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From the beginning of 2021 and the end of 2022, the price of lithium skyrocketed over 900% as the transition to electric vehicles (EVs) incentivized the production of rechargeable batteries to support the demand for vehicle-related lithium-ion batteries. The construction of gigafactories bolstered the demand. At the same time, the COVID-19 pandemic had disrupted the supply of lithium causing the market to tighten further. Several market research firms expected the demand for lithium to exceed supply in 2023; however, additional supply came to market as new capacity came online. Consequently, the price of lithium has declined over 75% in 2023, and the stocks of lithium producers and junior mining companies have also weakened, providing a thought-provoking investment opportunity to benefit from the projected long-term shortage of lithium supply. The valuations of lithium producers and early-stage lithium junior mining companies have become more reasonable.
The decline in the price of lithium has led many pundits, forecasting firms and analysts to residue their demand forecasts for both EVs and lithium in recent months, after initially believing only inflation, higher interest rates (increasing financing costs) and economic uncertainty were impacting demand. We believe that lithium’s price decline was primarily a result of an unexpected expansion of production. Analyzing the results of the major producers of lithium, it is apparent that volumes increased during 2023 through September as managements have placed a priority in expanding production capacity. Consequently, a shift from a deficit to a surplus occurred in the lithium industry. Parenthetically, the current low price of lithium should bolster the widespread build-up of battery capacity, which should further aid in the adoption of EVs.
We believe there is still a long-term structural supply-demand imbalance due to years of underinvestment in the search for and development of new sources of lithium coupled with the incentivized shift toward EVs. The current low price of lithium will exacerbate the future supply deficit by making it more challenging to incentivize the development of new lithium mines.
A study conducted by the Fraser Institute projects that 50 new lithium mines will be required to meet the 2030 targets for governmental EV mandates that require the phase out of ICE passenger vehicles in North America. In the U.S., President Biden’s EV Acceleration Challenge targets 50% of all new passenger vehicles sold be EVs by 2030, while in Canada, the ZEV mandate requires that 100% of all new passenger vehicles sold must be zero-emission by 2035. The report estimates it takes approximately 15 years to commence production from a new mine (from discovery to initiating production). For reference, the report estimates that it requires 10 kilograms of lithium to manufacture a typical electric car.
There are three key drivers of lithium demand over the short-, intermediate- and long-term time horizons. Short-term, the tenor of lithium demand is being influenced by the health of China’s economy, while in the intermediate-term, the effects of incremental increases in supply appear to dominate. Long-term, the mega-trend of transitioning from ICE to EVs (Internal Combustion Engines to Electric Vehicles) has become a major secular driver for battery-grade lithium. Both public policy and the subsequent investments being made by OEMs into vehicle electrification have supported the increased demand for lithium. In addition, demand for lithium-ion batteries is being generated from stationary grid storage applications, the second largest consumer of lithium.
Electric Vehicles
Although lithium is important for many applications (consumer electronics, glass, ceramics, aerospace and other industrial uses), the primary driver of lithium demand is the rapid growth of EVs. Lithium-ion batteries are the power source of choice due to the characteristics of high energy density, long cycle life and being lightweight. The market penetration of EVs has accelerated from 2.5% in 2019 to approximately 15% in 2023 with projections for 2030 being in the wide range of 38%-to-68%.
There are many market research firms providing statistics and forecasts for both EVs and lithium demand (consumption) and supply (production). Benchmark Minerals’ currently forecasts that the lithium market will return to a deficit in 2028, with the expectation that lithium prices will begin discount the deficit roughly 12 months ahead of time. However, the EV industry is still in an early stage of development, and the lithium market is sensitive to changing sentiment due to the potential huge supply deficits estimated in the out years, namely 390,000 tonnes in 2030 and increasing to 1,900,000 tonnes in 2040.
China
China is the largest EV market, accounting for approximately 60% of global EV sales, and home to the EV manufacturer, BYD Co. Ltd. (Pink: BYDDY), which is now neck and neck with Tesla (NASDAQ:TSLA) for the global production title. The country also dominates the supply chain for lithium-ion batteries. Though the short-term outlook is murky, current demand for lithium by cathode manufacturers is waning, which has resulted in destocking at the battery cell level. As supply chain destocking diminishes, conditions in the Chinese lithium market should tighten.
