TORONTO (miningweekly.com) – In line with the breakneck growth in lithium demand, driven by the unprecedented use of the soft, silver-white metal in new battery technologies, investors are increasingly scrutinising South American countries such as Bolivia, Chile and Argentina, where about 70% of the world’s known lithium deposits are found, to ascertain investment stability.
Despite various market analysts contesting the pace at which lithium demand was growing, London-based risk management consultancy PGI Intelligence believed market trends indicated that lithium would be an increasingly profitable sector in mining in the next five years.
In its latest report, ‘PGI Insight: An evaluation of the lithium mining environment in South America’, the firm pointed out that demand for lithium grew at an average yearly rate of 11% between 2010 and 2015, with the price of 99% pure lithium carbonate exports to China – the world’s largest lithium market – more than doubling in the last two months of 2015 alone.
According to PGI, the demand growth was expected to continue on the back of forecast supply shortages and a predicted increase in demand for lithium-ion batteries for use in electric vehicles and battery-based energy storage.
PGI cited advisory firm Global Lithium president Joe Lowry, who was expecting global demand for lithium carbonate to rise to between 280 000 t and 285 000 t by 2020, up from about 163 000 t in 2015, with larger spikes to follow.
Bolivia, Chile and Argentina were likely to become key players in the lithium industry, with the ‘lithium triangle’ of salt flats, or ‘salars’, of Uyuni in Bolivia, Atacama in Chile, and Hombre Muerto in Argentina, accounting for more than 70% of the world’s known reserves. All three countries had made clear their intentions to invest in and develop their lithium deposits, offering a mix of different opportunities and obstacles for investors.
According to PGI, Bolivia boasted the largest single deposit of lithium, but rudimentary infrastructure, a challenging regulatory environment and doubts around the security of investments continued to hinder investors.
Located in a remote location some 3 600 m above sea level with little surrounding infrastructure, the transport of product from Uyuni would be costly, not least given that Bolivia lacked a seaport.
Although no specific local content requirements on lithium mining had been announced, the government’s strict general local content requirements of a maximum 15% of foreign employees created an additional obstacle in terms of the expected high start-up costs.
High levels of State control over lithium mining and a burdensome tax regime also presented investment hurdles in Bolivia’s lithium sector. While government was pushing an agenda of creating a domestic lithium value-added industry, previous proposals to exploit lithium reserves from foreign companies with substantial expertise in lithium battery and electric car technology, including France’s Bolloré, South Korea’s LG Group and Japan’s Mitsubishi and Sumitomo, had so far failed to materialise.
A letter of intent was signed between the Bolivia government and the French Atomic Energy and Alternative Energies Commission in 2014 to explore cooperation within the lithium industry, though few details of these developments had subsequently emerged. President Evo Morales had also stated that the government aimed to retain at least 60% of revenues from any partnership arrangement.
PGI stated that investment security would remain another critical concern in light of the previous nationalisation of foreign mining companies and the limited investor protections provided by the 2015 law on arbitration. In 2012, the government nationalised Glencore’s Colquiri tin/zinc mine and South American Silver’s Malku Khota silver/indium mine.
According to PGI, government law offered no guarantees of investment security, as the 2015 law on arbitration stipulated that disputes arising from investment in natural resources were not subject to arbitration.
The success of the government’s current pilot lithium development programme with Germany-based K-Utec, a well as its ability to engage foreign partners in joint-development projects, would be indicative of wider investor appetite and the prospects for broader mineral processing in Bolivia.
“The growing interest of manufacturing companies dependent on lithium to engage in the production phase and secure longer-term contracts, guaranteeing supply at more stable prices, could incentivise some to invest in such joint ventures,” PGI stated.
Chile’s lithium industry is the most mature in the Americas and its reserves of lithium were of a higher quality and more easily exploitable than Bolivia’s, yet the constitutional definition of the mineral as a strategic asset had complicated the investment process and could slow future investment, PGI warned.
PGI pointed out that Chile’s first-ever tender for a special lithium contract in 2012 was a failure, with a concession awarded to domestic chemical company SQM cancelled shortly afterwards owing to irregularities in the bidding process. An ongoing contractual dispute between SQM and the Chilean government also highlighted the potential legal difficulties that concession holders might face.
Government exploration of public–private initiatives to develop the lithium industry could facilitate a more open investment climate for private companies in Chile’s lithium sector. Santiago would be keen not to lose out market share to other emerging lithium producers, such as Argentina, and, in February 2016, the city agreed with Albemarle Corp – which acquired Rockwood in 2015 – to almost triple production at their facilities in Salar de Atacama and Sector La Negra.
The move was opposed by SQM, which asked local authorities to invalidate the deal alleging serious violations of environmental regulations during the evaluation process in May 2016. The public reaction to increased private investment in lithium could also influence the pace of reform in the sector, while the activities of State mining company Codelco, which held two existing concessions, would be indicative of how much the government intended to participate in lithium in upcoming years.
Meanwhile, regulatory reforms to encourage investment in Argentina’s mining sector would likely speed up lithium industry growth and could see the country have the fastest project growth rates of the lithium triangle.
Political change with the election of President Mauricio Macri in December 2015, and the improving legislative landscape for mining companies, could see rapid growth in Argentina’s lithium industry.
Since assuming office in January 2016, President Macri had undertaken a series of reforms to improve the investment climate, including the elimination of currency controls that previously complicated the repatriation of profits, and the removal of a 5% tax on mining exports.
Argentina’s Mining Code gave each province autonomy in determining the strategic status of lithium, which in turn, would determine if concessions could be granted to private investors.
Companies with total or near-total ownership of lithium concessions include Dajin Resources, which held a 100% stake in the Salinas Grandes lithium site, in Jujuy, and Galaxy Resources, which had a 96% stake in Sal de Vida.
PGI reported that FMC Corp, which already operated in Argentina, had expressed optimism around the investment climate in Argentina’s lithium sector under the Macri administration, in line with wider investor sentiment regarding Argentina’s natural resources. The speed of development of projects such as the Olaroz facility, operated by Orocobre, and the Western Lithium project, due to start production next year, would provide early indicators of the market’s growth, the firm forecast.