Lithium: The Australian Resource Opportunity of the Decade

Lithium demand is set to skyrocket globally over the next decade, driven by the rapid growth of electric vehicles (EV's). With the world's largest reserves of lithium ore, Australia has a prime opportunity to capitalise on this trend and become a major producer of refined lithium. However, quick and decisive action is required to secure Australia's position before the window of opportunity closes. This article makes the investment case for why Australian companies should move swiftly to establish domestic lithium refining capabilities.

The Growth Opportunity

The EV market is expanding at a remarkable clip, with production forecast to grow 26% annually through 2030 (Exhibit 1). As EV's rely on lithium-ion batteries, this exponential growth means lithium demand will also surge. Total lithium demand is expected to rise from 0.72 million metric tons of lithium carbonate equivalent (LCE) today to 3.06 million metric tons by 2030 - an astounding 20% compound annual growth rate.

Within this demand profile, lithium hydroxide will be the fastest growing product segment, with expected growth of 31% per year. This is because high-nickel batteries, which use lithium hydroxide, are becoming the dominant battery chemistry for EV's due to superior energy density and cost profile compared to lithium carbonate chemistries.

Australia is Endowed with Massive Resources

With over 13 million metric tons of identified lithium reserves, Australia has the second largest reserves in the world after Chile. Unlike Chile's lithium brines, Australia's lithium is found in hard rock deposits with high ore grades, making it cheaper to mine and process. Australian companies are already the largest global producers of spodumene concentrate, which is the precursor mineral to refined lithium chemicals.

In 2021, Australia produced over 400,000 metric tons of LCE worth of spodumene, accounting for over 40% of total global lithium production. However, nearly all of this output was exported to China for processing into lithium chemicals. Going forward, there is a prime opportunity for Australia to capture additional value by transitioning to domestic refining of spodumene into lithium hydroxide.

Estimating the Revenue Potential

Converting spodumene into lithium hydroxide is projected to provide significantly higher margins compared to selling unrefined ore. While spodumene fetches $2,500 to $3,500 per metric ton, lithium hydroxide prices have recently exceeded $70,000 per metric ton.

With Australian spodumene output expected to reach 716,000 metric tons LCE by 2030, full domestic refining could generate $9.6 billion in incremental revenue compared to exporting the material unprocessed. Even assuming a more conservative long-term lithium price of $15,000 per metric ton, refining to hydroxide could still deliver a 12-21% IRR for greenfield projects.

Strategic Advantages for Australia

Beyond the direct revenue upside, establishing a full lithium value chain in Australia provides several strategic advantages:

Low Costs: Integrated mining and refining lithium hydroxide in Australia is estimated to cost just US$6,600 per metric ton LCE, 52% below the global average of US$10,400. This is driven by plentiful cheap renewable energy as well as proximity to China-based equipment suppliers.

Favoured Access to Major Markets: Australia's free trade agreements (FTAs) with major EV producers like the US, Japan and South Korea provide tariff-free access to 50% of expected lithium demand in 2030. US EV tax credits also favour sourcing from FTA partners like Australia.

Low Emissions: Australia's wealth of solar, wind and other renewables can support production of low-carbon lithium chemicals. This will be a key advantage as automakers seek to decarbonise their supply chains.

Leapfrog into Hydroxide Capabilities

After years of undersupply, there is currently a global glut of lithium carbonate while hydroxide remains tightly balanced. This underscores the need for Australia to prioritise developing hydroxide refining capabilities rather than carbonate in order to align with market demand.

Albemarle and Tianqi have led the way constructing the first lithium hydroxide refineries in Western Australia with capacity of 50,000 metric tons per year each. However, their projected 2030 output of 234,000 metric tons LCE will only be enough to refine one-third of Australia's spodumene production. This leaves an opportunity for new entrants to add significant capacity and establish Australia as a world leader in lithium hydroxide.

Key Risks and Challenges

While the revenue potential is substantial, investors should be aware of several risks inherent in developing greenfield refining projects:

Labor Shortages: Western Australia already faces chronic shortages of construction labor which lead to cost blowouts. Creative workforce strategies will be needed to contain expenses. Construction labor shortages in Western Australia could drive cost overruns and project delays. Securing sufficient skilled talent will be a challenge.

Permitting Delays: Lithium refining is a new industry in Australia. Navigating the licensing and approval processes may cause unanticipated delays.

Technology Risk: The technology is proven globally but new to Australia. Poor commissioning or design issues could hamper ramp-up and hurt project economics.

Geopolitics: Rising Australia-China trade tensions add uncertainty to accessing key Chinese equipment suppliers and customers

Alternate battery tech: If new battery chemistries displace lithium, it could undermine project assumptions and economics

Stranded Asset Risk: Lithium prices and demand growth have considerable uncertainty. Conservatively phasing capacity expansion will reduce risk of oversupply if demand slows.

ESG Scrutiny: Mining and refining have high carbon and water footprints. Maintaining robust sustainability practices will be essential.

While these risks are real, they are surmountable with careful project planning and execution. The enormous long-term demand outlook makes lithium refining in Australia a highly compelling growth opportunity. Acting swiftly in the next 1-2 years will be essential for Australian companies to fully capitalise before the window begins to close. By leveraging it's natural advantages, Australia can establish itself as a renewable energy superpower - not only exporting sunshine but also the vital battery chemicals needed to store and transmit this energy to the world.

Here are 5 key takeaways for investors on the Australian lithium opportunity:

• Lithium demand growth will be explosive, rising 20% annually through 2030 driven by electric vehicle adoption
• Australia has massive lithium reserves that can be mined at low cost, providing a competitive advantage
• Refining spodumene domestically into lithium hydroxide could deliver ~$10 billion in extra revenues versus exporting ore
• Strategic benefits include low production costs, favoured access to key export markets, and low-carbon production
• New projects face risks like labour shortages and permitting delays, but the growth outlook remains highly compelling overall

Some lithium companies that have been successful in establishing operations in Australia include:

• Albemarle - US-based lithium producer that has built a 50,000 tpa lithium hydroxide refinery in Kemerton, WA. They have succeeded by leveraging technology expertise and forming a JV with local partner Mineral Resources Limited.
• Tianqi - China-based lithium miner that has built a 24,000 tpa refinery in Kwinana, WA, with plans to expand to 100,000 tpa. Their success factors are financial backing from Chinese shareholders and a JV with Australian partner IGO Limited.
• Core Lithium - Core Lithium is an emerging lithium mining company focused on developing the Finniss Lithium Project near Darwin, Australia. As a pure-play lithium explorer and developer, Core Lithium is well-positioned to capitalise on growing lithium demand by bringing a new domestic lithium mine online.
• Mineral Resources Limited - Australian mining services company that is Albemarle's JV partner in the Kemerton refinery. Their local market knowledge and operational execution capabilities have been key.
• IGO Limited - Australian mining company that is Tianqi's JV partner in the Kwinana refinery. Their lithium exploration assets and local workforce have supported success.

In general, factors that have enabled these companies' success include leveraging technical expertise from foreign partners, joining forces with local players for regional expertise, and having strong capital backing to fund major projects. Securing early mover advantage in lithium hydroxide has also been a key success factor.