Stock Drop was Overdone.Lithium stocks bounce as devil is found in detail of SQM’s Chilean deal
25th January 2018
Tim Treadgold
Ignorance is not bliss, it’s actually quite expensive, as some investors in lithium stocks discovered this week as the shock of last Friday’s sell-off gave way to fresh details of what’s happening in Chile’s lithium industry.
In a few words, not as much happened in Chile as was first feared, and perhaps nothing at all, because while Chile’s biggest lithium producer, SQM, has won the right to expand production it will be at a fiercely expensive cost, thanks to a new royalty rate of up to 40%.
Rather than SQM rapidly regaining its status as the world’s biggest lithium producer after it ended years of hostility with the Chilean Government, it is possible that SQM will not be the market destabiliser that investors feared – and even if it’s brine-lake lithium can be a low-cost source of lithium, the new royalty regime could be a killer.
As more information from Chile reached the market, Australian lithium stocks clawed back much of their lost ground.
Pilbara Minerals, which lost 8c to 92c in the immediate aftermath to the SQM deal being announced, traded yesterday up to $1.05, back where it was a week ago, before settling at around $1.01.
Orocobre, which fell 82c to $6.36, traded yesterday up to $6.98, to be just short of where it was before news of the Chilean Government approving SQM’s expansion broke in Australia.
The lithium news was the highlight of a shortened trading week in Australia which was dominated by the start of quarterly reporting season and should feature a fresh burst of interest in nugget-gold stocks today (Thursday) after an update from Canada’s Novo Resources at a conference in Vancouver.
Two investment bank reports of significance for lithium investors were released this week, one from UBS based on a tour of China and the other from Macquarie Bank, which looked at the Chile deal that frightened the market last week.
The key point in the UBS report was an observation made after a meeting with executives from Tianqi Lithium, the world’s third biggest producer of lithium carbonate, during which negative comments were made about the quality of China’s home-produced lithium.
China’s salt lakes, according to the UBS report, have impurity issues which can mean that the final carbonate product “is unlikely to reach battery grade” – an observation which goes some way to explaining why Australian lithium is in strong demand.
Quality, according to Tianqi, is seen as a “bigger and bigger” driver of future lithium projects – another plus for Australia.
The Macquarie report, however, was dynamite for the lithium industry, because it is the first to analyse the detail of the deal between SQM and the Chilean Government, including a breakdown of the punitive royalty regime.
Under a deal which also catches US-based Albemarle, a 6.8% free-on-board royalty will be replaced by a sliding scale using the price of lithium carbonate as a guide with the new starting rate (when the price is less than $US4000 a tonne) being 7%, rising to 10% when the price is between $US5000/t and $US6000/t, and then up to 25% when the price is between $US7,000 and $US10,000/t – peaking at 40% when the price is more than $US10,000/t.
That royalty regime explains why Kidman Resources is not concerned about its joint venture with SQM at the Mt Holland hard-rock lithium project in WA, where royalties are a fraction of that being introduced in Chile.
SQM is probably keener on the WA project than before, which could be why Kidman’s share price added 10c this week to around $1.95, before settling at $1.85, a level which is up 23c on Monday’s low point of $1.62S