The driving ambition behind a $ 4 billion lithium merger

Orocobre means “golden copper” in Spanish, but the company focused on lithium shortly before its listing when founding director Neil Stuart attended a mining conference in Argentina’s wine region of Mendoza and earned the credentials. rights of a salt lake 4000 meters above sea level in the Andes.

Lithium was at the time a very small opaque industry run by an oligopoly of Chinese, Chilean and American companies.

The lack of credible and transparent price information has made banks reluctant to lend to aspiring lithium; a bias that has only started to fade over the past two years.

Interest-free from banks, Seville traveled the world in 2008 and 2009 looking for partners to help finance the construction of a project that extracts lithium from salty groundwater beneath the Salar de Olaroz in Argentina.

He soon realized that Orocobre’s future would be defined by cars, rather than calculators and iPads.

“When I started going to conferences and realizing who these partners might be, it became very clear that the other side of the value chain was the auto companies, or the trading houses who thought there was there was a future in trade with car manufacturers ”. said Seville.

A crucial deal to sell the project’s equity and buy it from a division of the Japanese Toyota group was reached in 2010.

Toyota’s involvement convinced the Japanese group Mizuho to do in 2012 what most bankers considered unthinkable; lend $ 192 million to a lithium aspirant with no delivery history.

The loan was largely guaranteed by the Japanese government, and like rare earth producer Lynas, the involvement of Japanese patient partners has enabled Orocobre to survive the extreme volatility of the lithium industry and the challenge of the commissioning of a new project.

Olaroz’s remote and inhospitable location in a high altitude desert ensured many false starts before lithium was first produced in 2015.

An OEM ignored Orocobre’s request for an industrial-scale water boiler capable of dealing with the low atmospheric pressures associated with operation at 4,000 meters above sea level.

Instead, the supplier installed a boiler designed to operate at sea level, causing weeks of confusion over why the processing plant was underperforming.

“We were scratching our heads wondering why things weren’t working, until one of our employees looked at the nameplate on the side of the boiler and said, ‘Take a look. to this, ”Seville remembers.

“It was a real pain.”

As Orocobre developed the world’s first new lithium ‘brine’ operation in decades, Galaxy was proving a hard rock deposit at Mount Cattlin, Western Australia, which was traditionally known for its potential to produce another niche product. ; tantalum.

Like Orocobre, Galaxy was listed with ASX in 2007 with Perth geologist and mining entrepreneur Michael Fotios at the helm.

Fotios, by the way, is the common thread between the two largest mergers in the ASX resource sector over the past year; As well as being the founding father of Galaxy, he was also instrumental in relaunching in 2009 what was then a $ 6 million company called Northern Star Resources.

Michael Fotios was Managing Director of Galaxy Resources when it went public in 2007. Trevor Collens

Northern Star became the world’s sixth-largest gold miner in October when it merged with Saracen to create a company worth more than $ 13 billion on Friday.

“I seem to have this trail of things behind me, some are good and some are bad, but that’s good, that’s the nature of the mining game,” Fotios said of his connection to the two mergers.

Mount Cattlin was acquired from the administrators of Sons of Gwalia, bankrupt miners, in 2006 and had Fotios been successful, mining at Mount Cattlin would not have started until now.

“In 2008, you could see that it would take at least ten years for there to be adoption of electric cars,” he recalls this week.

“The strategy was to bring together as many great resources as possible and when the boom really happened you would have three or four major resources and not just one.”

But others at Galaxy weren’t ready to wait a decade, and Mount Cattlin produced its first lithium in October 2010.

“That’s why I left Galaxy; we drilled the resource but I didn’t think it should be developed right away. I thought they better wait five or six years and sit there because the real demand was going to be in the late teens and early 2020s, ”Fotios says.

“But of course they went ahead and developed it and they went through a hollow and it got them all kinds of trouble.”

Fotios’ comments hint at the roller coaster the lithium industry has endured over the past decade.

Less than two years after its start-up, Mount Cattlin was closed due to low demand in July 2012.

A surge in lithium prices between 2014 and 2018 – driven by Chinese EV subsidies – brought Mount Cattlin back to life in January 2017, and five more WA mines followed over the next 18 months.

