Five Lithium Stocks to Watch in 2011 – Part 1

The Salar de Atacama salt flats in Chile. Is most of the easily recoverable lithium here already gone?

Read the word lithium and it’s likely not too long before you are reading the word battery. Jon Hykawy, lithium analyst for Byron Capital Markets echoed the sentiments of many recently when he described lithium as “hot and getting hotter.”

Lithium demand is experiencing a “sea change” according to James Calaway, chairman of Australian lithium miner Orocobre (TSX: ORL) in an article by the New York Times. He further enounced, “We are at the front end potentially of a very significant increase in the demand for lithium for the emerging electric transportation sector.” Calaway’s company recently entered into a $100 million joint-ventured lithium project in Argentina with Toyota Tsusho, the material supplier for Toyota.

Investors picturing a massive new demand for lithium unfolding in order to power our lives might be surprised to hear that, in 2008, just 25% of the world production of lithium carbonate was used by battery manufacturers. The majority of the demand for lithium comes from its use to manufacture high performance alloys, ceramics and glass. But it’s the anticipated demand from the automobile and electronics industries, which are increasingly adopting lithium batteries, that has the spotlight on the element. This is because a lithium-ion battery stores two to three times as much energy per pound as a nickel-metal hydride battery.

According to French technology consultancy firm Meridian International Research, the current supply of lithium is so tight and the potential sources are so limited that by 2015 there may only be enough lithium carbonate to power 1.3 million GM volt class vehicles. And, the report goes on to suggest, politics may play a major role in the supply/demand equation. Meridian says that 70% of the world’s lithium may ultimately come under state control. The lithium frenzy was not eased by recent actions in Argentina. The government in the that country’s Jujuy province recently declared it a “strategic” metal, effectively notifying all current and future lithium projects that they must be evaluated by a special commission.

In talking to The Energy Report analyst Merrill McHenry described the structure of lithium pricing as one that lends itself to confusion and speculation. “You take a mineral with no spot market and very obtuse pricing and combine that with a significant distance from here to high future volumes, significant market penetration of hybrids and higher pricing estimates and you have a scenario ripe for volatility.”

But not everyone agrees that there might not be enough lithium to satisfy demand. Lithium consultants Tru Group, who presented at the Lithium Supply & Markets Conference in Toronto in January, pointed out that the world’s current major lithium chemical producers, SQM, FMC Corporation and Chemetall/Rockwood Holdings, have the in-ground resources and ability to meet nearly all market requirements by simply expanding capacity through 2020. Their report further stated, “Only a select few new projects could make it into profitable production and then only as marginal suppliers. Bottom line is if you do have a good resource make sure you also have the strongest possible lithium technical capability to develop it."

Today, the debate over “peak lithium” rages between those, such as Meridian’s William Tahil, who say that most of the easily recoverable lithium from world-class properties like SQM’s Salar de Atacama project in Chile has already been recovered. While groups like Argonne National Laboratory, a research branch of the US Department of Energy, says that on the other hand “long-term supply should not be a major concern.”

Whichever side is ultimately proven correct issues around the supply, demand for lithium appears to be on the front burner for some time to come. That means volatility in the lithium market and, perhaps, opportunity in the sector. For investors looking to sort the lithium contenders from the pretenders, Highgrade offers, in no particular order, five lithium stocks with varied stories to keep an eye on in 2011.

1. Lithium One (TSXV: LI)

Other people’s money. Not only does Lithium One have what might be one of the purest sources of lithium in the world; the company recently reported what it described as favorably low magnesium and sulphate content at their Sal de Vida brine project in Argentina, but some well timed agreements have minimized the company’s requirements for additional fund raising to capitalize on the project.