Contrary to Benchmark’s forecast, BMI Industry Research, a research unit of Fitch Solutions, expects a shortage of lithium as soon as 2025 due to China’s lithium demand (between 2023 and 2032) is projected to increase at a CAGR of 20.4%, while at the same time China’s lithium supply is expected to grow only at a CAGR of 6%. We believe that if China is unable to satisfy its own internal demand for lithium, national priorities will result in a lithium deficit in other countries.
Narrowing Down the Opportunities
Globally, the leading countries producing lithium (hydroxide & carbonate) are (in order of production) Australia, Chile, China, Argentina, Canada and Zimbabwe with the major producers of lithium being Albemarle (NYSE:ALB), Mineral Resources Ltd (ASX:MIN), Pilbara Minerals (ASX:PLS), Arcadium Lithium (NYSE:LTM) [potential upcoming merger of Livent and Allkem] and Sociedad Quimica y Minera de Chile (NYSE:SQM). The investment performance of these producers should reflect the company’s prospects considering both company production levels and lithium pricing.
As mentioned above, the major producers of lithium have expanded production capacity in 2023. Albemarle is producing higher volume so far in 2023 due to additional capacity coming online from Chile (La Negra III/IV) and China (Quizhou) under management’s strategy to deliver volumetric growth. Mineral Resources Ltd ramped up production in 2023 and plans to dramatically increase production in Western Australia next year. Pilbara Minerals increased production volumes by 64% to 620,100 tonnes in fiscal 2023, while Livent expects commercial volumes from Argentina to commence in the first quarter of 2024.
Onshoring of North American Supply
In North America, governments have emphasized the development of lithium production capacity in the name of national security. In the U.S., lithium was listed as one of the 35 critical minerals by the U.S. Department of the Interior in May 2018; subsequently, in June, the U.S. Department of Energy published a collaborative report entitled “National Blueprint for Lithium Batteries 2021-2030”, in which it was stated the one of the main goals (of this combined effort of the U.S. Departments of Energy, Defense, Commerce, and State) is to “secure U.S. access to raw materials for lithium batteries.” Under the Defense Production Act of 2023 in conjunction with the Inflation Reduction Act of 2022, funds are being appropriated to increase the domestic mining and production of lithium in order to reduce the dependency on foreign imports of this strategically important metal.
Canada has also recognized the importance of critical minerals and is funding $3.8 billion toward implementing Canada’s Critical Minerals Strategy, which was released in December 2022. Importantly, lithium is one of the six prioritized minerals among the 31 listed under Canada’s strategic vision. Interestingly, the Inflation Reduction Act states that the $7,500 EV Tax Credit requires that battery minerals in the EV to be extracted or processed in the U.S. or any of the 20 free-trade partner countries, which includes Canada.
The expected global supply gap for lithium should be more intense in North America since there is an ongoing trend to emphasize local supply to satisfy North American lithium demand. There is strong government support for securing domestic supplies of lithium in order to avoid, or at least to diminish the effect of, supply chain interruptions in the U.S. and Canada.
More Advanced North American Junior Exploration Companies
There are over 30 junior mining lithium companies with spodumene deposits in the Tier 1 mining jurisdictions of the U.S. and Canada. Many of these companies are in the very early stages of exploration (geophysics, sampling, mapping, desk top studies, etc.) without having yet put drill to ground.
In an effort to be selective, we tightened the field to companies which have reduced exploratory risk by advancing the hard rock lithium project(s) beyond the very early stage to a certain point, namely with 100%-owned properties having discovered over 15 confirmed spodumene-bearing pegmatite dykes, completed an MRE and conducted metallurgical studies that demonstrate that the ore is amenable to produce battery-grade lithium concentrate. Some of those companies are Patriot Battery Metals (OTCQX:PMETF), Critical Elements Lithium (OTCQX:CRECF), Snow Lake Resources Ltd. (NASDAQ: LITM), Frontier Lithium Ltd. (OTCQX:LITOF) and Foremost Lithium Resource & Technology Ltd (NASDAQ:FMST). It is noteworthy to observe that all have been uplisted to either NASDAQ or the highest tier of OTC markets, the OTCQX.
Foremost Lithium Resource & Technology Ltd
To illustrate the desired characteristics, let’s examine Foremost Lithium, which holds 22,305 hectares (55,118 acres) within six lithium projects, five of which are situated in western central Manitoba, which the company has dubbed “Lithium Lane.” Management is focused on advancing its flagship Zoro Project, along with exploring the properties of the Grass River Claims, PEG North, Jean Lake and the Jol Claim in Manitoba, in conjunction with the Lac Simard South Property in Quebec. The company also holds the Winston Gold-Silver Project, which includes the Little Granite Gold-Silver Mine, in New Mexico. Comprised of the Little Granite Mine and the Ivanhoe & Emporia claims, the Winston property is situated in the historically prolific Black Range (Chloride-Grafton) Mining District. The Foremost Lithium was listed on NASDAQ in August 2023.
