17/02/2022 - 08:00

Back for a second bite at lithium

17/02/2022 - 08:00

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Surging construction activity in the lithium sector will provide increased opportunities for local workshops and sub-contractors.

Back for a second bite at lithium
Tony Ottaviano says Liontown’s $450 million capital raising puts it in a stronger bargaining position. Photo: Matt Jelonek

The lithium sector provides a perfect case study in how widely and rapidly activity can swing in response to commodity prices.

The sector enjoyed a burst of rapid growth up to 2019, until the price fell sharply. That resulted in mines being placed on care and maintenance, new projects being deferred, and several companies falling into administration.

Lithium is now well and truly back on the rise, with industry analysts such as Roskill predicting a big supply deficit and a surge in prices.

One of the winners has been Perth-based producer Pilbara Minerals, which is keen to expand production at its Pilgangoora mine to meet increasing demand.

“Pricing is quite incredible,” managing director Ken Brinsden said.

“There is very, very strong pricing, especially in China, which is the world’s largest lithium metals market.

“Given where prices have got to, there is a growing disconnect between available supply and surging demand.”

Another company set to benefit is IGO, following a well-timed move into the lithium sector.

In December 2020, IGO announced a deal to acquire a minority stake in the Greenbushes mine and the Kwinana refinery from debt-laden Chinese company Tianqi Lithium.

Managing director Peter Bradford said the market had changed rapidly since then.

With the price of lithium-rich spodumene concentrate up strongly, expansion plans have been brought forward.

“Everything at Greenbushes has been accelerated,” Mr Bradford told Business News.

“That’s because back in December 2020, spodumene prices were sitting around $US400 a tonne, now they are up well above $US2,000 a tonne.

“There is a desire from all stakeholders at Greenbushes to accelerate production.”

Liontown Resources, which is planning to kick-off development of its Kathleen Valley project this year, is also bullish on the market outlook.

“I’m very strong in the short to medium term,” managing director Tony Ottaviano said.

He supports Roskill’s long-term view on the spodumene price of $US1,392/t.

This is substantially below current prices, but Mr Ottaviano emphasises a lot of stock market analysts were still assuming a price of around $US800/t.

“We believe Roskill have the most realistic view of supply and demand, and how bringing on new supply will be much harder than people think,” he said.

Mr Ottaviano also believes Kathleen Valley is one of the very few projects advanced enough to enter the market by 2024, when supply shortfalls are forecast.

Mr Brinsden shares the view that bringing on new supply is very challenging.

“It’s easy to put supply numbers in a spreadsheet; it’s not so easy to deliver them on the ground,” he told a recent investor conference call.

“We’ve heard from plenty of analysts who say there is plenty of lithium in the world.

“There is not plenty of lithium in the world that fits the right combination of location, quality of supply, close to infrastructure, in the right jurisdictions that don’t suffer from geopolitical challenges.”

Ken Brinsden. Photo: Matt Jelonek

Mr Brinsden said the market volatility in recent years added to the challenge.

“It is tough to bring on additional capacity in an environment where you were previously being punished,” he said.

“The very low pricing environment meant every producer had slowed down.

“It’s highly likely that on the supply side there will be challenges.

“It’s probably the case that the supply response has already been overstated.”

As with most mining companies in Western Australia, Pilbara Minerals has experienced these supply challenges firsthand.

It failed to meet its production guidance in the December quarter and is currently reviewing its guidance for the current year.

“We have definitely had some growing pains,” Mr Brinsden acknowledged.

The biggest constraint had been getting sufficient workers, especially short-term labour supply, he said.

“That gets to the heart of a lot of issues we have been dealing with, especially when we are ramping up,” Mr Brinsden said.

“When something breaks, or there is a shutdown, you typically can’t get the labour, at least not like we used to, to create the peak loads to get the jobs done quickly.

“Our mining contractors feel it as well as they have a mobile, transitory labour force.

“It’s a big issue.”

Mr Brinsden sees a silver lining to this problem.

“It’s kind of perverse,” he said.

“For the very same reason that Pilbara Minerals had a challenging production quarter, you are likely to see pricing increase because the supply response was insufficient.”

On the demand side, Mr Brinsden expects continuing strong growth from chemical manufacturers in China, who enjoy high profit margins.

That is driven fundamentally by the increasing usage of lithium batteries in electric cars.

“The chemical conversion industry can pay a lot more for spodumene and in my view they will because there is no alternative,” Mr Brinsden said.

“They are contractually bound to sell chemicals, but they don’t have the raw material.

“That means they will pay virtually anything for the raw material. It’s quite incredible.”

He said automotive manufacturers were likely to pay a price for the lack of investment in the supply chain.

“The car makers have been asleep at the wheel.

They haven’t been paying enough attention to the supply chain for battery raw materials.

It will take some years to get right,” Mr Brinsden said.

Liontown Resources

Against this backdrop, Liontown has ticked off several notable milestones in recent months.

