The Wave of Consolidation in the Lithium Sector Begins

Dear Shareholders,

The news was surprising: a few days ago the Australian conglomerate, Wesfarmers, announced its intention to acquire Kidman Resources for around US$544 million. Together with Chilean lithium producer SQM, the Kidman is developing a large hard rock lithium deposit in Western Australia. According to a resource estimate from March 2018, up to 189 million tonnes of lithium-oxide-containing rock is hosted at its Earl Grey project. This corresponds to about 6.5 million tonnes of lithium carbonate equivalent. Wesfarmers’ offer is 47% higher than Kidman’s market price before the takeover bid was announced – but probably still well below the fair value of the deposit, given the enormous upcoming increase in lithium demand. This is a sign that investors are becoming increasingly anxious and that excellent entry prices for large conglomerates in the mining and chemical sectors are being offered now.

Wesfarmers Managing Director, Rob Scott, said the company had spent two years looking at the lithium sector. He expects that lithium hydroxide, in particular, will play an important role in the automotive industry in the future as manufacturers want to produce more and more long-range cars.

Even before the Wesfarmers offer, there was momentum in the market. At the beginning of April, the Volkswagen Group signed a Letter of Intent with Ganfeng Lithium for long-term lithium supply. It was agreed that the Chinese lithium producer would supply VW Group with lithium over the next ten years.

VW originally estimated its future demand for battery cells at 150 gigawatt hours (GWh) per year. This corresponds, roughly, to 7- to 8-fold output of Tesla’s Gigafactory, currently the world’s largest battery factory. In the meantime, however, VW has once again revised its plans for electric cars sharply upwards. Now the company wants to put a total of 22 million electric vehicles on the road in the next ten years. VW had originally expected 15 million electric cars. Stefan Sommer, VW Group Board Member for Components and Procurement, commented: “By 2025, around a quarter of our delivered fleet will already be electric. Accordingly, our demand for raw materials for cell production will increase rapidly in the coming years”.

Lithium supply will soon become an issue

The long-term securing of the light metal by VW makes absolute sense. There is currently still enough lithium on the market because only a few electric cars are produced. However, experts anticipate that bottlenecks could occur by the end of the year. While there are already around 40 megafactories in operation worldwide, many are only producing battery cells at a fraction of planned capacity. However, the battery plants will be ramped up in the coming months, which will cause the demand for lithium to rise sharply.

Last year, the Chinese Tianqi Lithium group purchased a stake of 24% of SQM, the second largest lithium producer in the world, for just under $4.1 billion. Tianqi already operates a joint venture in Australia with Albemarle, the world’s largest lithium producer.

Chinese companies recognized early on that lithium is of strategic importance in the global roll-out of electric cars. VW is merely a first mover outside of China and this realization will also prevail among Western car manufacturers, slowly but surely. One doesn’t need a crystal ball to see what this means for lithium producers and developers like Rock Tech Lithium.