Lithium Mining (r)Evolution, From Deflation to Inflation, Geopolitical Watch, Credit Suisse Does it Again
Lithium Mining (r)Evolution
Lithium, perhaps more than any other material, is at the centre of the energy revolution on our planet. Expectations of lithium’s production are high and many, ranging from high purity, productivity, environment protection standards (water consumption, pollution, etc.), to human rights, local engagement, diverse workforce, traceability, etc. On top of these lofty expectations, lithium needs to be available in large quantities, fast, yesterday if possible. The world markets must do their magic to attract competent people qualified who can do these things.
Something interesting is happening in this sector. The market need for Lithium outpaces supply has pushed the price far higher than predicted just a couple of years ago.
Everyone wants this metal. As it happens, suddenly everyone is digging for Lithium in their backyard. I noticed in April a spike in the number of public announcements made by Australian gold companies declaring the discovery of Pegmatite deposits. Their share price, along pure lithium stocks, jumped in the first week of April, like coordinated by an invisible hand, a sign of frothing. Over the next few weeks the miners saw their share price following the opposite trend, sliding without an end in sight. This is not just a retreat from a hot high. In the context of the current global markets the downdraft reflects the installation of extreme pessimism. Raising capital to fund these operations with uncertain prospect of generating cash is challenging and that dampened the enthusiasm for the moment.
Despite the negative market the price is still high and the world still urgently needs lithium. Elon Musk expressed his frustration at the high commodity prices and the challenge of sourcing EV batteries several times. Without this input the gigafactories are “gigantic money furnaces” waiting for supplies that keep coming short.
A New Crop of Modern Lithium Miners Is Emerging
It seems that battery makers are scrambling to find suppliers that capable of delivering Lithium at scale, clean and in a reliable fashion. No one wants to be accused of recklessly damaging the planet or being socially irresponsible. This requires quality human and geological resources, but also, very importantly, technology.
Technology is paramount, especially when trying to lower the carbon footprint and limit the impact on the environment. Having the capability to design high quality industrial processes is one part of it. The other is to have advanced technical skills capable of solving future problems through ingenuity. It is like having computing power on tap. If the miners can put that on the “About Us” card, their brands would inspire trust, a confidence that they can be a proper partner you can rely on to navigate these difficult times.
One way in which lithium miners can do this is to partner with technology companies like Lilac Solutions. As an example, Lake Resources has partnered with Lilac Solutions to build a modular demonstration plant in Argentina for brine processing. This California based tech company has raised late last year US$150m series B capital to fund its research and services operations. The company is driven by the belief that it will achieve sustained technological leadership which is, as Lilac Solutions CEO David Snydacker said, badly needed in a “speculative” investment environment where lack of adequate technology ends up in failed ventures.
The other way is to build own strong research centre dedicated to complex problem solving, building in house technology IP, working inside the actual production factory to iterate designs at high speed. Two companies have taken the less traveled road of building their own the research labs to perfect the technology of lithium extraction from brine and sedimentary resources.
The first company, Vulcan Energy, listed on ASX and Frankfurt stock exchange, has built its own research centre in Germany.
The research centre looks like a pharmaceutical lab. Vulcan Energy has an exemplary and genuine application of ESG principles in practice (for more details see my analysis of the company’s pioneering environmental initiatives in the EU here). Maybe this has to do with the DNA of the founding leadership, or the fact that its operations are at the heart of Germany in densely populated geographical areas, which require careful considerations for self-evident reasons, or maybe both. But it is also because of the reasons I mentioned earlier, based on expectations that future industries accept business, environment and social responsibilities at an unprecedented level.
The other company is Arizona Lithium. This miner is at an earlier stage (only 4% of its licensed zones have been explored in depth) benefiting from a fortunate location (within the US Battery Corridor) and style of resources (sedimentary), its latest steps indicate they take a similar path with Vulcan Energy. Listed on ASX, Arizona Lithium (ASX:AZL) has a small market cap (AUD160m give or take), about AUD54m cash, but very ambitious plans. Earlier this year AZL appointed Brett Rabe as its Chief Technical Officer and quickly committed for establishing a research and processing facility in Arizona in conjunction with the local government, accepting a US$1m grant, with positive future prospect of being involved in state investment programs of up to US$100m. In a recent interview Brett Rabe talked about this as being an innovation incubation centre which will involve collaboration with many partners, not just on matters of Lithium extraction technologies, but on other aspects related to electric batteries and new advanced materials. I look forward to see how exactly this research centre is going to take shape. This initiate lays a solid foundation for producing a well informed and thorough feasibility study later on.
This is not your typical template for early mining. These two companies are deeply involved downstream with broad connections to many parts of this large ecosystem that is Electric Vehicles industry. I believe that mining industry as a whole, regardless of the type of resources it produces, will change along these lines: be more connected and aware of the broad socio-economic implications, datafy all aspects inside the mining supply chain for transparency and accountability purposes, to gradually make the production of materials more efficient, more environmentally friendly and with positive social impact.
From Deflation to Inflation: What a Difference Two Decades Make
Nobody ever knows for sure the fundamental value of an asset, which depends on many factors, including how the economy is likely to perform in the distant future.
Ben Bernanke, October 15, 2002
Twenty years ago, Ben Bernanke was appointed as governor to the Federal Reserve Board. Unlike today, the mounting challenge at that time was the threat of deflation. His approach in dealing with deflation based on Milton Friedman’s suggested tactic (tax cuts combined with money creation) attracted the nickname “Helicopter Ben”.