These include publishing a definitive feasibility study for Kathleen Valley, which Mr Ottaviano said was grounded in substantial detail.

It factored in a 15-20 per cent cost escalation, plus contingencies, to reflect the heated labour market in WA and higher prices for steel and copper.

“We wanted to be beyond reproach,” Mr Ottaviano said.

The DFS, along with the buoyant lithium market, allowed the company to complete a $450 million capital raising.

“One of the largest ever for a developing company,” Mr Ottaviano said.

He explained it was a deliberate strategy to raise the capital before securing other funding from banks.

“It gives us a better standing with contractors and third parties to secure long lead items,” Mr Ottaviano said.

He believes this is particularly important in the current market, where contractors and suppliers can pick and choose who they work with.

“Immediately, we’ve had impact where companies are approaching us across the board around working with us,” Mr Ottaviano said.

“The most profound change has been the posture of the customers and the banks.

“The banks have been very accommodating.

“We’ve benefited from the maturity of the lithium market over the past five years where we can rely on traditional, plain-vanilla project finance.

“The first generation of lithium producers didn’t have that luxury.”

Mr Ottaviano believes the scale of the project makes Kathleen Valley attractive to many contractors.

It will initially target annual production of 500,000t of spodumene concentrate, rising to 700,000t after about six years.

Another attraction was its focus on renewables, which he said would supply 60 per cent of its power.

However, he has no illusions about the challenges that come with a tight labour market.

As well as high labour rates, Liontown faces the risk of lower productivity, with workers new to the industry generally less efficient.

Mr Ottaviano does not expect any quick relief from government policy changes.

“Once the borders open, more people will come into WA, but labour rates will be sticky; they will take some time to come off,” he said.

Liontown and its engineering partner Lycopodium have been developing a construction plan that suits current market conditions.

“The plant flow sheet is basically a gold plant design,” Mr Ottaviano told Business News.

Lycopodium and many of the other engineering firms have done these flowsheets hundreds of times.

“They have got the design so refined that a lot of it can be built off site and brought in.

“Rather than stick-build on site, we are going to bring things in as modules and pre-assemble off site.”

He believes that will result in lots of work being done in Geraldton and Kalgoorlie, where the modules can be fabricated and pre-assembled.

That means a very small construction team on site.

Liontown also plans to use smaller contractors to do smaller scopes of work, on the expectation this will result in a more assured supply.

“Usually, these smaller contractors have their own team that has been with them for some time,” Mr Ottaviano said.

Lynas Rare Earths recently outlined a similar strategy for construction of its $500 million rare earths plant in Kalgoorlie.

Mr Ottaviano noted that Liontown had two years to put together its operational workforce.

“If we can’t find people to run it by 2024, I think the industry in general is going to have problems,” he said.

Liontown’s board is expected to make a final investment decision on Kathleen Valley in the June quarter.

In the meantime, the company has started placing orders for big pieces of equipment that have a longer delivery time.

The board has also approved a pre-feasibility study to evaluate downstream processing of its spodumene concentrate.

“We’re getting a tremendous amount of interest from customers,” Mr Ottaviano said.

A recent scoping study estimated Liontown would need to invest about $1.5 billion to build a lithium refinery.

The proposed refinery would have annual production of 86,000t per annum of lithium hydroxide.

Three refineries

The proposed Liontown refinery would be the fourth in WA, following those currently being built by Tianqi Lithium, Albemarle and Covalent Lithium.

These projects are poised to make WA the largest producer of lithium hydroxide outside of China, which hitherto has dominated the market.

The Kwinana refinery, which was the first to start development, illustrates just how challenging these projects are.

Tianqi announced in 2019 it had completed construction of the first processing train while deferring completion of the second train, considering the market downturn and its own financial woes.

IGO, as a relatively new minority shareholder, told the stock market last month that the commissioning of train one was still not complete.

The current focus is on the transition from batch processing to continuous processing, to achieve battery-grade production.

Production of the first battery-grade lithium hydroxide is expected in March this year.

IGO expects ‘commercial production’ at train one to be declared in the September quarter.

The second processing train, which is half built, will double production to 48,000tpa.

“We are moving that along in parallel,” Mr Bradford said.

“We have made an early works commitment to the pyromet and leaching circuit.

“That will be progressed ahead of a formal final investment decision later in the year.”

The second refinery to enter production in WA is being developed by US chemicals giant Albemarle Corporation at Kemerton.

Local joint-venture partner Mineral Resources has reported that mechanical completion of ‘train one’ was achieved in November, with construction of the second processing train continuing.

The two will have combined capacity of 50,000tpa.

The third refinery is being developed by Covalent Lithium, which is half-owned by Perth conglomerate Wesfarmers.

The $1.9 billion project involves construction of a new mine and concentrator in the Goldfields and a refinery at Kwinana.

Infrastructure for the Mt Holland mine site, including a 550-room village and aerodrome, is substantially complete.

NRW Holdings’ engineering subsidiary, Primero Group, was awarded a $290 million engineering, procurement and construction contract in September, for the Mt Holland concentrator.

