Concerns regarding state interference in Chile’s lithium sector may have been overplayed for Cleantech Lithium
“…The company assets have lower levels of lithium concentration and, while highly economic for a company such as CTL, they are not of the scale that could be considered assets of national strategic importance…”
CleanTech Lithium (AIM:CTL), nurturing a set of highly prospective mines on Chile’s spectacular salt flats that promise to help meet global demand for critical battery metal lithium, was one of 2022’s most popular small cap stocks, the company’s value nearly tripling in the 12 months after its IPO last March.
But investor concerns regarding the intentions of Chile’s left-wing government, which last month announced plans for extensive public control of the country’s lithium reserve, the largest in the world, have sent CTL’s price tumbling all the way down from 89p – as recently as February – to 36p at the time of writing.
Three lithium prospects
TMS discussed the company’s prospects in some depth when we last covered the company in November. To recap, CTL has three prospects with collective resources of more than two million tonnes lithium carbonate equivalent (LCE).
Drilling last year at the Laguna Verde Project, focused on a hypersaline lake with a large sub-surface, produced a resource estimate of 1.51 million tonnes of LCE at a grade of 206mg/L lithium, the deepest hole explored recording lithium grades of up to 409mg/L, suggesting drilling to depth offers further upside. A scoping study published earlier this year indicated robust economics for a multi-decade operation producing 20,000 tonnes per annum with a modest operating cost of $3,875 per tonne of lithium carbonate. The study estimated an NPV of $1.83bn, an IRR of 45.1pc and a payback period of 18 months, based on a long-term lithium carbonate price of $22,500 per tonne from 2027.
Exploration at a second flagship project, Francisco Basin, a 110 km2 licence 100 metres south of Laguna Verde, yielded a maiden resource estimate of 0.53 million tonnes LCE at a grade of 305mg/L. A scoping study is being prepared for an expected base case production rate of 20,000 tonnes of LCE per annum.
CTL has a greenfield prospect at Llamara, some 600 km to the south of the two projects under development, comprising 119 exploration licences covering a total area of more than 344 km2 within a large basin. Two historical geophysics lines indicate an extensive deep brine aquifer in the project area with a thickness of several hundred metres. Highly elevated lithium concentrations have been recorded in surface salt crusts of up to 3,100ppm lithium, and within hectorite clay deposits of up to 2,400ppm lithium, supporting the exploration potential of the sub-surface brine aquifer.
Lithium is the key mineral for the transition to electric vehicles. According to estimates quoted by CTL demand for lithium will surge from 350,000 tonnes in 2020 to 2.5 million tonnes in 2030, and to more than seven million tonnes in 2040, with a positive long-term price trend estimate of $15,000 per tonne for battery-grade Lithium Carbonate and Lithium Hydroxide from 2025 to 2040. Europe is expected to be the key growth market for lithium, with demand forecast to increase more than 20 times over the course of the current decade. The continent is largely reliant on China for its lithium, which processes 60pc of the world’s supply.
The undoubted promise of CTL’s resources, has, however, been shadowed by uncertainty about the Chilean government’s policy regarding the country’s exceptional lithium reserves, shadows which deepened in the weeks leading up to the announcement of its National Lithium Strategy. Socialist administrations in Bolivia and Mexico have taken their lithium industries into public ownership in the past few years, and Chile, Bolivia and Argentina have discussed the idea of an OPEC-style Latin American lithium producers’ cartel to co-ordinate pricing. Elsewhere Zimbabwe has banned unprocessed lithium exports and Indonesia is curbing exports of battery commodities.
And sure enough, when the day came last month President Gabriel Boric set out plans to bring broad swathes of the industry under state control. Referencing the nationalisation of copper under his socialist predecessor Salvador Allende in 1971, the President said ‘the state will participate in the whole lithium production cycle and create a National Lithium Company to do so’. Chile’s two existing lithium miners, SQM and Albemarle, will be required to negotiate an unspecified state participation in their existing concessions, which run to 2030 and 2043 respectively.
But the government’s proposals fall short of full nationalisation, representing something of a compromise within Boric’s coalition government, envisaging majority state-owned partnerships with private companies for the exploration and production of lithium deposits. The government’s power is constrained within a South American country noted for its fine political balance between left and right. Its outline for a radical new constitution was soundly defeated last September, not least because of the impact it might have had on Chile’s mining-dependent economy, and the lithium strategy is likely to be subject to amendment when it goes to congress, where Boric lacks a majority. Legislators will be wary of following in the footsteps of Bolivia, which has failed to realise its lithium potential since nationalising the industry. A JPMorgan study indicated that Chile’s share of the world lithium market could decline from a third to a tenth if investment freezes.
