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Millennial Lithium (ML.V) Set to Benefit from its Position in the Lithium Triangle

04/10/2017


TSX:ML.V
OTC:MLNLF

Summary
 
· With lithium carbonate prices having risen significantly over the last two years from under $6,000 to above $14,000 per tonne, investors are intently focused on ferreting out opportunities in the lithium industry.
· Consistent news flow from Tesla and other builders of battery gigafactories reinforces the macro-case for lithium.
· The Lithium Triangle, particularly in Argentina and Chile, appears to be the sweet spot for low-cost incremental supply.
· Millennial Lithium is well-positioned to benefit from its highly prospective lithium projects in Argentina.
 
The proliferation of rechargeable electrical energy storage devices (along with impending eruption of increased demand from commercial production of mainstream electric vehicles and grid-level energy storage devices) has supported a 150%+ increase of lithium pricing since 2014. Due to the extensive use of lithium for a variety of applications, this positive macro-trend is expected to continue into the next decade when incremental supply can catch up to the growing demand for lithium compounds. As many investors know, a strong pricing environment is a catalyst (and arguably the best catalyst) for multiple expansion and stock price appreciation.
 
The development of new supply of lithium is expected to be dominated by projects being initiated in the continental brines of the Lithium Triangle, particularly in Argentina and Chile. These lithium-rich brine deposits situated in salars are the most economically recoverable form of lithium due to their near-surface location and the low cost method of extraction and evaporation method of concentration. We appear to be at the tipping point of when increasing demand will expose a situation of inadequate supply.
 
Millennial Lithium (TSX:ML.V) (OTC:MLNLF) is developing a portfolio of mining concessions located in the Lithium Triangle. Management is targeting the salars of Argentina in particular and thus far has gained control of four lithium brine projects: Pastos Grandes, Cauchari East, Cruz and Pocitos West. The company’s flagship project, Pastos Grandes, is currently being advanced though drilling programs, as management is embarked on a three-year work plan which anticipates commercial production to commence in the fourth quarter of 2019. A ground geophysics program (TEM) was recently completed at the Cruz Property, indicating a continuous 6-kilometer north-south trending conductive unit ranging in depth from 30 meters to 250 meters. A drilling program is expected to commence during early 2017 at the Cruz Property by JV partner Southern Lithium Corp. We expect Millennial Lithium to benefit from the anticipated continuation of increased prices for lithium through its projects and properties in Argentina.
 
Lithium Market
 
As the lithium market undergoes a structural shift as a result of increasing demand and limited capacity, the macro investment case for lithium is becoming more widely-known. With increasing demand for portable electronic consumer products (smartphones, tablets, notebooks, power tools, etc.), the rise of battery-building gigafactories and the step-up to mass production of hybrid and electric vehicles, more lithium is needed for the manufacture of lithium-ion batteries. Though non-battery, lithium-related markets (particularly as an additive in the manufacture of heat-resistant ceramics, specialty glass and lubricants/greases) have grown, the dominate catalyst for future growth of the overall lithium market is anticipated to be the increasing demand for rechargeable lithium-ion batteries.


 
Lithium is the lightest metal, and because of its inherent instability and high reactivity with air, it only appears in compounds in nature.The electrochemical properties of lithium provide cathode and electrolyte material for commercially viable, rechargeable electrical energy storage devices.
 
The main commercial lithium compounds are lithium carbonate, lithium chloride and lithium hydroxide, which are produced from predominately two sources: hard-rock ore (spodumene-bearing pegmatite from Australia and China) and subsurface continental (non-marine) brine deposits from closed-basin beds (from operations in Chile, Argentina and the U.S.). There are also lithium clay projects in the U.S. and Mexico that are developing hydrothermally altered clay deposits.


 
The chart above illustrates the structure of the supply chain for lithium industry from raw materials (pegmatite and brines) to intermediate lithium compound products (lithium concentrate, lithium carbonate, lithium hydroxide and lithium chloride) and finally to end-products.
 
