.

In simple terms, one tonne of 5% spodumene concentrate contains 23.3kg of lithium metal, which is sufficient to produce 183.3kg of pure, intermediate lithium sulphate, which can itself then be converted into 123.2kg of pure lithium carbonate with a market value of US$721 (at currently prevailing prices) or 139.8kg of pure lithium hydroxide monohydrate with a market value of US$1,433 (assuming no processing losses). On this basis, using lithium sulphate as an intermediate feedstock for the industry is feasible (note: on a profit and loss, rather than a return on capital, basis) as long as purchase and processing costs, combined, do not exceed US$1,586 per tonne of lithium sulphate for supply to lithium carbonate producers or US$5,472/t for supply to lithium hydroxide monohydrate producers.

RCK’s Georgia Lake project already benefits from its proximity to power sources and the national grid. It also has easy access to a transcontinental rail station and a deep-sea port less than 200km away, providing options for product delivery to end-users.

An initial SWOT analysis of RCK’s preferred option is as follows:

RCK is in the process of advancing its integrated project towards a pre-feasibility study (PFS), which is likely to consider two options, being the all-Germany and all-Canada ones. However, a variation on the all-Germany option is for RCK to site its lithium conversion plant in Romania, in particular, to which end we understand that senior management has been in talks with the Romanian prime minister, its finance minister, its environmental minister and its EU minister. Among other things, it is thought that this may make the chemical conversion plant eligible for a wider range of European subsidies.

Given the different exigencies of operating a spodumene mine and a chemical conversion plant, RCK’s business model is not that of a typical junior mining company of raising finance and developing a mine, but rather one that is more closely akin to that of a portfolio manager with a specific focus on minimising dilution for existing equity holders.

In the case of the 24,000tpa plant, RCK envisages initial capital expenditure of US$457m being financed in the ratio ⅓:⅓:⅓ subsidies:debt:equity – ie c US$152m each. In the case of the equity component, it envisages setting up a management company for the converter, which would be remunerated via a management fee (analogous to portfolio managers’ 2% plus 20 basis point charges for assets under management and performance) and funding only a 10% equity stake for c US$15m, with external equity partners funding the balance.

Up to project financing, RCK estimates that it will need to spend an additional US$15m on studies, of which C$8.5m has already been raised. As such, management anticipates one further equity raising in 2021 and one final (maximum) equity raising of US$15m (C$19.5m) as its share of the equity financing of the 24,000tpa plant project. On this basis, total (maximum) equity to be raised would be c US$23m (C$30m), or no more than 56% of the company’s current market capitalisation.

The COVID-19 pandemic has inevitably had an effect on the lithium price (both in the form of lithium carbonate and lithium hydroxide – see Exhibit 2), as a temporary reduction in electric vehicle demand has fed back up the supply chain to the spodumene producers. With the price of spodumene concentrate now well below levels that will incentivise future supply, producers have curbed both current production and future development plans to the point that commentators now widely believe that although demand in 2025 is likely to be in the order of 13% lower than pre-pandemic levels, supply will probably be c 10% lower as well. As a result, as evidence of a recovery in electric vehicle sales has mounted in the key market of China in the September to November period, longer-term price expectations for lithium carbonate have remained broadly unchanged around the US$10,000/t level.

One consequence of the uncertainty surrounding future lithium chemical supply however has been to tempt Tesla to vertically integrate upstream by acquiring the rights to a 10,000 acre lithium clay deposit in Nevada to underwrite its planned 30x increase in battery manufacturing capacity (measured in GWh) over the course of the next decade to underpin its electric vehicle production target of 20m units in 2030.

In addition to mining lithium clay, Tesla has disclosed that it intends to construct a spodumene conversion facility in Texas in order to supply its own cathode plant. While this move has been widely interpreted as adding to the supply of lithium chemicals in future years, we prefer to interpret it as bringing a base-load of supply, that would otherwise have to be contracted externally, in-house. In the first instance, this is likely to reduce price volatility. However, lithium supply is still expected to need to expand by in excess of 10x to meet global demand in 2030, so that the effect of new lithium mining and processing projects operated by Tesla and any other auto manufacturers that wish to enter the market may be to create a benchmark pricing level around the incremental cost of production at their mining and chemical operations, rather than simply displacing other sources of supply.

Edison’s long-term lithium hydroxide monohydrate price is US$14,021/t, which we first adopted in February 2019. At the time, both the lithium carbonate price and the lithium hydroxide price were relatively high (see Exhibit 2, below), albeit the premium of lithium hydroxide relative to lithium carbonate was relatively low (see Exhibit 3, below):

At the time therefore, our February 2019 long-term lithium hydroxide price was derived from a long-term lithium carbonate price of US$12,000/t and an anticipated lithium hydroxide premium of 16.8% per tonne. Note that in terms of lithium metal units alone, lithium hydroxide monohydrate would be expected to trade at a discounted price relative to lithium carbonate in the ratio 74:84 based on the different masses of the two salts per mole of lithium ions. The fact that it trades at a premium to lithium carbonate and that it has a lower volatility relative to its mean price is, to some extent, indicative of its increasing attractiveness as a chemical input for lithium-ion battery manufacturers.

Since February 2019, the prices of both lithium carbonate and hydroxide have continued to fall. However, after initially remaining low, since February of this year, the lithium hydroxide premium has increased sharply as the price of more specialised lithium hydroxide has stabilised while that of the more commoditised lithium carbonate has continued to fall. As a result, in the past five months, lithium hydroxide has recovered the premium price (and more) relative to lithium carbonate that it used to enjoy prior to May 2017 (Exhibit 3).

One potential interpretation of this trend is that the lithium hydroxide price premium (in percentage terms) is inversely correlated with that of lithium carbonate (ie a high lithium carbonate price correlates to a low lithium hydroxide price premium and vice versa) and this is, to some extent, borne out by statistical analysis. A regression analysis between the two (see Exhibit 4), reveals a Pearson product moment (correlation) coefficient of -0.63, which, given the number of data points in the analysis, is statistically significant at the 5% level (ie there is less than a 5% chance that the observed relationship occurred by chance).

However, if data points prior to February 2016 (when the lithium market became more dynamic – see Exhibit 2) are excluded from the analysis, the correlation coefficient improves to -0.89, as shown in Exhibit 5, below, which also shows the price premium that is required for lithium hydroxide relative to lithium carbonate in order to achieve a lithium hydroxide price of US$14,021/t (the grey curve).

As can be seen from the analysis:

As a consequence of this analysis, we are maintaining our long-term lithium hydroxide price of US$14,021/t in anticipation of the long-term lithium carbonate price being at or above US$10,325/t.

RCK’s enterprise value of C$44.1m (estimated end-FY20) equates to 12.8% of its updated Georgia Lake PEA NPV8 for a 15,000tpa lithium hydroxide plant and just 4.0% of its updated PEA NPV8 for a 24,000tpa plant (see Exhibit 1). This compares with the analysis in our report Gold stars and black holes, published in January 2019, which found that companies with projects at the PEA stage of development that used an 8% discount rate on average had EVs that equated to 12.3% of NPV8 (within a range of 0.2–34.1%).

It also equates to US$96.88 per resource tonne of lithium carbonate equivalent contained at Georgia Lake.

RCK had net cash of C$1.0m as at end-September 2020, since which time it has raised a further C$8.5m via the sale of 10.0m units of one share plus one warrant each at a price of C$0.85/unit. This compares with a cash burn rate of C$1.6m per annum for the four years FY16–19 (inclusive).