MELBOURNE/SANTIAGO – Australia's Kidman Resources and Chilean partner SQM may lose their right to develop the Mount Holland lithium project after a recommendation by a unit of the West Australian government that regulates mining leases.

Kidman had asked the Western Australia Department of Mines for an exemption to a rule that requires mine leaseholders to spend a certain amount on site development in order to maintain their rights to their leases. Kidman argued that since it only found lithium after the period was up, it should be exempt.

However, the Mines Department disagreed and recommended on Wednesday that the state Mining Minister Bill Johnston not grant the exemption.

The recommendation raises the risk that the Mount Holland development sites may be forfeited to other parties that made claims on the sites against the former owner. The process of deciding the case could delay the mine's development just as demand for lithium, used in automotive batteries, has increased.

Kidman Resources bought the Mount Holland leaseholdings for $3.5-million in early 2016.

SQM invested $110-million into Kidman in 2017 to jointly develop Mount Holland to produce lithium carbonate and hydroxide for electric vehicle batteries.

Kidman declined to comment when contacted by Reuters on Thursday because its shares are under a trading halt until September 17. SQM shares are halted as well.

However, SQM said in a statement on Wednesday that "although this recommendation ... is not a final decision ... it could generate uncertainty or delays" at Mount Holland.

Broker Canaccord Genuity said in a report that a final decision from Johnston would take about four weeks. If the exemption was not granted, the Mount Holland tenements could become liable for forfeiture, which would require a separate process that could take a further 12 months.

"The recommendation is not binding on the Minister, and we consider it improbable that the exemption will not be granted," said Canaccord, which has a speculative buy rating on the firm.

"Given our view of the likelihood of the exemption being granted, we see any share price volatility as offering attractive risk/reward prospects."