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Geothermal and lithium
There are a number of attempts going on to extract lithium from geothermal waters. Several people around the Salton Sea for example. Cornish Lithium (unquoted stock) is doing so in the rocks underneath Cornwall in England. I know of another attempt in Bohemia which has a very similar geology.
That there is lithium in such waters is well enough known. Well, there’s lithium in sea water for the same reason as well, there’s even one group claiming to be able to extract direct from the Red Sea.
But geothermal. Imagine you’ve a rock formation with lithium in it. The usual sort of granites, pegmatites, containing tin, spodumene perhaps. Water running through them will pick up some lithium in solution. Get enough hot water running through there and you might well end up with a rich lithium solution.
The task then becomes getting the water pumped up and then being able to extract the Li from the H2O. That’s certainly feasible, it becomes a matter of economics as to whether you’ll make money doing so.
As it happens I was talking to some people making membranes to do this just a couple of weeks back. It’s possible (which is not the same as viable economically, not by definition it isn’t) with as little as 100 parts per million lithium in solution. They claim economic viability at that as well but I’m less certain of how true that is.
So, the basic theory works however odd it might seem.
Vulcan Energy Resources (OTCPK:VULNF)
Vulcan is an interesting idea. Germany has a number of geothermal energy plants in the Upper Rhine region. So, why not add lithium extraction doohickeys to the water that is already running through the system? As and when that proves viable then of course more such geothermal plants can be added.
Seems like a perfectly sensible plan to me. Even if one has to buy the geothermal plant at the current cost of a geothermal plant that will be based on the value of the current energy output, still leaving room for the marginal revenue from the lithium to be additive.
Please note what I’m not trying to do here, which is to insist that Vulcan is going to be a lovely and wondrous investment. Instead I’m trying to look at the basics of the technology and how that is going to fit into the wider market.
How well Vulcan is capitalised, their operating margins, those aren’t what I’m talking about. It’s the basics of the technology, the marketplace as a whole that matters to me.
Parts of Vulcan that don’t matter
Vulcan makes much of being at the heart of Europe. This doesn’t matter one jot, not even a tittle. If lithium is $15,000 a tonne (about right, sometimes) then whether it costs $3,000 or $10,000 to ship a 40 tonne container around just isn’t relevant. Do note they’re talking about producing to battery material, not to a concentrate that has to be shipped to China like many spodumene miners must. Transport costs just aren’t an issue here.
OK, there can – will – be benefits from the EU wanting local production, some tax breaks, possibly grants and so on. But that’s politics, not the basics of geographic location. That wages will also be higher in Germany might well offset, more than so in fact, anything about transport.
The part of Vulcan that does matter
In the corporate presentation we get this: “$3,140 (Cost per Tonne)”
That’s for lithium hydroxide, so again not that concentrate derived from spodumene. This compares to $5,872 from brine operations and $6,855 from hard rock mining (or, really, spodumene although there are other ores).
Now that’s not really a proper cost as it’s using the energy possibly created as a byproduct credit. We can get lower than that brine number if we include iodine as byproduct credits and so on.
But this for me is the important part of this. It’s also not something I think specific to Vulcan but something that we should be thinking about more widely.
My worry about the lithium market
Yes, I know, everyone and their dog is insisting that the world is going to need massively more lithium. Prices are going to soar and anyone producing will make a fortune. Except we were also saying that in 2012 and 2013 and it didn’t quite work out that way. Altura Mining got financed when we were all thinking that way and it went bust all the same.
For this is something that regularly happens with the so-called “minor” metals. There’s a lot, lot, more out there than anyone usually thinks there is. (I actually wrote an entire book on this, free version here). So, something becomes newly more exciting, supply increases hugely more than demand and the price crashes.
Now, I don’t say this will happen with lithium this time around. Again. But it’s certainly something that could happen. Lithium just isn’t that rare. It’s only in these last few years that people have really been thinking about all – all that is – of the ways we could be getting lithium from wherever. Proper investment in new technologies, rather than just more places we can evaporate brines, or mine spodumene.
OK, so what happens with lithium supply then?
So, what happens if the global market does that thing again of increasing supply more than demand? Of course, the price falls. But we’ve not got something different in the market here.
Well, OK, we’re assuming that the Vulcan numbers are right but from other conversations this sounds believable at least. That geothermal lithium, given the energy credits, will be cheaper than either brine or hard rock sources. Just the advances in recent years in membrane technologies mean that makes sense to me.
So, the market moves into oversupply. This means that at least some of the new producers will go bust. As with Altura, those does indeed happen – or as happened to Greenbushes a couple of decades back. Ah, but which producers will it be that go bust?
It’s going to be the higher cost producers of course. What we normally call the marginal producers.
What I’m seeing in the Vulcan numbers is that the geothermal producers are going to be the low cost producers. The ones who survive even as the higher cost producers above them end up leaving the market.
That is, if we want to play the lithium game but are worried about oversupply if all current projects come to fruition then the way for us to do so is to steer clear of those marginal producers – the hard rock ones – and be in the low cost producers. Brines and geothermal.
This also enables us to avoid that Chinese bottleneck on processing the spodumene concentrates.
My view
I realise this hasn’t said whether you should invest in Vulcan or not. I’m still much to hesitant about the excitement surrounding lithium to want to be doing that. I can see one project that I’m really very, very, suspicious about gaining investment for example. One that I know a lot of the details about. So, I’m suspicious of the pricing of the whole sector.
But it is still possible to say that if – if – you’re interested in the sector then I think we’re seeing an interesting technological change here. Spodumene has always been the marginal source, costs well above brines. But it looks like geothermal is coming in below brines, at least by this accounting.
That, to me, says that we should be looking to invest in the geothermal and or brines operations, not the hard rock ones.
The investor view
I think it’s necessary to grasp this technical difference between sources of lithium. It’s great to be in the marginal producers when there’s a boom on – the leverage is greater. But if the bust arrives – and in near all minor metals it eventually does – then it’s the marginal who go to zero while the low cost suppliers just motor on.
The value of Vulcan is in being in that bottom quarter of the costs of production. That’s also likely something that extends to other geothermal lithium producers.
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