TSLA - Lithium 101 And The Best Run Lithium Company With Owen Clendenin (Green Growth Giants)
2023-05-16 09:00:00 ET
Summary
- Leader of Green Growth Giants, Owen Clendenin, is our guest this week.
- In this episode, Owen Clendenin dives into everything about Lithium.
- We cover the companies he says are doing business the best, who has the best management team, and he shares what investors need to watch for each earnings call.
We encourage you to listen to the podcast embedded above or on the go via Apple Podcasts or Spotify .
This episode was recorded on May 15, 2023.
Leader of Green Growth Giants, Owen Clendenin, dives into everything about Lithium in this episode. We cover the companies he says are doing business the best, who has the best management team, and he shares what investors need to watch for each earnings call.
Relevant Links:
Timecodes:
(00:28) - What is the decarbonization economy?
(03:42) - How investors should approach the lithium space
(05:54) - The source of lithium for major companies
(07:28) - Where to invest in the lithium industry
(09:06) - Individual names that investors should research further
(13:14) - Which company has the best management team
(19:32) - What investors need to listen for on the earnings calls
(23:08) - The Lithium Price Safety Net
Daniel Snyder: Welcome to the Investing Experts Podcast. I'm Daniel Snyder. In this episode, we're joined by Owen Clendenin, leader of the Green Growth Giants investing group here on Seeking Alpha. This niche group focuses on the decarbonization economy to find hidden investment opportunities. And today, we're talking all about lithium. But first, did you know the link to our guest investing groups can be found in the description of this podcast? Give it a click and check them on out. Now, let's get to the interview.
Let's dive right in. The decarbonization economy is what you focus on. Can we just start by stating what is that? What is the decarbonization economy?
Owen Clendenin: Yeah. Well, first of all, thanks for having me. Pleasure to be here. I think decarbonization economy is kind of at-service level what it sounds like. Right now, obviously, as we have a lot of fears about climate change, temperatures rising, there's a drive from a lot of countries around the world to rein in their carbon output and really try to tackle that climate issue.
So, by reining in their carbon output, they're decarbonizing industries. And the economy around all of the new businesses, all the new technologies that are being developed for this transition, whether that's carbon capture or primarily electric vehicles, is what we see oftentimes grabbing the spotlight. It's this new economy that's largely based around trying to limit the carbon output of the various industries that we have in our world.
Daniel Snyder: What made you want to start focusing on this space instead of something that's more clickable and high and mighty in the media such as technology stocks. Why this?
Owen Clendenin: I actually think in a lot of ways it's a pretty solid jump from technology stocks. But in general, you have or from what I saw, you have a tremendous opportunity, generational opportunity with decarbonization. It's estimated we're going to be spending trillions of dollars a year to decarbonize our industries.
When there's that kind of money being spent, there's money to be made. And so, when I first started looking into it, I think Tesla ( TSLA ) was my jumping point in 2015. Obviously, they were kind of really pioneering the electric vehicle market at that time. And from there, my interest in the sector just kind of naturally grew as I came to understand what kind of opportunity was available here. And the kind of investment that was pouring in.
Daniel Snyder: So you said you started with Tesla, where has this grown from there?
Owen Clendenin: Current day, I would say my focus now is primarily on the lithium industry and a few other battery metals, nickel, as well, I cover. And then with battery technology as well. I find battery technology more so than the EVs themselves present another great opportunity for growth because you see, the lithium ion battery was invented in the 1970s, right, by John Goodenough.
But really since 2010 even there wasn't that much change done to the basic premise of the battery. And all of a sudden, over the past 10 years, 13 years, 15 years, technologies exploded, as investment pours into the sector. And so looking at the technologies on the rise there, also presents a pretty tremendous opportunity to see -- get ahead of the curve.
Daniel Snyder: So, I think you hit the hot word of the episode is lithium. Right? A lot of investors keep hearing this word around. How should investors approach investing in the lithium space right now, if they don't know anything about it?
Owen Clendenin: Yeah. So lithium, I think, first and foremost, something I want to clarify is -- it's a specialty chemical. Right? It's not a commodity. All of your customers, whether that's your capital producers, your battery manufacturers, your EV manufacturers, they all have different specs on what they need for lithium. And the industry at this point is still far too immature to be considered a commodity. Maybe so I'm damn sure, 20 years, 10 years - maybe 10 years out, that will change. But right now, not yet. I don't want to get into too much of the weeds just yet.