Growing Demand for Lithium


 
Between 2010 and 2015, demand for lithium grew at a compound annual rate of 11%; we expect the annual growth rate to exceed 15% between 2017 and 2025. We expect that the demand for lithium will continue to increase, stimulated by the growing consumer electronics sector, an expanding energy storage business and the construction of battery gigafactories. Tesla is at the forefront with plans to supply both lithium-ion batteries for 500,000 cars annually within five years and Powerwall lithium battery packs to store electricity produced by solar panels at residential homes. In addition, grid energy storage systems are being deployed by electric utilities. Numerous other companies (LG Chem, BYD, Contemporary Amperex Technology, Foxconn and Boston Power) are building or planning to build facilities to manufacture EV (Electric Vehicle) lithium-ion batteries, further supporting the anticipated buoyant future demand for lithium compounds.


 
Insufficient Supply of Lithium
 
According to the latest report on lithium by the US Geological Survey (USGS), the world’s largest producers of lithium are Australia (13,400 tons in 2015), Chile (11,700 tons), Argentina (3,800 tons) and China (2,200 tons). The USGS withholds U.S. production data in order to avoid disclosing proprietary data. On the other hand, the order of countries by identified lithium resources is considerably different: Bolivia (9.0 million tons), Chile (7.5 million tons), USA (6.7 million tons), Argentina (6.5 million tons), China (5.1 million tons) and Australia (1.7 million tons). A major reason for the disparity is the vast resources in the Lithium Triangle encompassing lithium brine deposits in Bolivia, Chile and Argentina, which accounts for almost 60% of identified lithium resources.


 
Currently, there is insufficient production capacity to support the expected increased lithium requirements. The expected lithium boom appears to be in its nascent stage. As a result, the supply shortage has led to dynamic pricing environment.
 
Lithium Pricing
 
The lithium market is an oligopoly where three major producers account for approximately 58% of global production: Sociedad Quimca Y Minera De Chile (NYSE:SQM), Albemarle (NYSE:ALB) and the FMC Lithium subsidiary of FMC (NYSE:FMC). The Big Three are diversified companies with divisions that produce the lithium compounds, such as lithium carbonate, lithium chloride and lithium hydroxide. SQM extracts lithium solutions from the brine deposits of the Salar de Atacama in northern Chile. Albemarle also has lithium brine operations at the Salar de Atacama and in addition, operates the Greenbushes spodumene mine in Australia with partner Sichuan Tianqi Lithium through the Talison JV.  FMC Lithium’s lithium reserves are located in the Salar del Hombre Muerto in Argentina. A few Chinese producers (like Jiangxi Ganfeng Lithium and Xinjiang Haoxing Lithium), which convert spodumene ore into lithium compounds, account for an additional 40%, which also includes Tianqi Lithium’s 51% of production from the Australian Greenbushes mine.



Lithium is not traded on an exchange and lacks a transparent pricing mechanism like the LME or COMEX. Instead, a few producing companies manage supply, and lithium compounds are sold on a contract basis at specified prices that are set by direct negotiation between producers and customers. For the most part, these contract prices are not published; however, approximate values can be gathered from industry sources, company financial reports and management presentations. Firms like CRU, Macquarie and Roskill make periodic price assessments.
 
A small number of major producers supply well over 90% of the commercially available lithium with some analysts believing that the percentage may be as high as 98%. An extremely limited spot market satisfies incremental demand. As a result, very little high-grade lithium carbonate is available on the spot market so that modest changes in demand magnify the movement in price of lithium that is not under contract. The spot market represents a small amount of the lithium compounds actually sold, but is an indicator of marginal demand.
 