In early June of last year Lithium One entered into a joint venture earn in agreement with Korea Resources Corporation (KORES) to develop their Argentinian Project. The arrangement required KORES to fund up to US$15 million to complete a Definitive Feasibility Study and to provide a completion guarantee for Lithium One's share of the debt portion of project development. KORES then brought more to the table when it entered into a consortium with GS Caltex and LG International, two leading battery and energy companies in Korea, to share equally in the 30% ownership stake.

Lithium One's Sal de Vida brine project located in Argentina within the famed "Lithium Triangle".

With things in full swing, Lithium One, early last month, reported its first independent lithium and potassium resource statement for its flagship Argentinian project. The inferred resource estimate, prepared by E.L. Montgomery and Associates, includes 5.44 million tonnes of lithium carbonate equivalent and 21.3 million tonnes of potash equivalent. Lithium One’s property is adjacent to FMC Corp.’s lithium brine operation, the source of more than 15% of the world's production of lithium, in the eastern part of the same Salar.

Lithium One’s second project, a spodumene hard rock project in James Bay, Quebec exhibits a spread-the-risk methodology similar to the one used on their Argentinian property. In February, the company announced a joint venture agreement with Galaxy Resources (ASX: GXY), an Australian listed mining company, whereby Galaxy can acquire up to a 70% interest in project in Quebec through earn-in conditions including $6 million in payments and the completion of a feasibility report. Galaxy owns and operates the Mount Cattlin mine in Western Australia which is currently producing spodumene concentrate. The Highgrade Review connected with Lithium One’s President and CEO Patrick Highsmith recently to discuss the company’s future - CLICK HERE - for the interview.

2. Canada Lithium (TSX:CLQ)

On the last day of February of this year, Canada Lithium had a surprise for investors. And, in this case, investors didn’t like what was inside the box. At 12:23 p.m. Pacific, shares of Canada Lithium were halted at the company’s request, pending news. A few hours later Canada Lithium announced it had hired Roscoe Postle and Associates Inc. to explore the possibility that its flagship project in northwestern Quebec might not be as large as they first suspected. Canada Lithium management said it was “unable to reconcile the results of the internal review, which incorporated various resource estimation methodologies, with the reported 43-101 resources announced in October, 2010.”

When the stock resumed trading the next morning, the verdict was swift and harsh. Shares of Canada Lithium ended the day at $.89 cents, down 34% from $1.35. The stock lost another $0.17 cents to close at $.72 cents on March 2nd.

Just months before, things were looking much brighter for Canada Lithium. In an interview with BNN on December 20th, 2010 CEO Peter Secker said the company would “be producing by the end of 2012, we’ll produce about 20,000 tonnes of lithium carbonate per year which would make us about 12% of the world market.” Mr. Secker also said that the mine’s life would be “in excess of 50 years” and felt there was “there’s a lot of potential there” for additional reserves being identified having only drilled 50% of the property.

Secker now believes there will be a material reduction in the measured, indicated and inferred resources reported in October. The question for investors now is: just how material? Speculation will no doubt run rampant over the months it takes to produce a new National Instrument 43-101-compliant report.

Canada Lithium believes an historical reserve estimate done by a firm called Nenninger et Chenevert Inc. in 1974 is is “relevant” but should “should not be relied upon” because “they do not meet the current CIM definition standards on mineral resources and mineral reserves adopted in 2005”.

Canada Lithium's Quebec Lithium Project is located in the Lacorne Township near Val d’Or. Between 1955 and 1965 the mine was a former producer of lithium carbonate, lithium hydroxide and spodumene. Before the internal review, Canada Lithium said the project could be one of the two-or three-largest hard-rock lithium deposits in the world. With all the recent uncertainty surrounding the project, however, some investors might be inclined to take this information with a grain of spodumene.

3. Talison Lithium (TSX:TLH)

With a market capitalization near half a billion dollars, Talison Lithium is the biggest lithium mining company listed in Canada, and the largest pure lithium play in the world.