But I think one of the most important things also to understand is, where it comes from. Right? You have two types of sources primarily, brine and hard rock. And then within hard rock, there are a bunch of different types of ores that you might be mining. The primary one there is spodumene. And then when you're producing lithium, you're either producing the end product, at least for the EV industry is either a lithium carbonate or a lithium hydroxide. But oftentimes, you'll have especially in Australia with the hard rock miners, you'll have spodumene concentrate produced as an intermediary step, which contains about 6% lithium oxide.
So, lithium oxide actually has a higher lithium concentrate -- yeah lithium -- concentration of lithium than just lithium carbonate. So, it's about 2.5x more lithium is in lithium oxide than lithium carbonate. So in a perfect world, it would take you about 5 tonnes of 6% spodumene concentrate to make 1 ton of lithium hydroxide. But in the real world with conversion inefficiencies and all the various losses that are associated with that kind of a process, it's really about 7 tonnes to 8 tonnes of lithium per 6% spodumene concentrate per ton of lithium hydroxide or carbonate equivalent.
Daniel Snyder: Where are these companies like Tesla getting all of their lithium from?
Owen Clendenin: So, when you're looking at a company like Tesla especially, it's usually pretty diversified. But the largest producer or largest country for lithium production -- raw lithium production or lithium extraction I should say, because it gets a little nuanced here as well, is Australia. About half of the lithium production in the world comes from Australia.
However, Australia doesn't actually produce any battery chemicals. So, Australia produces pretty much exclusively 6% spodumene concentrate. There are a couple of companies now that are investing in refineries in Australia to try to produce that hydroxide on-site. But right now, all of that is shipped to China. And so when you hear people talking about China having this huge grip on the lithium market or the battery market, that's really what they're talking about.
So, China itself doesn't have too many natural lithium resources, and the ones that they do aren't really that great. It's usually low concentration brines or lepidolite, which is another hard rock ore. But they own the refining. They have pretty much a complete monopoly over it, and so that's most often where Tesla is getting their battery production, especially because they rely on lithium hydroxide for their NCA battery chemistry. But if you're looking carbonate, most of that's coming from Chile.
Daniel Snyder: For investors looking at this space, say they want -- should they be investing in the refining process companies, or should they be more investing in the discovery and mining of lithium?
Owen Clendenin: Yeah. Great question. So, at the moment I prefer integrated production sites. I think that's where you get the most bang for your buck. So the companies that are mining it and refining it, but if you had to choose one, the mining business right now is stronger. I put out an article recently actually looking at Tesla in some of their comments about the lithium space or Elon Musk's comments about the lithium space. And being in the refining business right now, isn't too bad. Right? Everyone in lithium right now is making fair bit of money.
But your margins there, even at the peak we're looking at about, 20%, 30%. Again, not half bad. But for mining, you're looking at, you know, 90%, 80%. Because we're so -- we're very much ore limited rather than refining capacity limited. And so at the moment -- and that's what I kind of foresee for the next, you know, the foreseeable future I suppose. The lead times for mines is just significantly higher than the lead times for refinery. So, it's much easier for the refining business to respond to fluctuations in demand than it is for the mining industry to do so. And so if you had to choose one, I'd go with mining, extraction.
Daniel Snyder: So we've been talking about the general overall sector of lithium so far. What about, like, some individual names. Right? Like, I personally don't know any. I'm sure some listeners don't know any as well. Where should they start looking at companies that you have kept an eye on.
Owen Clendenin: Yeah. I think this is where you can kind of break it down between your producers and your juniors. Right? So on my coverage universe, I cover a lot of juniors as well, which are companies that aren't yet producing, but they own a lithium asset, and they're currently in the process of developing it.
In terms of the producers, though, I think, you know, your big names, obviously, Ganfeng ( GNENY ), Albemarle ( ALB ), Allkem ( OROCF ), SQM , even Livent ( LTHM ), you could throw in there. But all of them kind of have certain compromises. So Ganfeng, biggest lithium company, I really like their business plan. They have a lot of really great assets. Unfortunately, they are located in China. Right? So that obviously carries a certain geopolitical risk, especially as you see countries like the United States trying or even limiting the amount of Chinese investment that they're allowing within the country for these critical supply chains.