The price of lithium is most commonly quoted in $ per tonne of high-grade LCE (lithium carbonate equivalent), which generally has become the industry standard to estimate the unit value for lithium. It should be noted that lithium is sold in a variety of different lithium compounds, each available in different quantities, purities and particle size, often specific to various processes and applications. As a point of reference, lithium carbonate (Li2CO3) contains approximately 18.8% of lithium; consequently, 5.3 tonnes of lithium carbonate contains 1.0 tonne of lithium. Also, generally high-grade lithium carbonate (99%+ pure) sells at a $500-to-$1,000 per tonne premium to industrial-grade Li2CO3.
 
Over the past 15 years, supply/demand imbalances have impacted price.  According to the USGS (which appears to utilize technical/industrial-grade prices), between 2001 and 2005, LCE prices were relatively stable with the average annual price between $1,720 and $1,460. However, from 2005 to 2009, the average annual price rose from $1,460 to  $4,530 (32.7% CAGR). Following the global financial crisis (2009 to 2011), high-grade LCE prices declined to $3,870 in 2011, despite industry leaders SQM and Rockwood Holdings (which was acquired by Albemarle in 2014) idling capacity. From 2011 to 2014, LCR prices recovered to $4,510 (5.2% CAGR).


 
However, beginning in 2015, the supply-demand imbalance of lithium became manifest. The LCE market tightened and culminated in a price spike starting in late-2015 and lasting through the first quarter of 2016, which may be a forerunner of price expectations that are expected to result from a potential future supply shortage of high-grade lithium. As demand for rechargeable batteries has increased, the supply of lithium compounds tightened, primarily lithium concentrate (spodumene) feedstock, but also high-grade lithium carbonate. As demand from the battery factories in China increased (particularly from EV manufacturers), the supply of spodumene concentrate from Australia, the world’s largest producer of lithium, came into question. Albemarle, which acquired had Rockwood in the prior year, not only controlled more Australia’s lithium concentrate supply, but also a major investment by Tianqi Lithium into a German subsidiary of Albemarle raised concerns about a potential supply deficit in the spot market, which was further fueled by the anticipation of the wave of gigafactories. Also, companies in need of lithium compounds as a raw material but without contracts scrambled to acquire supply in the spot market.  The price of high-grade lithium carbonate entered a period of significant price increase. Spot prices almost doubled to $13,000 per tonne by the end of December 2015 and then surged during the first quarter of 2016, peaking above $22,000 per tonne in mid-March 2016. There were even some reports of transactions as high as $26,000 per tonne, even though we estimate that the average price during the first quarter of 2016 was approximately $17,000.


 
After the steep run-up during the first half of 2016, lithium product pricing corrected slightly during the third quarter of 2016 despite continued demand for lithium concentrate and lithium carbonate. However, pricing appeared to firm once again in the fourth quarter.
 
Initially as demand increases, the major companies can respond by increasing production. However, to be able to satisfy large increases in demand over the long-term, as for most metals and minerals, the addition of new lithium production capacity is required. This supply side response not only is capital intensive but also necessitates lead times measured in years to properly develop. Projects require financing, exploration (geophysical surveys, surface geochemical sampling programs and drilling), economic assessments, metallurgical studies, environmental report, processing design, permitting, construction, commissioning and optimization.
 
A number of greenfield hard rock and brine expansions are being advanced to alleviate the tight market situation. However, we do not expect that these few projects will be able to meet the rising level of demand until the mid-2020s, given the anticipated robust demand from a global wave of construction projects for new gigafactories and grid power storage initiatives, along with the continued growth in the demand for mobile devices.
 
The lithium mining industry is expected to expand production through the development of new projects in order to accommodate increasing demand. Over the medium-term, the supply of lithium will be dominated by projects being initiated in Argentina, Chile, China and Australia, but particularly from the Lithium Triangle. Typically, the cost of production from brines is much lower than from hard rock, and therefore, it is expected that continental brine resources will be preferred over hard-rock ore for new capacity.
 
