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High Oil Prices Prove a Boon to Lithium Companies

By Dave Zgodzinski | Mon, 15 July 2013 23:02 | 0

The price of oil is subjective. It depends on viscosity, sulphur content, location and many other factors like Middle Eastern politics. The price of West Texas Intermediate crude is pushing over $100 a barrel again. The price of Brent crude is a few dollars higher than that.

But then there is the price of oil in Lac Megantic, Quebec. That price is many lives lost. After the tragedy of the runaway oil train, the price of oil in that town is immense. And it’s another factor that will affect the equation for oil transportation, insurance, and other costs in the oil industry.

Pumpjacks
Pumpjacks in an oil field

The current price of West Texas at over $100 a barrel is somewhat of a mystery. It wasn’t supposed to be this high. What with all the new production that has come out of oil shale plays in the US in the past five years. Production in South Dakota is booming. Despite the BP disaster, deep offshore wells are being drilled galore in the Gulf of Mexico with promising results. And despite all the bad publicity, production from the Alberta oil sands is increasing and extraction technology continues to improve.

And yet, a growing economy, even a slowly growing economy, keeps sucking up all that new production. And paying $100 a barrel for the pleasure.

It wasn’t all that many years ago that oil was pushing up towards $150 a barrel. All the talk was about “peak oil” and the fear was that we would soon be running out of petroleum. But only a few years later, the situation reversed. Now there is just too much of the stuff being pumped out in the Dakotas and other tight oil plays. And new production is so high that the only way to move it in some cases is by rail, because they can’t build pipelines fast enough.

And that’s the way it has always been with oil – boom or bust. The cycles are big and emotional, as are the price swings. And there have been many cycles in the oil business over the last 150 years. Unfortunately in the oil business there are recurring tragedies that bring the hidden costs of oil into perspective – Exxon Valdez, Gulf Wars I and II, BP and the Gulf of Mexico, and now Lac Megantic. Nature is damaged, lives are lost, insurance rates go up. It all gets factored in.
The renewable energy business has really only had one cycle. There was a boom in first few years of the new century as governments pushed for renewable energy and technologies improved to deliver better, more reliable and more economic production.

Then there was the bust of 2009. Renewable energy looked like it was done. Bankrupt Governments can’t afford to push development of green power any more. And more importantly, gas and oil exploration made some big scores in shale drilling. So the price for hydrocarbon fuels dropped.

Renewable electricity production competes directly with electricity generated by natural gas. There has been a collapse in gas prices in the past couple of years due to huge new production from shale in places like Pennsylvania and Ohio. Low gas prices have meant low electricity prices and less incentive to build wind and solar farms.

Electric cars compete directly with vehicles powered by oil.

Chevy Volt
Chevy Volt

The continuing improvements in drilling and extraction technology have ramped up oil production and the fear was that a glut would ensue. The lower prices of crude helped keep gasoline prices down and low gas prices make buying an electric vehicle less attractive.

But now West Texas Intermediate is up over $100 again. Some commentators blame Egypt or Syria. Lord knows the problems in the Middle East near the big oil fields are increasing. But even after the news from over there temporarily settles down, the oil price stays high. Oil trains are carting the stuff to market. New pipelines are being built. But the thirst for petroleum swallows it all up. And that moves gasoline prices up a notch or two.

Every time the equation includes higher gasoline prices,  it looks better for electric vehicles. The economics make more sense and more consumers are willing to try an electric car. Car makers improve the products and more models are being built to compete. A new BMW electric vehicle is now being rolled out, many others will follow. Charging stations continue to be built and their presence assures other potential buyers. Critical mass is being added.

Electric cars are still more expensive and less convenient than gas powered vehicles. But they are continuing to improve and prices continue to drop. And despite the best efforts of millions of people around the world in the petroleum industry, there will continue to be tragedies related to the oil business. It’s a flammable substance.

So the price of oil continues to move higher.

This focus on electric vehicles brings us back to the element that is necessary for the batteries that make them go – lithium. I have written about new lithium producers – lithium juniors. The stocks have not been great performers. But that may change if gasoline prices continue to rise and electric vehicles become better sellers. Here is an update on three companies I wrote about in the past.

Canada Lithium

Canada Lithium has overpromised and under delivered – not a good combination for any company.  First, there was a debacle regarding the reserve numbers. Canada Lithium owns a lithium deposit in northern Quebec about 60 kilometers on a paved road from the gold mining town of Val D’Or. This was a past producing mine. After the company raised money in a financing, there was news that were discrepancies with the tonnage and grades of lithium still present in the deposit. The stock dropped, and then I first wrote about the company.

After independent studies gave a more accurate picture of reserve numbers, the company got busy with building the mine. But as with many other mining projects these past few years, there have been delays and cost overruns. Canada Lithium has had no revenues up until now, so the company has been forced to raise more and more money as delays pushed back production and costs escalated.