And now with the Inflation Reduction Act, the new EV tax credit is based on what percent of your battery minerals are sourced from countries that we have a free trade agreement with. Right? So U.S. producers are obviously going to start trying to diversify away from China. And at the moment, when we're supply limited, producers don't really have the luxury of picking and choosing, but down the line that could be an issue.
Allkem, I think, is another solid company, but something they struggle with is they tend to be pretty sluggish. They have a slow response time. They shut down their Virginia mine in 2019, which at the time was probably the right decision. Pricing wasn't great for them. And it made sense, but it took them a couple years to get that back into production. And they missed out a lot of the huge rise at the start. They've also just been slow in their expansions. They've been trying to expand their production in Chile for probably half a decade now. No such luck there yet either.
So you have these existing producers. Allkem, I'd say is probably my favorite producer at the moment. But you have all these producers that are great. They're able to take advantage of the money on the table now. But the juniors, I also think are really exciting. So a couple of juniors, Lithium Americas has been my favorite for quite some time. They've got a project in Nevada, two in South America, or -- yeah, two in South America, recently acquired Arena Minerals to enlarge their Sal de la Puna project. And with juniors you have the ability to capitalize on the attractive financing environment.
In most other junior mining industries, whether that's gold, iron, whatever you have, whatever metal you're talking about, financing is one of the hardest things to orchestrate. You can call that a failure of management or whatever other factor, but really the crux of the issue is financing. And right now, because of the extreme demand for lithium and the extreme growth of that industry, financing is cheaper than it is in any other junior mining sector. It's more readily available than it is in any other junior mining sector and that can help supercharge your returns.
And obviously you have the added benefit of mining a metal that I think has quite a long runway in terms of price upside that they can lock in down the line. So, I like Lithium Americas ( LAC ), great management, great projects; Green Technology Metals ( GTMLF ) an Australian company, but with a mine in Canada is another good one I think, much earlier on, but again good management and looks to be a pretty solid project there as well.
Daniel Snyder: So to unpack all of that, two questions for you. One, how far of a runway do you see this having? And two, you said management. I imagine management is a huge key in this space, which company would you say has the best management? And how they operate?
Owen Clendenin: Yeah. Both good questions. So, the first one, I think the runway it's hard to say. S&P actually has a good visual on this. Right now, you have about 53 lithium projects under development in a pipeline projected to come online before 2030. If all of those projects make it online before 2030, you're looking at a shortfall of about 680,000 tonnes per year of lithium carbonate. For context, the market for lithium carbonate, 2 years ago wasn't even that big. So you're looking at a shortfall that was bigger than the lithium market was 2 years ago.
The other thing too is, it's unlikely that all those projects will make it to production by then. There tends to be a lot of delays in this industry. Sometimes mines just don't even -- aren't able to make it either. So it's - that of course is contingent on-demand being there. As I see it, I don't think there's much that could get in the way of demand. I think, obviously, right now, there are recession fears that could impact the demands, but what that does, in my opinion, is really just push back the investment horizon.
So you might have dead money for a while, and some of your juniors might have to go under or force themselves to be sold. But because lithium projects have such a long lead time, usually you're looking at least 7 years from initial discovery. We kind of have a pretty good idea of what the best case scenario could be 7 years from now. And if there's a recession, financing dries up, investment dries up, and so then the investments that we need now for demand 7 years from now aren't there. Right?
So I think we probably have at least another seven or so years of this very volatile market where price or supply demand is constantly swinging back and forth, but I think more often than not, we'll be in a supply deficit.
Now, in terms of management, on the junior side, I talked about them already. I think Lithium Americas has the best management of any junior mining company at the moment. Incredibly intelligent base and something that a lot of juniors don't have, which is experience. Obviously, this is a very young industry, right? So you don't have a lot of the same workforce that you do in other industries. Right? You don't have experienced executives, you don't have a whole pool of talent to pick up from schools because no one's really teaching lithium refining, lithium extraction.