Lithium Triangle


 
One of the world’s largest and higher quality resource bases of lithium is the undeveloped brine deposits of the Lithium Triangle, which refers to one of the world’s major continental evaporate complexes located in the mountainous region where borders of Argentina, Bolivia and Chile meet. The Lithium Triangle hosts many significant lithium brine deposits that have formed in the closed basins of this tectonically active and arid region. The concentration of saturated salt  brines include accumulations of lithium salts: initially deposited during periods of intense volcanic activity along the west coast of South America in the late-Cretaceous to early-Tertiary Periods; subsequently conveyed by hydrothermal activity (via preferential flow paths previously created by tectonic activity); and later concentrated in depressions (often inland closed lakes and/or calderas) through weathering and leaching of the volcanic lithium source-rocks by snowmelt and rainwater run-off. Another potential mechanism for transporting lithium to the basins may have been the interaction of groundwater with the magmatic systems. Nevertheless, the accumulation of lithium-rich brine in closed basins (aka salars) within the Lithium Triangle is well documented.
 
​Around half of the world’s lithium supply is derived from the brines of the Lithium Triangle. Chile is the #2 producer of lithium in the world and the #1 in identified lithium resources, while Argentina is #3 in both categories. Though Bolivia is #1 in in identified lithium resources, the country only made its first shipment to China in August 2016 due to various reasons: the unfavorable political/business environment, the cost considerations of refining Bolivia’s magnesium-rich lithium salts and a less competitive evaporation rate.
 
In the near future, the Lithium Triangle is poised to become even more dominate as the major source of lithium in the world not only due to the vast identified lithium resources in the region, but also because brine production more cost-competitive relative to hard-rock and clay sources of lithium.


 
With the tipping point toward higher lithium prices on the horizon and with brine deposits poised to be a major contributor to low-cost incremental supply, lithium exploration & development companies of the Lithium Triangle, with their blue sky potential, appear to be well positioned to benefit from higher lithium prices.
 
Millennial Lithium
 
Millennial Lithium with its pipeline of projects is among those exploration & development companies being positioned to benefit from higher lithium prices. The mission of Millennial Lithium’s management is to become a low-cost supplier of high-grade lithium from the development of its projects in the Lithium Triangle. Recognizing the opportunity in the lithium space, in May 2016, management fundamentally changed the company’s focus from oil & gas to lithium and soon thereafter, reorganized the company and changed its name to Millennial Lithium. The company controls four highly prospective projects in the Lithium Triangle: Pastos Grandes (5,757 hectares), Cauchari East (2,989 hectares), Pocitos West (15,857 hectares) and the Cruz Project (2,500 hectares). Management believes that Pastos Grandes has the potential to achieve commercial production within three years.
 
On July 19, 2016, the company announced it had entered into an agreement for an option to acquire 100% of the Pastos Grandes Lithium Project in the Salta Province of Argentina. The Project is comprised of four mining properties (El Milagro, Neftalí II, Norte Argentino, and Jorge Eduardo) which encompass 1,221 hectares. The earn-in began in September after the initial payments totaling US$700,000, along with issuance of 500,000 shares to the vendors.  To complete the earn-in, Millennial Lithium is required make additional payments: US$500,000 and US$500,000 in common shares on the six-month anniversary (mid-March 2017) and US$1.0 million on the 12-month anniversary (mid-September 2017). Also, the Project is subject to a 1.5% NSR, which the company can purchase for US$3 million. In addition, Millennial made application to the Provincial mining authority of Salta, for an additional 4,236 hectares of mineral claims adjacent to the 1,219 hectare Pastos Grandes project.
 
Prior to exercising the earn-in option, a NI-43-101-compliant Technical Report on the four mining properties of the Pastos Grandes project was completed and subsequently was filed on SEDAR on September 21, 2016. The Salar de Pastos Grandes was explored by a two-year program by Eramine Sudamerica S.A. during 2011 and 2012 at a cost of over $4 million. The exploration program included six exploration wells, geophysical surveys (Controlled Source Audio-frequency Magnetotellurics, Time Domain Electromagnetic and Vertical Electric Sound) and evaporation tests.
 