The sudden wave of new supply in the still small lithium industry overwhelmed demand, crushed prices and sent some rival miners to the wall amid the bear market that operated between mid-2018 and mid-2020.

Galaxy and Orocobre both lost money in FY2020 and were both forced to raise equity.

But the lithium roller coaster started to follow north again in June 2020 when stimulus packages in countries like Germany offered nearly 10% discounts on the purchase price of a new electric vehicle.

From less than 100,000 in April 2020, global sales of electric vehicles have jumped to nearly 600,000 in December 2020, with 87% of sales made in Europe or China.

European sales fell in the new year due to the expiration of some subsidies, but Chinese sales continued to climb and global EV sales remained around 300,000 in February.

From just 4% of vehicle sales in 2020, UBS predicts that electric vehicles will account for 20% of global vehicle sales in 2025.

By 2030, UBS estimates that half of all vehicle sales will be electric; an objective which will require a production of batteries multiplied by 22 compared to current levels.

“We are more confident than ever in a steep EV penetration curve,” UBS said in a March 4 note.

“We don’t think the supply of raw materials is ready for the wave of demand that’s coming.

“Considering all the known [lithium] projects available by 2030, we estimate that the total amount of lithium available will only be sufficient to meet 22% of EV penetration. “

Morgan Stanley is more cautious with predictions that electric vehicles are expected to account for 13% of vehicle sales by 2025 and 31% by 2030.

But the two forecasters expect electric vehicles to hold more than 80% of the market by 2040.

AustralianSuper long ago identified transportation electrification as the type of ‘mega trend’ that suits its long-term investment style, and Orocobre has been one of its most successful investments in the industry. battery minerals.

AustralianSuper first invested in Orocobre in 2015, seized the declining share price to become a significant shareholder at the end of 2018, and increased its stake to over 7% when raising funds from the ‘last year.

Orocobre CEO Martin Perez De Solay (left) and Galaxy CEO Simon Hay at Galaxy’s Perth office after finalizing details of their $ 4 billion merger. Trevor Collens

Much of that stake was acquired at prices close to half of the $ 6.36 Orocobre shares fetched on Friday.

AustralianSuper’s senior portfolio manager Luke Smith said his team saw through lithium’s short-term volatility and remained focused on the long-term picture.

“This is a good example of AustralianSuper using its longer term approach to invest and see through short term volatility and stay focused on the strong theme of EV and battery storage,” he said. he declares.

“The lithium market quickly returned to the commodity recovery cycle after two spikes of steady downward pressure on prices that was exacerbated by the onset of COVID in early 2020.

“The deployment of more electric vehicle models by many global automakers begins to accelerate in 2021 and will continue to expand rapidly over the next five years, supporting strong growth in demand for lithium and materials from associated battery. “

Mr Smith said the merger was positive as it would allow Orocobre’s technical experience in Olaroz to contribute to a similar project that Galaxy is building near Sal de Vida.

“AustralianSuper understands the strategic rationale for the merger from the perspective of both companies as it expands the asset base in multiple jurisdictions,” he said.

“As a result, the operational risk inherent in the merged company is reduced compared to that of a single asset company.

“In addition, Orocobre’s management team can use their experience in the development and operation of Olaroz for the development of Sal de Vida. The value of having an experienced team in the development of Sal de Vida is a significant advantage of the merger. “

The big question for investors in the lithium sector is whether the industry has grown and matured to the point that it can support further increases in supply, or changes in subsidy policy for electric vehicles, without switching between boom and bust.

The man who will lead the merged entity, Argentina’s father of five, Martin Perez De Solay, said the fact that European EV sales are starting to keep pace with Chinese sales should ensure more consistent demand for lithium. .

“It’s a completely different market now,” he says.

“The demand was primarily from China, but it’s a market where the strongest growth in demand is coming from Europe and the United States is rapidly moving into the deployment of electric vehicles.

Fotios agrees that lithium will be less of a roller coaster ride in the future.

“The maturation and geographic diversification of this supply chain is what was needed before it became stable and this happened,” he says.

“I think from now on it becomes pretty stable.”

About Jimmie T.

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