The company has diluted the shares by selling more stock to raise capital.

The delays have soured investors. When I first wrote about Canada Lithium in December of 2011, the stock was at 50 cents Can. a share. It rose to over 90 cents this past February as first lithium production was supposed to be imminent. But then there were more delays and more money raised so the stock dropped back down and closed Friday at 56 cents a share.

Canada Lithium 52 Week Chart
Canada Lithium 52 Week Chart:Source - Bigcharts.com

It would appear that the stock is a bargain again. But now is the time for the company to stand and deliver.  At the beginning of July, Canada Lithium announced that it had processed the first batch of 99.1% pure lithium carbonate from its processing plant. The material was then brought to battery grade – 99.5% lithium carbonate by treatment in the the solvent extraction and bicarbonate circuits.

A shipment has finally been sent to the company’s long term contract customer – the Tewoo group in China.

If Canada Lithium’s mine and processing facilities can begin to deliver the kinds of production that were anticipated in the past couple of years, the stock should recover in price, even if there is more stock out there because of additional financings.

If there are any other serious problems with the mine or processing plant, it will be difficult for the company to recover.

Orocobre Ltd.

Canada Lithium is mining lithium from hard rock and so can theoretically begin producing quickly. Other junior lithium producers are looking to produce lithium from brines in salt flats in South America. This is a longer process to get started. Even after the brine has been pumped into evaporating ponds, it takes many months for enough evaporation to allow production to begin from the salts.

Orocobre has been working on its Salar de Olaroz brine project in northwest Argentina. Thus far progress is steady. The project has good reserves of lithium and potash in solution in brines. The technology for producing from these salt brines is well understood. Orocobre has obtained financing to put the project into production. Now they have to connect the dots.

Orocobre has played its cards well in dealing with the politics of doing business in Argentina. When the local provincial government of Jujuy saw the potential (read “money”) in lithium mining, the granting of permits slowed down and threatened to stop altogether.

Orocobre made a deal with the provincial government which, through a crown corporation, now owns 8.5% of the Olaroz project. Orocobre then quickly received environmental and mining permits.

The company was adept at getting financing as well from another large organization – Toyota Tsusho. With the help of this Japanese conglomerate, Orocobre was able to raise the $229 million US in debt required to finance the Olaroz lithium project.

Toyota Tsusho will own 25% of the project and will be the prime customer for the Lithium. Thus far, the development of Olaroz is on budget and on schedule.

The company estimates $70 million US of EBITDA annually from this mine if it can ramp up to production of 17,500 tonnes of lithium per year. What’s more, the Olaroz property has reserves that can sustain a mine at good production levels for 40 years. At Friday's closing price of $ 1.53 Can. the total market capitalization of Orocobre is about $180 million Can.

Orocobre has invested in other industrtial mineral operations in Argentina. Last year, the company bought Borax Argentina from Rio Tinto. This subsidiary company mines and sells borax which is used in soaps, enamels, fire retardents and many other products. Borax Argentina has just received an infusion of capital to revamp operations, and hopefully will spin off cash for Orocobre soon.

The depreciating Argentinian currency is a positive factor for Borax Argentina, with costs denominated in Argentinian pesos.

Orocobre is working on other lithium projects as well. The company’s Salinas Grandes brine property is located about 140 km from the Olaroz property. The company has been drilling and testing the brines produced at the property with good results – high lithium and potash content, and relatively low magnesium and sulphates which must be separated.

Porosity testing and more exploration must be done in order to give reserve estimates, but Orocobre is encouraged by the results to date of the work done on the property.

Orocobre's stock was $1.75 Can when I first wrote about the company. It moved higher afterwards, but has dropped back to closer on Friday at $1.53. If the Olaroz Project advances as hoped, the stock will reflect it.

Lithium Americas Corp.

Lithium Americas also has a large brine lithium deposit in northwestern Argentina - the Cauchari-Olaroz. This deposit is in the same general vicinity as the Orocobre deposit and has some promising reserve numbers. Lithium Americas claims that Cauchari is the third largest lithium brine deposit in the world.

The project received final approval from the provincial government of Jujuy in December of 2012.

But Lithium Americas has not made the same progress as Orocobre. Lithium Americas has been unable to secure financing for the Cauchari mine. The company expects to receive the go ahead for financing this year, but to date, nothing has materialized.

In May, the company announced the resignation of its longtime President and CEO, Waldo Perez. This is obviously an admission that the company is not progressing as hoped and that confidence in management had eroded.

Of these three aspiring lithium producers, Lithium Americas has had the worst performing stock. It closed at 46 cents Can. a share on Friday.

If the equation changes and a financing deal can be arranged, the company will have a positive future.

By. David Zgodzinski

About the author

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