But Lithium Americas has been able to piece together a pretty solid management team that has experience in the lithium industry, building companies, building exploration, from exploration to production. So in terms of juniors, I probably have to lean towards Lithium Americas. And then for existing producers, I would have to probably give that one to Allkem. Again, they're much more agile than most producers are, which right now I think you have to be, again, because of that volatility, they're consistently demonstrating, they have -- how they're able to take advantage of swings in the spot market by hosting price auctions for their spodumene concentrate.
And things like that it's -- they recently also it was about a month or 2 ago, unveiled this new tolling agreement where their spodumene price is linked to what their refiners' hydroxide final selling price is, which is kind of a convoluted pricing mechanism. But again, it demonstrates their willingness to innovate within not just on the production and mining side of things, but also on the pricing side of things, their commercial strategy as well, I think has proven to be very, very intelligent.
Daniel Snyder: So I'm looking here at Lithium Americas on Seeking Alpha, ticker symbol LAC. Looks like they're headquartered out of Canada, if I get - yep I got that right. Question for you about lithium in America, though. right, we've talked about Australia. We talked about Chile. Is there lithium deposits in America?
Owen Clendenin: Yeah. Yes. Yeah, so what you have in America, primarily in the United States, is a third type of lithium deposit. So, I mentioned brine, I mentioned hard rock. In the United States, you're looking primarily at sedimentary or clay. Right now, there's only one lithium project in the United States that is under operation, and that is Albemarle's Silver Peak operation in Nevada. And that is a brine operation. So it's -- but it's, you know, it's a fairly small operation. It's not great quality. I think they're producing about 5,000 tonnes a year.
They're trying to get that to 10,000, but we'll see. But primarily, what you have is a lot of sedimentary deposits also primarily not located in Nevada. So that's what Lithium Americas is developing, a sedimentary deposit in, called it Thacker Pass in Northern Nevada, right on the border. And then you also have a couple of companies, Ioneer, developing a sedimentary deposit; American Lithium; Century Metals, another company actually rather like, developing pretty adjacent to Albemarle Silver Peak mine. But yeah, you're looking primarily at sedimentary deposits there.
Daniel Snyder: Thanks for clarifying that. Owen, I want to ask you before we wrap up. I have another question specifically about this lithium industry. Right? I said I don't know a lot about it. When you're going through earnings calls and presentations and looking at the fundamentals of these companies, is there anything specific that investors should look for within lithium that they wouldn't necessarily look for elsewhere?
Owen Clendenin: Yeah. I think, again it depends on whether you're talking about a producer or a junior mining company. If you're looking at a producing company, I think what you want to really look for is, try to determine what their selling point is. The pricing structure in the lithium industry can be very opaque. It's very difficult. It's not usually completely aligned with the spot prices. So the spot prices are what we see often reported, but that's not what lithium prices truly are. You might have a spot price of 70,000, but your contract price is 40,000, or you might have a spot price of 30,000, but your contract price is still 40,000.
And it can vary significantly by company to company. You could have a company for the same quarter that has a average selling price of 20,000 or one that has 45,000. And so what you really need to look out for there is how well the company that you're trying to follow is taking advantage of the market, how well they're able to sell their product and get a good price for their lithium. But that's not only indicative of the management's strengths, but then also obviously, it doesn't matter how strong the lithium market is, if the company is unable to take advantage of that. So, I'd say that's probably one of the first things I'm looking for when I go through that material.
In terms of a junior, I think it's really just important to understand the resource quality. Again, management is critical for junior, because that can really - it doesn't matter if you have a great resource, if you have a bad management team it's not going to make its production. So that's another thing you want to focus on. You want to see if they have experience, but you also need to have a good project. So for a brine project, typically, you like to see something more than 500 milliliters per liter in terms of concentration of lithium in the brine. For a hard rock, for a spodumene, you want to see ideally 1.5% or higher.
You can get as low -- 1% is alright as well, especially right now, but those are typically what I try to look for in terms of just the quick and easy. Obviously, there's more nuance to it as well. But the quick and easy I would say is, to look at that -- and you want to see what kind of source it is. If it's hard rock, you want to see if it's spodumene, if it's you know because you have -- if you have lepidolite for example, lepidolite, a similar or in a way, but only in the sense that it contains lithium. Producing lithium hydroxide from lepidolite, from the ground up, usually will cost about at least for a high grade lepidolite deposit you're looking at 20,000 dollar per ton production cost.