Four drill holes totaling 389 meters (ranging in depth from 50 to 125 meters) were completed. All the holes encountered brine grading an average of between 331 and 566 milligrams/liter (mg/l) Li to their total depth, therefore, the deposit remained open at depth. While the lithium values are within the typical range of 200-to-1,400 mg/l Li for economically evaporation ponds, the Technical Report noted that “it is typical to encounter more dense brine and higher lithium content at greater depths, as the more dense brine tends to sink over time.” Furthermore, the magnesium-to-lithium ratios (Mg:Li) were between 5.35 and 7.87 for the drill holes, within the rule of thumb that the ratio must be below 10:1 for a brine deposit to be economical.


 
The dataset from previous exploration work at the Pastos Grandes Property is not yet sufficient to develop a resource estimate; however, the Technical Report concludes that Pastos Grandes is “a project of merit for advanced exploration and development for lithium and potassium.”


 
In November 2016, Millennial Lithium commenced a drilling program in the northern portion of the Pastos Grandes Project not only to confirm prior results, but also test deeper into the salar (to over 350 meters). Two exploration holes (PG-MW-16-01 and PG-MW-16-02) were drilled vertically to the depths of at least 192 and 400 meters, respectively. Both holes intersected brine-bearing formations at depths greater than the prior 2011-2012 campaign. The 9 samples from PG-MW-16-01 graded between 297 mg/l and 471 mg/l, averaging 395 mg/l Li with an average Mg:Li ratio of 6.2. The 10 brine samples collected from PG-MW-16-02 graded in the range of 339 to 399 mg/l, averaging 389 mg/l Li with an average Mg:Li ratio of 6.1.
 
In late February 2017, Millennial Lithium announced that the company intends to complete a non-brokered private placement of up to 6.0 million Units priced of $1.45 per Unit for anticipates gross proceeds of up to $8.7 million. The net proceeds are primarily targeted to advance the Pastos Grandes project through drilling, evaporation trials and process engineering. Management anticipates that the proceeds from this private placement will be sufficient to advance the Pastos Grandes project up to the Preliminary Economic Assessment (PEA) stage.
 
Cauchari East Lithium Project

 
In September 2016, Millennial Lithium entered into an option agreement to acquire up to 100% of the Cauchari East Lithium Property through a series of cash payments, stock issuances and exploratory expenditures. The execution of the option agreement with its $250,000 payment has not yet been announced. Encompassing 2,989.48 hectares, the Cauchari East project is located in the Puna region of Jujuy Province of northwestern Argentina, less than 20 kilometers to the south of Orocobre's Olaroz lithium-potassium project (a producing mine) and less than 5 kilometers east of Lithium Americas' Cauchari Lithium Project.
 
Lithium Americas' Cauchari Lithium Project has been the target of exploration campaigns between 2009 and 2012 by both Orocobre Limited and Lithium Americas Corp. NI-43-101-compliant Technical Reports were filed in 2010 and 2016 which indicate that Cauchari brine has attractive lithium chemistry with low Mg/Li and high K/Li ratios. The 2016 report for Lithium Americas' Cauchari Lithium Project estimates an inferred resource from the combined northern and southern resource areas of 230 million cubic meters of brine at an average grade of roughly 380 mg/l Li and 3,700 mg/l K. Millennial Lithium’s management believes that the data from the Technical Report on Cauchari “confirms that the brine resource extends to the east of the basin, towards the Cauchari East Project.”
 
In March 2017, Millennial Lithium initiated a Vertical Electrical Soundings (VES) survey ground geophysics program at Cauchari East. The survey is expected to be comprised of seven profiles that will help detect the presence of subsurface geo-electric layers, which should reveal the locations of soil layers, the top of bedrock, the groundwater table and salt water intrusions.