Though, clearly, CTL wants to stay on good terms with the government, the company’s communications since the President’s announcement have been upbeat. Commenting on Boric’s statement, CTL said that following ‘discussions with government officials since the announcement and having sought legal advice in-country, the Board have been given reassurances that CTL’s assets will not require majority state participation.’ The company was given to understand that the focus of ‘majority state control’ is for assets considered to be of strategic importance to the country, relating to the vast Atacama and Maricunga salt lakes. CTL’s assets have lower levels of lithium concentration and, ‘while highly economic for a company such as CTL, they are not of the scale that could be considered assets of national strategic importance.’ In summary, ‘private companies, such as CTL, with exploration licences that merit exploiting, will have the option to invite state participation but will not be compelled to do so.’
Indeed the company believed that in certain respects the Strategy could work in its favour. CTL had ‘been holding discussions with state entities regarding their minority participation in our assets as this may have benefits to the Company in the development of our projects’, and had applications ready to submit for both the Laguna Verde and Francisco Basin projects pending the outcome of negotiations.
CTL also noted the common commitment of the company and the government to Direct Lithium Extraction (DLE), an emerging technology through which the mineral is extracted direct from the brine in which it is habitually found, thereby overcoming the aquifer depletion issues that plague traditional lithium operations. The technique offers the prospect of higher recoveries and purities than other forms of lithium extraction, and promises to be significantly greener. Traditional brine mining processes require the diversion of water and can have long-term environmental consequences. With DLE, which the government has declared all future lithium brine projects should use, spent brine is re-injected into the basin aquifers, minimising the environmental impact of operations.
Work so far at Laguna Verde has indicated a geothermal heat source with brine temperatures of 20C to 30C close to the surface, which the company says is ‘the optimal temperature range for the DLE adsorption process’. Laboratory DLE processes have produced a sample kilogram of battery grade lithium from the Project. CTL has entered an agreement with SunResin, a global leader in commercial scale DLE plants, which includes the operational commencement of a pilot plant designed to provide sufficient volumes of product for testing by potential customers, anticipating the scope of a full-scale commercial lithium production facility.
CTL’s results for the twelve months to 31 December 2022, published earlier this month, presented a picture of a company pressing full speed ahead with its programme. Further resource drilling is underway to upgrade resources at Laguna Verde and Francisco Basin, and due for completion this summer. A Pre-Feasibility Study for Laguna Verde is scheduled for late 2023, and the SunResin pilot plant commenced operation in Q1 2023, its production expected to ramp up to one tonne per month of LCE by mid-Q3. A scoping study is in progress on Francisco Basin with completion expected in Q3 2023. The company plans an exploratory drill hole at Llamara in Q2 2023 to determine whether a targeted aquifer contains significant concentrations of lithium.
CTL is working to establish the resources at all three projects, determine their economic value through feasibility studies, and then mobilise the capital to bring them into production. The company says it has ‘a growing number of potential strategic partners’, both with the Chinese companies currently dominant within the industry, but also with battery companies and auto sector OEMs making equity or debt investments into lithium projects to secure supply, and larger lithium producers seeking to expand their footprint by acquiring other lithium development projects. CTL says it has had a number of ‘knocks on the door’, but will engage in substantive discussions later in the year when it has a better understanding of its lithium resources and project valuation.
CTL believes political dynamics position the company ‘in a very favourable place’ to become a preferred supplier of battery-grade lithium to the EU and the US, which both place a high premium on ‘green’ lithium, the EU following President Biden’s green-growth Inflation Reduction Act with the Critical Raw Materials Act, which includes lithium as a key component in the drive to secure battery production in the EU. The IRA requires the US to source 80pc of all battery materials from the US or from a free trade agreement country, like Chile, and the EU is requiring vehicle OEMs to be transparent in sourcing of raw materials for batteries and is pushing strongly to see that supply chain decarbonised. CTL intends to sign a power purchase agreement with one of Chile’s renewable energy companies to fully green its operations.
The company had £12.4 million by the end of 2022, having raised £17.9m over the course of the year. It has expanded its visibility on public markets, commencing trading on the Frankfurt Stock Exchange, Open Market, LT Baader Bank and the Munich Stock Exchange last year, and on the OTCQB Venture Market this year. ASX dual-listing is planned for early Q3 2023.
CTL, then, has grounds for optimism, an uncertain few weeks notwithstanding. House broker Canaccord Genuity, a leading broker in the lithium space, has declared CleanTech Lithium as their top pick for 2023. More notably perhaps, given Canaccord’s association with CTL, the US business magazine Forbes, earlier this year picked out the company as one of its four preferred lithium investment recommendations.
Clearly, CTL has a long way to go, and a lot of money to raise, before it can turn its prospects into production. Concerns regarding state interference in Chile’s lithium sector may have been overplayed, but given South America’s volatile political climate the government could yet seek to extend its control. And DLE technology, for all its seeming potential, is still viewed with some scepticism within the industry. There are only a few working examples of DLE being used at commercial scale, with no guarantee that the process, described by some analysts as something of a ‘black box’ methodology pioneered by Chinese companies about which limited information is available, can be applied to every lithium resource.
But there’s no doubt CTL is an exciting prospect, positioned as well as any small cap can be to help develop the largest global reserve of one of the world’s most sought after commodities. We liked CTL when we last looked at the company, and we still do, a promising small cap natural resources stock that may now be in value territory.