Primero said it anticipated a peak workforce of 350 people on the project.

(This contract was awarded shortly after Primero won a $40 million EPC contract for Core Lithium’s Finniss project.)

Another ASX-listed company, Civmec, was subsequently awarded a construction contract in December for the refinery at Kwinana.

Wesfarmers has stated that preliminary work to evaluate expansion options have begun in parallel with construction of the project.

Mine expansions

To meet the increased demand from lithium refineries in WA and customers in China, production of spodumene concentrate in WA is also set to grow.

The growth is led by Greenbushes, which is already the world’s largest producer with installed capacity of 1.34mtpa.

Jointly owned by Albemarle, Tianqi and IGO, capacity at Greenbushes is poised to nearly double over the next five years at a cost of $1.4 billion.

The expansion plans were detailed in a prospectus lodged last month by Tianqi with the Hong Kong Stock Exchange.

It includes a revival of two projects originally earmarked for 2019, during the most recent lithium boom.

Chemical Grade Processing Plant #3 comprises a third processing plant to increase capacity by 500,000tpa.

Tianqi said construction of CGP3 was scheduled to start in the September quarter this year, with production to start two years later.

IGO’s Mr Bradford said capital expenditure would increase next financial year once construction commenced on CGP3.

“The quoted capital cost for that is $516 million and the large part of that will be incurred in FY23 and FY24,” Mr Bradford told Business News.

First production is targeted for early 2025, with throughput ramping up over six months and optimum recovery over 12 months.

“Immediately following that, subject to board approvals and market conditions, we would expect a similar level of capex for CGP4,” Mr Bradford said.

These projects will deliver more work for Lycopodium, which in October last year was appointed engineering, procurement and construction management contractor for CGP3.

Lycopodium has also been appointed contractor for an expanded mine services area at Greenbushes to accommodate an expansion of the mining fleet.

Lycopodium and Monadelphous, through their Mondium joint venture, have also been building a tailings retreatment plant, which is nearing completion.

Other upcoming projects include a new tailings dam, upgraded power infrastructure, a mine-access road and associated site buildings and service facilities.

Pilbara Minerals is planning for major growth at its Pilgangoora project though, as noted previously, it has not grown as fast as expected.

The company produced 281,000t of spodumene concentrate in FY21 and is currently forecasting production of 400,000-450,000t in FY22.

That’s well down from an earlier forecast of 460,000-510,000t.

Once the company completes the ramp up of its Pilgan and Ngungaju processing plants, it anticipates annual production of between 540,000t and 580,000t.

Its next expansion, dubbed P680, is intended to realise an additional 100,000t of production capacity from the Pilgan processing plant.

The company is targeting FID early in June quarter.

That will be followed by further expansion, dubbed P1000, to increase total Pilgangoora production capacity to up to 1 million tonnes a year.

The target date for FID for the P1000 project is the December quarter of 2022.

Pilbara Minerals is also aiming to invest in downstream processing.

A scoping study is under way with local company Calix on ‘midstream’ processing of lithium chemical salts.

Subject to the results of the scoping study, the two companies plan to establish a joint venture and work on the development of a demonstration plant at Pilgangoora.

This follows the formation of a joint venture with South Korean multinational Posco to develop and operate a 43,000tpa lithium hydroxide refinery in South Korea.

Pilbara Minerals will initially own an 18 per cent interest in the JV with the right to increase its interest to 30 per cent. Construction is due to commence this year.

A new operation to enter the market this year will be Wodgina, jointly owned by Albemarle and MinRes.

Wodgina was placed on care and maintenance in November 2019, shortly after it was built, because of the then weak global market conditions.

The joint venture decided late last year to restart operations with a goal of producing spodumene concentrate midway through this calendar year.

It will initially focus on restarting just one of Wodgina’s three 250,000tpa processing lines, with additional processing lines likely as demand increases.

The mine and concentrator are serviced by their own 64-megawatt gas-fired power plant, a 700-bed accommodation village and an airfield capable of landing A320 aircraft.

The start-up and initial operating phase at Wodgina are expected to create 200 new full-time jobs.

Overseas projects While WA is rapidly emerging as a global leader in the lithium sector, there are plenty of projects under way or planned in other countries.

Perth-based companies are playing a lead role in many of these longer-term opportunities.

AVZ Minerals is a major shareholder in the Manono project in the Democratic Republic of Congo.

It secured backing last year from private Chinese company Suzhou Cath Energy Technologies to support the project, which is targeting annual production of 700,000t of spodumene concentrate.

Another project in Africa is Firefinch’s majority owned Goulamina development in Mali, which is targeting annual production of 726,000t.

One of the most innovative opportunities is being pursued by Perth-based Vulcan Energy Resources.

Its Zero Carbon Lithium project in Germany is designed to do just what its name says.

It combines a geothermal energy project with production of ‘brine’ lithium, as opposed to the hard-rock lithium projects that exist in WA.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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