 
The Cruz Property
 
In October 2016, Millennial Lithium entered into an option agreement to acquire 100% of the Cruz Lithium Property in Argentina’s Salta Province. Under the agreement, Millennial has paid the vendor US$150,000 and can earn-in the 100% interest with two additional payments of US$550,000 each, one on or before October 11, 2017 and the other on  or before October 11, 2018.
 
The following month, in November 2016, Millennial Lithium granted an option to Southern Lithium Corp. to acquire up to an 80% in the Cruz Lithium Property. To earn the first 70%, Southern Lithium must maker initial payments totaling US$200,000 (received), issue 540,000 shares of Southern Lithium (SNL.V), deposit US$500,000 into a joint exploration bank account (completed), expend US$500,000 exploring the property by October 1, 2017 and make two additional payments of US$1.0 million each, one on or before October 1, 2017 and the other on or before October 1, 2018. Southern Lithium can earn an additional 10% by completing a bankable commercial feasibility study within 3 ½ years.  Obviously, these option agreements are cash flow positive for Millennial Lithium; the Cruz Property is being advanced through a fully funded development campaign with Millennial retaining 20% of the Project.
 
In early-February 2017, a Transient Electromagnetic Survey (TEM) was conducted over 20.25 square kilometers of the Cruz Property. Over the 4,500 meter by 4,500 meter grid area, a continuous north-south trending high conductive unit was detected. The unit extends over 6 kilometers and in most salar basins in the area has been generally associated with high content of lithium brine. Indications of brine appear to be as shallow as 30 meters in the central part of the property and extending to a depth of 250 meters further out from the center.
 
Encompassing 2,500 hectares, the Cruz Property lies at the north-end of the Salar de Pocitos, at the junction of a fault system and the northwest-southeast aligned Pleistocene volcanoes (Tul-Tul Medio, and Pocitos), which are possible sources of lithium brine occurrences having used the faults as conduits for lithium-bearing fluids.
 
Pocitos West Project
 
On February 2, 2017, Millennial Lithium announced the acquisition of an option to purchase a 100% interest in the Pocitos West Project, which encompasses 15,857 hectares of prospective lithium brine concessions on the Salar de Pocitos. Pocitos West is situated approximately 40 kilometers west of the Pastos Grandes Project and roughly 30 kilometers south of the Cruz Property. The initial option agreement and first option payments (which total US$250,000) have been paid, and Millennial can earn the 100% interest by making additional payments totaling $4,250,000 over a prescribed schedule within the next three years.
 
On March 27, 2017, Millennial Lithium closed private placement financing of 4,750,000 Units at $1.25 per Unit. Each Unit is comprised of one common share and a 2-year one-half share warrant.  Each full warrant is exercisable into one common share at $1.50. Net proceeds of approximately $5.58 million are being directed toward advancing the Pastos Grandes Project through additional drilling, along with process and evaporation trials, and also for general working capital purposes. Millennial Lithium has engaged Montgomery & Associates to provide guidance for the drilling program and pumping tests to better estimate the areas and volumes of the prospective brine resources.
 
Conclusion
 
· Though there is some debate, as always, about the resolution of the current lithium supply-demand imbalance and the resulting effect on pricing, I fall into the camp that there will be insufficient supply to meet the anticipated demand over the next few years, which should result in a robust lithium pricing environment.
· Such opportunities, especially when accompanied with targeted areas such as the Lithium Triangle, are infrequent and should be pursued vigorously when they occur.
· Millennial Lithium is advancing the development of multiple lithium brine projects in Argentina. The projects are being fast-tracked, and management anticipates completing a PEA for Pastos Grandes in 2017.
· Since the company’s projects are still in the exploration stage, Millennial Lithium will continue to need to raise the capital to fund the development of its lithium brine projects.
· Currently, Millennial Lithium’s has a market capitalization of approximately CDN$59.7 million with 42,643,743 shares outstanding.

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