Why I am bullish on Lithium

[dan_s]

Notes below are from my friends at Stifel Nicolaus:

We returned to Washington D.C. nine months after the signing of the U.S. Inflation Reduction Act to hear from mining/OEM industry leaders, members
of the U.S. Department of Energy Loan Programs Office, Department of Defense, and State Department opine on the necessity of the integration
of critical metals throughout the EV supply chain. We come away confident in our forecast of a structural/domestic lithium supply gap by the end of
the decade due to secular, increasingly policy mandated EV demand tailwinds. Key takeaways as follows: i) the IRA has supercharged government
capital in the EV supply chain with a focus on the mid to upstream, ii) the speed of private capital has not matched government capital deployment
over the last twelve months, iii) we would not be surprised at more opportunistic bids emerging in the lithium space from diversified miners/energy
companies as the size of the industry now warrants purchase.

Key Points

Clearer federal supply chain policy strategy has significantly helped domestic U.S. EV supply chain development and EV penetration over
the last year. However, current supply chain logistics are not designed for the exponential growth needed to supply forecast EV demand. The current
U.S. EV supply chain is in some cases upwards of 50,000 miles. Lithium from South America and Australia is refined in China; cobalt from the DRC
and nickel from Russia is refined in Scandinavia and China. These products are shipped to Japan, Korea, and China for cathode production, cathode
shipped to the U.S. for cell production, and finally to OEMs. The U.S. federal government recognizes the increased risks associated with the possibility
of actors weaponizing the EV supply chain, not dissimilar from the current Russia – Ukraine conflict’s effect on European energy markets. We note that the necessary pace of lithium supply growth is something the industry has yet to experience. Capital intensive project development is common in the base metal industry, but is something the lithium supply industry has not yet experienced at mass.

With the development of new deposits in domestic jurisdictions, lithium refining capacity is a major concern of OEMs. The current U.S.
critical mineral pipeline will likely not be sufficient to source demand intimated by EV penetration goals. Lithium supply is increasingly expected to
come from greenfield sources as 'easy tonnes' have been turned on. The majority of the supply response from the global lithium market over the
last seven years has been dominated by six brownfield asset expansions, while average global grades have dropped 29%. We expect supply growth
in 2024-2025 to come from a more balanced 48%/52% of brownfield expansions/ greenfield builds, as opposed to 85% of supply in 2022 coming
from brownfield expansions. We continue to forecast a drop in grade through the decade, and note lower grade projects have increased ramp-up
difficulty, capital intensity. Lithium is a unique metal in that: i) it does not concentrate into high grade deposits, and resultantly ii) there are no worldclass, game changing assets able to single-handedly significantly increase production. Most development assets are in the 20-30ktpa LCE range,
capable of supplying just a 25GWh factory annually, underscoring the necessity of individual mining project development to the EV revolution.

Markets increasingly understand 'If EVs need Li-ion batteries, EVs need lithium mining', with OEM/government capital seemingly leading
the charge. OEMs are increasingly aware of this, with many acknowledging it is necessary to integrate deeper down the supply chain via partnerships,
from cathode manufacturers to direct mineral extraction. Many OEMs are looking at direct offtake agreements, partnerships at the asset level, and
equity participation. With incentive to source raw materials domestically & from U.S. FTA partners, we would note OEMs are increasingly concerned
about optimizing the IRA in order to expand the scope of eligible critical minerals, with recent rumors intimating emerging producer Argentina may
be close to receiving an exemption.

OEMs pointing to consolidation in the lithium space to optimize supply chains. We also note concern from OEMs surrounding the current
ownership profile of lithium deposits, with industry estimates pointing to over 2/3rds of global lithium deposits owned by junior mining companies.

OEMs are increasingly seeking suppliers of scale, which would point to further consolidation not dissimilar to the recent Allkem/Livent merger of equals.

Despite higher prices, the emergence of private capital has not materialized at the same rate as vertical/government capital over the last
year, a hindrance to greenfield lithium supply. Thus, we would not be surprised at further opportunistic bids emerging in the lithium space from
diversified miners/energy companies taking a long term view of the sector as the size of the industry now warrants purchase. The size of lithium
businesses are now too big to ignore as highlighted by comparative business segment EBITDA of the lithium producers and diversified miners.
EBITDA generated by diversified miners base metal units (Rio Tinto '22 base metal EBITDA of $6B, BHP '22 base metal EBITDA of $9B, Vale '22 base
metal EBITDA of $0.5B, Anglo American '22 base metal EBITDA of $2.6B) compares with the EBITDA generated by Albemarle's lithium business
('22 lithium EBITDA of $3.1B) SQM ('22 EBITDA of $5.8B) and others. While prices softened through 1Q23, we would note a significant portion of
material transacted in 2022 was still under long term contracts with lower pricing agreements, and following significant contract renegotiation by majors there is the potential for average transaction prices to be equally high in 2023.

In short, the lithium mining industry has become, and is increasingly becoming too big to ignore, especially on margin basis, and energy giant Exxon’s recent US$100MM purchase of acreage in the Smackover brine field of Arkansas showcases this (we expand on the energy's industry's potential investments into the lithium space below). < Keep an eye on Standard Lithium (SLI.V) which is moving forward with their Smackover project.