Financing Battery Material Projects Q&A with Chris Berry, Founder, House Mountain Partners Based in New York, Chris has been an independent analyst since 2009 with a focus on Energy Metals including lithium, cobalt, graphite, vanadium, and rare earths. His research provides strategic insights to institutional clients and has a specific focus on how disruptive trends in energy, strategic metals, and technology create opportunities. Before shifting focus to analysis of these trends, Chris gained twelve years of capital markets experience on both the buy side and sell side. What are the obstacles facing battery materials companies when trying to raise finance? The markets for battery metals have traditionally suffered from several challenges. The size and murky pricing dynamics have forced many commodity investors to shun these markets in favour of commodities with more liquidity, such as copper or iron ore. As an example, the lithium market is roughly 200,000 tonnes in size when measured in lithium carbonate equivalent units (LCEs) and generates perhaps $2bn per year in revenue. Compare that to copper which is roughly 23,000,000 tonnes and generates revenues in the hundreds of billions of dollars per year. Additionally, there is a broad lack of awareness surrounding how the lithium ion battery supply chain works. A lithium molecule travels thousands of miles from when it’s mined to the time when it’s placed in a phone or electric vehicle. The rapid evolution of the lithium ion supply chain has forced even the experts to rethink as the market has expanded. While around $1.2bn has been raised for lithium project development and expansion in 2017, we are going to need to maintain this pace until 2022 to ensure supply and demand can stay balanced. “…there is a broad lack of awareness surrounding how the lithium ion battery supply chain is currently configured and is evolving” Before looking at the potential financial returns of a given project, many of the conversations I have with investors focus first on understanding the battery metals market: supply and demand, end uses, offtake agreements, and supply chain participants. Companies trying to raise financing for various projects have had to follow this same approach, as these metals are still new to many institutional investors. What risks do companies face when developing their projects? Finding the deposit and building the mine are (almost) the easy parts of this process. Getting them commissioned on time and on budget and establishing binding offtake agreements are the real challenges that make the battery metals sector unique. During the last lithium boom in 2010-12, roughly $1bn was raised in the sector as demand was expected to triple between 2010 and 2016. Essentially, leading lithium projects tried to do everything all at once, including establishing a resource, confirming project economics, building the mine, building the concentrator, and building a conversion facility to produce battery grade lithium chemicals. This strategy turned out to be a disaster and thankfully it appears that many lithium projects in existence today have learned the lesson that building a multi-faceted project all at once is unwise. “The hesitancy of investors can only be overcome through time and experience. One of the biggest factors that can help investors get past their fears is an examination of company management experience in the sector.” How do companies win over investors who are hesitant to invest in battery metals projects? With the rapid price increases in lithium and cobalt, there is a definite degree of FOMO, or fear of missing out. The hesitancy of investors can only be overcome through time and experience. One of the biggest factors that can help investors get past their fears is looking for company management experience. Does the senior team and board have experience in lithium, cobalt, or graphite project development and production? Do they have experience with unique processing techniques? Has the process been commercialized elsewhere? Does management have relationships with downstream supply chain participants? If not, you may want to continue your research and find those companies that do. Many companies are riding the wave of high prices and news from countries that are de-carbonising their economies or supply chains. This is positive long-term, but can muddle the true potential (or risks) of a given company. Several companies are developing their own processing techniques. What are the risks associated with this approach and how does it impact their ability to raise project finance? Any “black box” technology is risky as much of it is proprietary and will remain so in order to protect a company’s competitive advantage. These companies must prove that their technology can be scaled up to a production level consistent with traditional mines (25,000 tonnes per year LCE), though the ultimate size of production depends on the size and flexibility of the company’s balance sheet. Unique processing technologies were made de rigeur in a previously sleepy lithium market where only the lowest cost producers could even hope to compete with the established players such as SQM. Despite the high prices buoying the