The Geopolitics of Lithium - Does Geography Trump Geology?
Dear Shareholders & Friends,
The issues surrounding the ethical and sustainable production of cobalt are by now well-documented. With most of the world’s supply coming from the Democratic Republic of Congo (“DRC”), a region characterized by extreme political instability, investment risk and the use of child labour in mines, it comes as no surprise that efforts have increased to both find supplies outside of the DRC and engineer cobalt out of lithium-ion batteries. While progress has been made reducing the cobalt-intensity of cathodes, the complete elimination of cobalt is yet to be achieved.
Relative to cobalt, the ethical and sustainable production of lithium receives little attention. Fortunately, lithium production is not characterized by the same types of child labour and safety concerns as cobalt; however, investors would be wise to take note of the increasing geopolitical risk and growing social and environmental issues threatening future lithium supply from South America.
Much of the World’s Lithium Reserves in Region Prone to Geopolitical Risk
Recent developments in the “Lithium Triangle”, an area of Argentina, Chile and Bolivia that is responsible for nearly half of the world’s lithium production, illustrate how precarious future lithium supply may be.
Chile, the world’s second largest lithium producing country behind Australia, has seen massive demonstrations in response to persistently high rates of inequality, among the worst in Latin America. The economic impact of the protests is already being felt with expectations of a contraction this quarter sparking a “big increase in uncertainty,” freezing investment and exacerbating the slowdown. Uncertainty will continue for the foreseeable future as the country begins the long process of drafting a new constitution.
Next door in Argentina, the world’s third largest lithium producing country, a return to Peronism has rattled markets. Tax laws have been modified 80 times since 1988, while fiscal rules changed 14 times. There have been 61 central bank chiefs in the institution’s 84 years. Battling high inflation and a currency crisis, the country now looks set to battle the International Monetary Fund (“IMF”) over the terms of the bailout received in 2018 under the outgoing pro-business president Mauricio Macri. Perhaps the only way to stave off a potential debt crisis will be to adopt painful economic adjustments of the sort that sparked the violent unrest in Chile. As tends to follow high inflation and currency devaluation, convertibility risk has been introduced into investors’ equations with the recent imposition of currency controls.
The third member of the Lithium Triangle, Bolivia, is thought to be home to the world’s largest lithium reserves. Despite losing a referendum in 2016 asking voters to allow him to seek a third term in defiance of the constitution he introduced, Bolivian president Evo Morales ran for re-election last month. After the election, when it appeared that Mr. Morales and his challenger, Carlos Mesa, were headed for a run-off, reports of a halting of the vote count sparked suspicions of malfeasance. While the country’s Supreme Electoral Tribunal declared Mr. Morales the winner, violent protests forced his government to cooperate with a vote audit by the Organization of American States (“OAS”). Based on their audit, the OAS alleged vast fraud, prompting Mr. Morales to call for fresh elections; however, this did not quell the violence and Mr. Morales resigned and fled to Mexico where he was granted asylum. With a new election scheduled for early 2020, the country looks headed for further chaos.
While geopolitical risks are nothing new to mining executives, the concept of “country risk” depends on a high degree of social stability and extended periods of institutional consistency and continuity. The greater returns demanded by those investors able to quantify country risk in this era of elevated instability will lead to reduced investment in these jurisdictions for the foreseeable future.
Lithium Projects in the Crosshairs as Social Licences are Evaporating
Chile’s lithium reserves and production have been a target of demonstrations, with access to some production areas blocked and further threats to block any new lithium development on the country’s salt flats. Investors in lithium expansions or new lithium mines in the area are right to be anxious as, this protests increases their cost of capital.
Social licenses to operate are also evaporating in both Argentina and Bolivia as recent events demonstrate. Earlier this year, lithium exploration companies in Argentina faced resistance to further development from local communities opposed to development on cultural and spiritual grounds with reports suggesting development remains at a standstill. In Bolivia, recent efforts to develop lithium production have met their demise in the face of protests, blockades and hunger strikes by locals demanding a greater share of any economic benefits realized.
Exacerbating resistance to lithium development in the Lithium Triangle is growing concern about the use of water in the extraction of lithium from brine deposits, particularly in this region characterized by high levels of water stress. In a cruel twist of fate, the arid climate is necessary to allow for the solar evaporation of lithium from the subsurface brine pumped to the surface into large ponds; however, this dry climate has also led to water shortages with some areas already needing to truck in potable water. Add to this the possible displacement of local agriculture and potential deleterious impacts on fragile ecosystems and it is conceivable that resistance to brine expansions is here to stay.
How Can Investors React?
Owing to their rich histories of natural resource development and robust and transparent regulatory frameworks, Canada and Australia are well-positioned to be secure, responsible and sustainable sources of lithium. The lithium deposits in Canada, particularly those in Ontario and Quebec, are of the conventional hard rock variety, such us Rock Tech’s Georgia Lake lithium project. The lithium at our project is hosted in spodumene and its extraction is well-understood and does not require massive amounts of water or generate problematic effluent. Furthermore, Canada has developed programs to support Indigenous partnerships including skills training, business development, procurement and capacity building ensuring ethical development.
In this period of elevated uncertainty, it is only a matter of time before the spotlight shines on Canada’s lithium potential owing to its relative investment safety and world-class infrastructure providing stronger, more efficient transportation corridors to international markets.