Whereas for, you know, the highest grade spodumene projects, you're probably looking at, you know, as low as 8,000 per ton. So, it's important to understand the mineral as well that they're getting the lithium from -- especially in the case of a hard rock deposits.
Daniel Snyder: All right. One last question before we get on out of here. In the article that you're putting out this week on your service, you mentioned something about the lithium price safety net. What is that?
Owen Clendenin: Yeah. I think that's something that is important for investors to understand. Right now, lithium is so detached from the cost curve, it is pretty much only a supply and demand issue. Right? But as the lithium industry matures, and we're looking 10 years down the line. On Seeking Alpha, obviously, my writing name is Long Term Tips. So I think you can get the idea of -- I like to look towards the long term.
And so a lot of these companies are ideally 10 plus year holds. And so 10 plus years from now, hopefully, the lithium industry is a little more mature. We're at a state where maybe we're coming back towards the cost curve. And that's something that I find some subscribers of mine are concerned about or even in general in the industry as a whole, people are concerned about us returning to that cost curve.
And so the safety net is something I, as I like to call it, is -- right now we're seeing the cost of producing lithium skyrocket. Obviously, some of that has to do with inflation. But primarily, it's because of the need to increase lithium production so rapidly that a lot of these producers have targeted lower quality projects, lower quality deposits, which has increased the average cost to produce lithium. So, if you're looking 2 years ago, the average cost to produce spodumene concentrate, you're probably looking at $800 a ton. Now it's easily over $1,500 a ton. Right?
If you need 7 tonnes to 8 tonnes of that to produce lithium hydroxide or lithium carbonate, you can kind of see how these costs are ballooning as the average quality of projects decreases.
But if you look further into lepidolite, which I mentioned earlier, so brine - hard rock is about 50%, brine is about 35%, and lepidolite is the rest of your production. Give or take, a couple percentage points. And lepidolite is that really low quality stuff or that really complex material where it's harder to extract the lithium from the ore, much more chemically intensive, much more challenging, takes a lot longer.
And so for high quality lepidolite projects, you're looking at about 20,000 at least per ton to extract. Right? So you're going from having an average production cost of maybe $8,000 per ton in 2019, 2020 even, and now at the high-end of the cost curve, you have producers that are in the high 20s, maybe even the low 30,000 per ton.
And lepidolite now being, you know, 15% or so of the supply picture, you can't just cut that out. If you cut out lepidolite, that's a big chunk of the market. And so prices need to be able to sustain those upper end lithium producers in order to maintain an even supply balance. And so what I see is, 10 years from now, sure we might not be as supply limited as we are now.
But if you can get into these low cost projects early on in their life, then you stand to do very well for yourself down the line because if they're still producing at you know, some are producing as low as, you know, $4,000 per ton, $5,000 per ton, but then you have in China with lepidolite producers producing for $20,000 per ton, $30,000 per ton I mean that that's an incredible comparative advantage that you've got and you can do pretty well with those margins.
So, yeah, that's really what it's all about is. Right now, we're in a supply limited - we're in a supply limited market, but down the line as we shift towards a better balance, the ramifications of having to boost supply so quickly will kind of prevent them from total collapse, I suppose. And you know, margins will still be pretty fat.
Daniel Snyder: Man, I got to say, I feel like I just went like Lithium School 101. You have dropped so much knowledge on us today. There's so many terms that I need to go research further or just go -- I mean, I could always come ask you. Right? Like, you're the master of lithium. Appreciate all the time today. Thank you so much for the insights, Owen. Anything else you want to say to our listener before we jump off here?
Owen Clendenin: Yeah, I think the most important thing is, it's a very complex industry. There's a lot to unpack. I could probably keep going for hours. But that's -- we scratched the surface here, but yeah, thank you for having me on.
Daniel Snyder: Just a reminder, anything you hear on this podcast should not be considered investment advice. At times, myself or the guests might own positions in the securities mentioned, but this is for entertainment purposes only and you should seek advice from a licensed professional before investing.
And just a reminder, you can find a link to the investing group service in the description or show notes page on Seeking Alpha. And we'll see you next episode.
We encourage you to listen to the podcast embedded above or on the go via Apple Podcasts or Spotify .
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Lithium 101 And The Best Run Lithium Company With Owen Clendenin (Green Growth Giants)