market currently, I still believe a processing technology can succeed and is necessary certainly for new entrants into the market to compete. These technologies save time and capital and are therefore of interest, but must be proven to be scalable. Battery producing companies are keen to vertically integrate their business by securing raw materials offtake. Does the race to secure high-grade material result in a lack of due diligence being conducted on projects? There is a race to be sure but with respect to a lack of due diligence, this is a tougher question to answer. Beauty is in the eye of the beholder with respect to these deposits. End users are incredibly careful in terms of who they enter into agreements with and spend a great deal of time looking at various deposits and management teams. Offtake discussions typically take longer than many people think as established end users of cobalt, lithium, or graphite don’t want to rush into a deal with a junior developer with no history of successfully operating a mine. There is also a distinction here – it’s not just battery manufacturers that are looking to lock down long term supply of these metals. Volkswagen recently made headlines by announcing its intentions to acquire large amounts of cobalt over a ten year period reportedly worth $50bn. The fact that you’ve got multiple players along these supply chains looking at long term supply contracts is positive for metals prices and a sign that everyone is taking the shift towards vehicle electrification seriously – but due diligence is of paramount importance. What should the miners be looking for in a potential offtake agreement? The structure in the best interest of shareholders involves a binding multi-year offtake agreement for supply and perhaps an equity investment by the offtake partner in the producer. This ensures that the offtake partner has ‘skin in the game’ and also gives the lithium producer comfort that there is a reliable customer on the other end of the phone. With governments around the world keen to push a green agenda, how can governments best support the development of energy metals projects? Governments can do a great deal with rebates on exploration or perhaps tax rebates on construction downstream (on conversion facilities, instance) but can also sometimes push too hard with higher royalty schemes in response to robust markets. This is akin to killing the goose that laid the golden egg. This is not an easy problem to solve as much of the supply chain exists in Asia where labour costs are lower than in other parts of the world. “…it’s not just battery manufacturers that are looking at locking down long term supply of these metals. Volkswagen recently made headlines by announcing its intentions to acquire large amounts of cobalt over a ten year period reportedly worth $50 billion” Which jurisdictions are offering incentivised funding opportunities for companies? I suppose a blatant example of a government pushing the green agenda would be the State of Nevada offering Tesla an incentive package worth $1.25bn over 20 years to build the Gigafactory. Similar types of arrangements are being discussed in Chile and South Korea. Given the low cost advantage that Asian-based manufacturing has, I would expect to see the majority of this capacity be built in that part of the world; however there is a unique opportunity for western governments to establish ‘next-generation’ supply chains. Let’s hope they don’t squander it. Like all resources, battery material projects exist in less developed countries. What jurisdictions would you be cautious of developing projects in? Obviously, the Democractic Republic of the Congo comes to the top of mind with respect to cobalt. The DRC was responsible for over 60 per cent of cobalt production in 2016, and paradoxically, I see cobalt production from the country increasing rather than decreasing in the coming years as the size and grade of those resources is almost unbeatable. Everyone in the cobalt world is looking for a pure play opportunity, but this is easier said than done. Bolivia has always been problematic in the lithium sector as producers and offtake partners are concerned about resource nationalism. I’ve also heard rumblings about “trillions” of dollars of mineral wealth (including lithium) in Afghanistan. The robust demand backdrop is a real opportunity for lesser developed countries though it remains to be seen how some of these countries handle new interest in their mineral deposits differently than in past booms. I do see a prime opportunity for Europe and Canada, in particular, to build projects that can feed these growing battery metals supply chains. Chris Berry President of House Mountain Partners, LLC ABOUT THE AUTHOR Based in New York, Chris has been an independent analyst since 2009 with a focus on Energy Metals including lithium, cobalt, graphite, vanadium, and rare earths. His research provides strategic insights to institutional clients and has a specific focus on how disruptive trends in energy, strategic metals, and technology create opportunities. Before shifting focus to analysis of these trends, Chris gained twelve years of capital markets experience on both the buy side and sell side.