Hallgarten's Ecclestone warns lithium NO Rare Earth-type space for up-and-comers

Hallgarten's Christopher Ecclestone says hard-rock lithium projects face larger capital and production costs than their brine counterparts.

Author: Dorothy Kosich
Posted: Thursday , 04 Feb 2010

RENO, NV -

While lithium demand seems to be again getting a head of steam thanks to hybrid cars, Hallgarten & Company metals analyst Christopher Ecclestone warned, "There is NO current shortage."

In a report made public Wednesday, Ecclestone cautioned, "This is NOT the Rare Earth space where everybody is potentially up and coming."

"The key thing to remember here is that there are four big producers," he said. "These producers (Soquimich, Chemetall, FMC and Talison) are currently serving the demand of the market. They are out there in the markets (or shortly will be)."

"They ARE the ‘lithosphere,'" he declared.

"There is NO current shortage," Ecclestone advised. "Most of these players are large and well-funded, compared to the new entrants."

"This is NOT the Rare Earth space where everybody is potentially up and coming. There is base industry of Western producers here. Thus the addition of less than a handful of extra producers will deal with added demand over the next few years," he said. "There is NOT space for all these projects from ALL these companies to move forward."

In his analysis, Ecclestone said the lithium sector is divided into two types of companies, those with exposure to lithium in brines, and those with exposure to lithium in rock/clays. However, he cautioned, "The chief problem for the hard-rockers that they have is large capital costs to get going (a formidable hurdle in current financial markets) and the fact that their production cost is around $2 per lb compared to around $1 per lb for the brine exploitation process."

Nevertheless, Ecclestone asserted "the most dangerous thing for the cartel would be LME trading and pricing of its commodity. There are many lithium users out there and very few suppliers."

"If the up and coming lithium players were to push the LME for a contract to be used on the element (such as Moly and Cobalt shall see from this month) then the bat and ball in the lithium space would be taken away from those who profit from it being run from smoky back rooms," he claimed.

Ecclestone suggested that the biggest risk in the lithium sector "is that the horse on which one decides to place one's bets drops dead before it is even in sight of the finish line. Some two-thirds of the companies in the space are surplus to requirements and have projects with too large tickets on their Capex and problematic locations or host bodies."

Nonetheless, Ecclestone said, "Lithium is not about to be superseded; indeed it looks like its consumption is holding up relatively well through the opacity of the market (and the supply) means that this is hard to judge. What one can look at are the identifiable uses of lithium and certainly the ‘go-go' purposes to which it can be put to use (cell phone batteries, laptop batteries and hybrid cars) are holding their own or surging ahead."

In his analysis, Ecclestone recommended Galaxy Resources (AX: GXY), and Orocobre (AX: ORE). He advised Galaxy Resources has financing "in the bag, all the off-take arranged and construction underway. What more could one ask?"

Meanwhile, Orocobre "has managed to grab the most interesting potential offtake partner (part of the Toyota group) in the downstream," Ecclestone noted. ""This will enable eventual funding (via the Japanese government) and give the company a principal client who will not be interested in pushing prices lower as long as heir is a symbiotic relationship between the two sides."