But in a move that speaks to how far the TSX Exchange has matured on the world mining stage, Talison is actually an Australian company with no connection to Canada other than its takeover of Salares Lithium, a TSXV listed junior with properties in Chile. The merger, which was completed last summer, gave Talison exposure to Salares’ lithium brine projects located in Chile, and creates as close to a diversified portfolio as exists in the suddenly burgeoning world of lithium mining. Salares resource in Chile has not be verified through NI-43-101, but the company says there is 394 square km of exploration potential within a number of salares brine lakes.

Meanwhile, at Greenbushes, a mine near Perth in Western Australia Talison mines tantalum concentrates and lithium minerals. The company purchased Greenbushes in 2007, and is already distributing to a well-established global customer base, including China. Production from the Greenbush mine fills 75% of the Chinese demand and a full third of total worldwide demand for lithium.

Spodumene at Greenbushes is mined from the pegmatite that's exposed in open pits.

According to Ahead of the Heard’s Rick Mills, Talisun Lithium offers “potential investors many attributes” including “exposure to both mineral and brine sources of lithium... a well established and diversified global customer network... and a low-cost, rapid plant expansion (that is) currently in progress.”

In 2010 Talison sold all the lithium concentrate it produced and did so with high margins receiving an average price of over $300 per tonne (or $2,000 lithium carbonate equivalent). It must be noted that the $2,000 LCE price does not account for any associated end-user lithium carbonate conversion costs estimated to be in the range of $2,000 to $3,000 per tonne.

Talison, straight out of the gate looks like an early leader in the lithium race. The company reports that in a few years expanded operations should reach annual production of approximately 110,000 tonnes of lithium carbonate equivalent. The company is drilling at Greenbush and expects to provide an update on mineral reserves and resources by June, 2011. Talison also plans continued exploration work on their Chilean salars brine properties this year.

Mineral Resources from the company’s NI-43-101 report define a technical grade ore type at a 4% Li2O block cut-off and chemical grade ore type at a 3.2% Li2O block cut-off. Over the 12 year mine life the company expects to produce 4.6 million tonnes of lithium concentrate, or an estimated 700,000 tonnes of lithium carbonate equivalent.

4. Rodinia Lithium (TSXV:RM)

A tale of two projects. Toronto’s Rodinia Lithium, like Talison and Lithium One, is developing lithium projects in two radically diverse geographical areas; Nevada and Argentina. But unlike its counterparts, Rodinia is focused exclusively on lithium brine production. A comparison of Rodinia's properties reminds investors that geopolitical concerns are never far from the mining world.

Earlier this month, Rodinia announced results from an independent brine resource estimate of its Diablillios Project in the province of Salta in Argentina. As conducted by AMEC Internacional Ingenieria y Construccion, the report is consistent with the standards set out in Canadian Securities Administrators’ National Instrument 43-101 but does not constitute a NI-43-101 report. Nonetheless, the report identifies 4,959,000 tonnes of lithium carbonate equivalent, 19,837,000 tonnes of potassium chloride and 6,194,000 tonnes of B203.

Talking about the results William Randall, Rodinia’s President and CEO said, “This resource represents one of the largest estimated brine resources in the world. In addition to its size, the brine geochemistry is favourable with low magnesium-to-lithium and sulphate-to-lithium ratios.”

Lithium brine refers to lithium that is not mined, but rather, produced from brine, or salt water. To recover lithium this way salt rich brines are pumped from just beneath the surface of the desert and diverted into a series of large, shallow ponds. Areas of Nevada, Chile and Argentina are particularly rich in lithium brine.

At first blush the timing of Rodinia’s resource estimate was not ideal. A few days after the report
the government of neighbouring Jujuy province in Argentina announced a decree making lithium of strategic importance to their region making investors nervous that legislation around lithium in places like Argentina might become more widespread and protectionist. Then on March 11th the Japanese earthquake and subsequent tsunami hit resulting in general and widespread market instability. Shares of Rodinia feel from $0.57 to $.385 in a matter of days.