There are 16 known spodumene-bearing pegmatite dykes at the Zoro Project. Two more are situated at the Jean Lake Property and another seven at the Grass River Claims.
The Zoro Project consists of 16 claims encompassing a total of 3,390 hectares (8,377 acres), which host 16 known spodumene-bearing pegmatite dykes. The Zoro Project was acquired through a series of three option agreements between April 2016 and September 2017, which were later fulfilled separately, transferring 100% interest of the Project to Foremost Lithium.
Exploration programs at Zoro have included prospecting in 2016, soil geochemical surveys in 2017 and 2018, five (5) diamond drill campaigns (2016-2019) that totaled 8,406m in 60 holes and an airborne magnetic survey in 2022. In 2016, there were seven (7) known dykes, and through subsequent exploratory efforts, additional dykes were discovered: D8 in 2018, eight in 2019 (D9-D15) and D16 in 2022, bringing the total to 16 spodumene-bearing dykes today at the Zoro Project.
In July 2018, a NI 43-101-compliant maiden resource estimate (MRE) on a portion of dyke D1 was completed. At a cut-off of 0.3% Li2O (lithium oxide), the Inferred Resource Estimate is 1,074,567 tonnes grading 0.91% Li2O, 182 ppm Be, 198 ppm Cs, 51 ppm Ga, 1212 ppm Rb, and 43 ppm Ta at a cut-off of 0.3% Li2O (lithium oxide) with contained 9,700 tons Li2O and 24,000 tons contained Li2CO3 (lithium carbonate). The spodumene mineralization has various geophysical signatures occurring both within laterally and vertically pegmatite dykes and hosted by both mafic volcanic and felsic sedimentary rocks.
Three metallurgical studies have been performed on samples collected from Dyke 1 of the Zoro Lithium Project. In 2020, the first was conducted on a sample collected from three pegmatite zones of D1 and resulted in a technical paper published in Mining Metallurgy & Exploration. Another metallurgical report was completed in 2022, and in 2023, more metallurgy work was conducted. In their totality, the metallurgical studies confirmed that the final product from the ore collected in Dyke 1 is amenable to produce near battery-grade 6% Li2O concentrate by employing a combination of Dense Media Separation and flotation of DMS middlings that achieved a spodumene concentrate grade of 5.88% Li2O with a recovery rate of 81.6%
The Jean Lake Property consists of five claims encompassing 1,002 hectares (2,476 acres). The Property is under an option agreement to acquire a 100% interest. Historically, a spodumene-bearing pegmatite dyke was discovered in 1931 and rediscovered while prospecting in August 2021; in 1931, historical drill reported logs for lithium as Gravitational Determination Percent Spodumene. Five chip samples were collected from blast material from two beryl pegmatite outcrops (now identified as B1 and B2); high assay results ranged from 3.81% to 5.17% Li2O. From December 2022 into 2023, a subsequent 246-hole (3,002m) drill program was conducted; the drilling results together with field observations indicate that B-1 and B2 are from a single beryl pegmatite dyke with a minimum strike length of 325m. There is a nearby beryl pegmatite designated as B3. Incidentally, the 3,002m drilling program intersected gold mineralization in eight drill holes.
In January 2022, Foremost Lithium acquired the Grass River Claims, which are located 6.5 kilometers east of the Zoro Lithium Property. The Grass River Claims consist of 29 contiguous claims encompassing a total of 6,339 hectares (15,664 acres), which host 10 exposed outcrops of pegmatites and seven (7) historic drill-indicated spodumene-bearing pegmatite dykes.
Management has an approach to monetize ore through a Direct Shipping Ore (DSO) procedure whereby bulk ore (conventionally blasted from the ground) can be shipped directly to a mine (possibly the Tanco Mine, 825 km from Snow Lake and located only 180 km east of Winnipeg), where the ore can be processed into concentrate. Thereafter, this feedstock can be shipped via the NAFTA superhighway (a portion of which starts in Winnipeg, only 180 km west of the Tanco Mine) to North American battery manufacturing sites. Management has put forward a Zoro Project Timeline that anticipates the DSO could commence in the second half of 2025.
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