Atlantic Lithium: Sensible Company, But That Lithium Price (OTCPK:ALLIF)

Goldman Sachs and lithium

Goldman Sachs has just released a note detailing their concerns over the lithium price off into the mid-future. There’s a note on that here. There are those who dispute it here at Seeking Alpha here and here. Regular readers will know that I’m minded to agree with Goldman. Not on their specific and exact numbers so much as on the general idea.

This is simply a feature of the mining markets. There’s a lot more out there – vastly, hugely more – of whatever we might think we desire to have than most people realist. I even write a whole (short and free) book on the point once. What might run short are two things. The first being current operations extracting what we desire and the second the technologies to extract at current prices. If demand changes, then prices do – so, more deposits become economic to mine. But that higher price also spurs technological development, and so we might end up at the end of the cycle with entirely new sources.

Some of which might be markedly cheaper than the new instances of the old technologies that have also been funded. Which is rather what Goldman is saying. We’re in the middle of – perhaps just passing the peak of – a vast investment boom in lithium supply. It’s possible – as I’ve been saying – that such new production might outstrip new demand and so lithium prices will decline despite the significant rise in that demand.

So, say that Vulcan succeeds (and that’s just one example of many attempts to capture lithium from geothermal sources) then perhaps some of the hard rock, spodumene, mines with their inherently higher costs aren’t going to work out? After all, this did happen with the last lithium boom. A perfectly decent spodumene mine, actually in operation but with the wrong capital structure, went bust for Altura.

It really is possible for demand to expand mightily and for supply to do so even more thus driving down the price. Which spells doom for the marginal miners funded in the throws of the investment boom chasing that expanded demand. Overall, at a societal level, this is why free market capitalism works of course, but for us trying to make decisions within the system, it poses a bit of a problem. We’ve got to try and decide which of the new projects to back.

Atlantic Lithium (OTCPK:ALLIF)

Atlantic is now, at $300 million and change, a little large to be really describing it as a junior miner. On the other hand, they’re not producing as yet, so they do fit into the technical description.

First, obviously, there has to be something to mine and Atlantic has that at Ewoyaa. They’ve spodumene, in quantity, at concentration. The next stages – how to mine, to concentrate and ship – are all known technologies.

If they need capital, they’re backed by Piedmont Lithium, they seem fully funded for current plans anyway. They’ll have no problem with a spodumene concentrate processor.

That seems a pretty brief overview, but this is rather my point here. There’s no doubt that Atlantic – well, no doubt in my mind – can produce a lithium concentrate at volume from their West African operations. Their exploration of other, similar, deposits seems to be going well. These are just not areas I am or would worry about. They’re fine, they’re solid.

‘But’

Which is where the but comes in. Having decided – as I have – that there’s a mine there, the capital to produce is available and so on, the last thing is, well, what’s the price going to be of the product? And that’s where we come back to that Goldman Sachs report, my worries about the overall market. To say it again, Altura did go bust.

We’ve traditionally had two lithium producing techs. From brines and from spodumene. The second is inherently higher cost than the first. Now we’ve a third player, the use of modern membrane technologies to extract from geothermal (and desalination plants are looking likely too) and so on. I expect this third tech to slot in between the other two in our cost spectrum.

This leaves hard rock mining, spodumene, as the highest cost lithium source. The marginal production. The one that suffers most from any oversupply and thus lower market prices.

Which is where I am with Atlantic Lithium.

My view

If you think that lithium isn’t going to go into oversupply then Atlantic is a perfectly good place to invest on that basis. There’s some gearing here – there always is in a mine in development – so good and high prices when they come to market will produce substantial capital appreciation.

My worry is only that I’m deeply unsure – to the point of thinking that there will be oversupply – that prices are going to hold up.

So, make your choices on that basis

The investor view

As I say, Atlantic is a perfectly reasonable lithium miner well down the development path. Think that the lithium price is going to hold up then it’s a nice buy for a long-term hold. Worry as I do about prices and oversupply then it’s not. But that’s the background macro analysis that has to be done.