Demand for lithium batteries for "green cars" like the Chevy Volt is expected to drive future demand for lithium.

Rodinia was quick to point out that its two main projects were unaffected by the decree. President and CEO William Randall calmed fears by pointing out, “Mining legislation and government activity within the mining sector varies dramatically from province to province in Argentina, and the evolution of legislation in one province does not directly impact neighbouring provinces.”

Clearly, the position of the Jujuy province in Argentina has no bearing on the company’s Clayton Valley Project in Nevada which the company believes can offer some strategic benefits down the road.

The Highgrade Review sat down with William Randall to find out more about Rodinia Lithium, its strategic partnership with China’s Ningbo Shanshan and the company’s future plans. CLICK HERE for the exclusive interview.

5. Lithium Americas (TSX:LAC)

The Lithium Triangle, the high altitude, semi-arid salt flats at the intersection of Bolivia, Argentina and Chile is where nearly three quarters of the world's salt lake lithium deposits are found.

It’s also where Lithium Americas' Cauchari‐Olaroz property is located. A more specific description of the location of their property - smack dab in the middle of Jujuy province in Argentina - will provide much of the reason why the company's stock was under pressure for most of March. Shares of Lithium Americas fell from $2.19 on February 28th to a low of $1.33 on March 16th, before recovering ground in sessions that followed.

In early March, Walter Barrionuevo, the Governor of Jujuy Province in Argentina, issued Decreto 7592/11, which changed existing laws for all existing and pending lithium projects. From now on in Jujuy, a ‘special expert commission” will review all projects. Lithium Americas, however, believes the market overreacted to the possibility of troubles at Cauchari‐Olaroz, pointing out that exploration and development permit applications were approved in late 2009 and is fully permitted through final feasibility. The Company is currently working on the environmental baseline and has confirmed that new legislation should not effect the current development program at Cauchari‐Olaroz, but is expected to increase the requirements for the final exploitation permit that will be requested once the final feasibility study is completed and presented to the Government as it is mandatory under the Argentinean law”.

Hernán Zaballa, a partner at Buenos Aires law firm Brons & Salas believes that mining in Argentina, a country in which each province owns its natural resources, gets a bad rap. “I do not think having different approaches to mining is a killer for Argentina and it is probably unfair the country is ranked so low in surveys like the one of the Fraser Institute” he recently told The Engineering and Mining Journal. “If you look at Canada or the U.S., you have big differences between states. Nevada is not California; Alberta is not British Columbia.”

And things aren’t all gloomy for Lithium Americas. Current disruptions aside, the company's brine based project in Argentina was able to attract Magna International and Mitsubishi Corporation as equity investors. Both have off-take arrangements with the Company.

A worker at Salar de Uyuni lithium brine deposit in neighbouring Bolivia - part of the Lithium Triangle.

As Lithium Americas President and CEO Dr. Waldo said in an interview with BNN, “Lithium carbonate is not like gold where that you put an ad and you sell it... it has to be sold to a market that needs it. In our case our partners are Magna and Mitsubishi and this is something that gives you the comfort that there is a buy out there on the other side of the deal.”

Lithium Americas is clearly a little further ahead than some of the other junior miners in the Lithium Triangle. In mid-2010 the company engaged ARA Worley Parsons to perform engineering services on the Cauchari project. And on March 7th, 2011, the company entered into an agreement with SGS Canada for the completion of bench studies required for the design and construction of a lithium carbonate pilot plant and hopes, despite the new decree, to produce its first lithium carbonate before the end of 2011.

In late 2010, Lithium Americas released the results from an independent NI-43-101-compliant resource estimate completed under the supervision of Groundwater Insight. The company’s President and CEO Dr. Waldo Perez stated, "With measured and indicated lithium carbonate and potash (KCl) resource equivalents of 5.3 million tonnes and 17.3 million tonnes re