Two years later Ben Bernanke was appointed the Chairman of the Federal Reserve Board. During his tenure the Fed he transformed the way the institution communicated with the public at large removing largely its traditional secrecy. This was a shrewd strategy, making the Fed more effective in affecting long term interest rates and changes in the consumer and business behaviours by design.
The persistent fear of deflation over nearly two decades may have created a bias which was evident in the way the Fed handled the rising inflation starting in the first half of 2021. At the same time individuals and businesses may be similarly biased based on deceptive belief that the solution to any economic problem is to release more money.
Inflation Relief Package and Potential Side Effects
High inflation and raising interest rates are causing a great deal of angst. Politicians may be tempted to take the opportunity to woo their voters by treating the economic discomfort with fiscal incentives, even though in the case of structural inflation they will make matters worse. California’s Governor Gavin Newson announced a relief package for eligible state residents to help them with inflated gas and food prices with stimulus checks worth up to $1,050.
The package will be well received by those who qualify. However, given that this inflation is caused by supply side issues, what this package does is to help beneficiaries to simply skip ahead in the demand queue obtaining scarce products ahead of those living in other states who don’t get the extra cash. The package is assistance in a bidding contest for limited supplies. The end result is higher prices, not a solution to the supply problems. The inflation can is kicked down the road until capital investment and/or targeted regulations happen.
Governor Gavin Newson is not alone in this. French President Macron made promises on the eve of legislative elections 2022 of new handouts, pension hikes and tax breaks. Australian Prime Minister Albanese also plans to rise minimum wages to “tackle the spiralling costs of living” and keep them “ahead of inflation”.
We really are in the inflation trap. Except for Japan who dream of having as they are sick of decades of deflation.
Geopolitical Watch
Saudi Arabia is on the move, ending a long diplomatic winter that followed the murder of Jamal Khashoggi in Turkey. This is notable as it is flags significant changes in the region.
The first shift occurred after the Russia’s invasion of Ukraine when Saudi Arabia and UAE leaders declined calls with Biden. This is pure halal rebellion against the world power used to have its own image projected across the region as an undisputed protector. The refusal may have been shocking, but not that surprising. President Biden expressed publicly in the past his negative view of Crown Prince Mohammed bin Salman and did not do anything to build a working relationship between the two since the beginning of his first term as the US President. The US Administration ignored Middle East, the Yemen problem and the Iranian threat. The rejection was primed by the earlier call in November 2021 when the US Administration asked OPEC to pump more oil to lower the gas price for the US motorists.
The second shift was Saudi Arabia’s invitation to Xi Jinping to visit the kingdom. This was early March, AFTER refusing to take President Biden’s call. This is a symbol of massive proportions. Statements by Saudi officials such as “The crown prince and Xi are close friends and both understand that there is huge potential for stronger ties.It is not just ‘They buy oil from us and we buy weapons from them’” are in stark contrast to the in-your-face snubbing of the US attempts to rebuild its reservoir of goodwill in the region.
The third significant diplomatic move made recently by Saudi Arabia was the Crown Prince Mohammad bin Salman visit to Turkey.
This move is equally remarkable as Turkey and Saudi Arabia have been at odds on many aspects, apart from Jamal Khashoggi’s diplomatic incident. Turkey has historical aspirations of regional leadership, an excellent strategic placement and a relatively large population. The rapprochement with Saudi Arabia may be based on immediate pragmatic considerations for its fragile economic stability. However, this meeting is so unusual, you cannot not wonder what else is happening here. The visit may be the result of a joint agreement on the necessity to placate Iran’s influence in partnership. This is a reasonable possibility backed by the open willingness of Arab country to establish and strengthen their relationship with Israel against Iranian threat.
It is also possible that these changes are caused or hurried by the Ukrainian war which forced Russia to reveal its ambition to regain the world power status using military as a tool of influence and outright fear. Maybe Putin is right, a new world order is emerging, it is just not clear yet what order will that be. Imagine for a moment that China becomes friendly with Turkey which is increasingly feeling as a European outsider. Imagine a picture in which Turkey switches alliance from Europe to China which would be more than willing to back Turkey becoming a powerful partner on terms more satisfying
I should also note Crown Prince’s visit in Egypt and the red carpet welcome. Add to that a minor diplomatic event in which Mohammed bin Salman meets the Malaysian Defence Minister. Is that important? Maybe yes, maybe no. One could note that Malaysia is the only country in Asia (outside China) where people hold a favourable view of Russia.
All eyes are now on President Biden to see if he will visit Saudi Arabia (he hates that, but he needs to).
Credit Suisse Does It Again
What is wrong with this firm? Credit Suisse found guilty in money laundering. This is bad, but the defence is hilarious:
The former employee, who prosecutors said regularly accepted suitcases of cash from one of the ring members that went beyond allowed limits, was given a 20-month suspended sentence. A person from another bank and two members of the crime ring were also found guilty of money-laundering charges.
WSJ - Credit Suisse Found Guilty in Money-Laundering Case Tied to Cocaine Ring. June 27, 2022.
The defence: “the former employee’s lawyer said she wasn’t sufficiently trained by the bank”. Your honour, the HR department was at fault, inadvertently, of course. Didn’t they know employees need to be told that if they are offered suitcases with cash, regularly, something is not right and should be reported?