Sub: Global investment in lithium mines requires vigilance against various risks

Sub:  Global investment in lithium mines requires vigilance against various risks

The application of lithium in the battery industry has grown rapidly, from 7% in 1997 to 78% in 2021. The global lithium resource reserves are abundant, with huge potential in the future. In the short to medium term, supply exceeds demand. At present, the upstream and downstream industries of lithium mines are in a period of deep adjustment, and enterprises should be more vigilant about various risks when making investment decisions.

The global lithium industry is developing rapidly, with supply exceeding demand in the short to medium term

Firstly, the global climate goals and the energy transition processes of various countries are driving the continuous increase in demand for lithium salts.

In 2022, there will be over 26 million electric vehicles on the road worldwide. It is expected that global electric vehicle sales will reach nearly 14 million units by 2023. In the future, the vast market for new energy vehicles will drive rapid growth in global demand for lithium salts. The total sales of electric vehicles are expected to exceed 20 million by 2025 and 40 million by 2030. According to the International Energy Agency's forecast, the total number of electric vehicles worldwide will increase to about 240 million by 2030, with an average annual growth rate of about 30%.

Secondly, the global lithium resource reserves are abundant, with enormous potential for future development.

In 2022, the total global lithium resources are equivalent to approximately 560 million tons of lithium carbonate equivalent (LCE). The South American "lithium triangle" region (Bolivia, Chile, Argentina) accounts for a total of 51.1%, while the United States and Canada account for 17.6% and 6.9% respectively. China ranks sixth in the world, accounting for approximately 6.1%. In the long run, with large-scale capital investment, both resource reserves and production capacity are expected to continue to grow, supporting long-term demand.

Thirdly, global lithium mine design capacity will quickly meet demand, but there is still uncertainty in achieving capacity.

According to the production capacity planning statistics of the main global lithium mine (brine) projects currently in production or under construction, and considering the release time of production capacity, it is expected that the effective global lithium resource production capacity will reach 1.41 million tons, 1.8 million tons, and 2.41 million tons of LCE respectively from 2023 to 2025. The lithium demand is expected to be 1.1045 million tons, 1.3612 million tons, and 1.6515 million tons of LCE respectively from 2023 to 2025, and the industry will shift towards an oversupply pattern. However, the decrease in prices has squeezed the profit margins of enterprises, coupled with factors such as resource country policies and global industrial and supply chain restructuring, making it highly uncertain whether production capacity can be successfully achieved.

Fourthly, the establishment of lithium futures market accelerates the trend of lithium prices towards supply and demand fundamentals.

The establishment of the lithium carbonate futures market has strengthened the market's ability to regulate prices. In the short term, the amplification effect of the futures market has accelerated the decline in lithium carbonate prices. The Guangzhou Futures Exchange has launched lithium carbonate futures and options, which will better meet the needs of risk avoidance and high-quality development in the lithium industry. The spot pricing of lithium carbonate is relatively scattered, with prices that are not publicly disclosed and transparent, which makes downstream enterprises have a strong demand for risk management of raw material prices, hoping to use financial instruments to avoid price fluctuation risks.

The lithium resource market in China is flourishing and has enormous development potential

Firstly, China's lithium reserves rank among the top in the world, and there is still room for increased reserves.

One is that China's lithium reserves and ranking have significantly increased, with per capita reaching the world average level. As of the end of 2022, China's lithium ore reserves were 15.7 million tons of LCE, accounting for 16.47% of the world's total, ranking second in the world; China's per capita lithium ore reserves are 11.12 kilograms, almost reaching the world average level.

The second is the differentiation of lithium resource structure in China, with reserves mainly consisting of lithium mica and spodumene, and low degree of salt lake exploration. Lithium reserves in China are dominated by ores: in 2022, Jiangxi, Qinghai, Sichuan and Xizang will rank the top four in lithium reserves in China, accounting for 40.2%, 29.4%, 21.3% and 8.9% respectively. In China, lithium resources are mainly distributed in salt lakes: salt lakes are mainly distributed in Qinghai and Xizang, accounting for 82% of the total; Spodumene is mainly distributed in Sichuan, with a resource proportion of 10.9%; Lithium mica is mainly distributed in Jiangxi, with a resource proportion of 7.5%.

Secondly, China's self-produced raw materials are difficult to meet demand and have a high degree of external dependence.

Firstly, China's lithium industry maintains a relatively fast growth rate, with lithium ore smelting capacity mainly concentrated in Jiangxi, Sichuan, and Qinghai provinces. Among them, Qinghai is mainly supplied with self-produced resources, while Jiangxi and Sichuan are mainly supplied with imported resources. According to the Lithium Industry Branch of the China Nonferrous Metals Industry Association, in 2022, China's lithium carbonate production reached 395000 tons (with a production capacity of about 600000 tons), a year-on-year increase of about 32.5%; The production of lithium hydroxide reached 246400 tons (with a production capacity of approximately 360000 tons), an increase of approximately 29.5% year-on-year. From 2017 to 2022, the annual compound growth rate of lithium salt production in China was 32%.

Secondly, the proportion of self-produced raw materials in China's lithium carbonate production is relatively low, and the dependence of raw materials on foreign countries is high. In 2022, China's lithium ore raw material production accounted for 17% of the world's total, while the basic lithium salt production capacity accounted for about 70% of the world's total, and the demand for lithium carbonate accounted for 80% of the world's total, indicating relatively insufficient self-sufficiency.

Thirdly, the demand for lithium salts in China is growing rapidly, with strong expectations for future growth. According to statistics from Shanghai Nonferrous Metals Network, the total demand for lithium salts in China in 2022 was about 644000 tons, of which the lithium battery industry was about 609000 tons, an increase of 53.7% compared to 2021, accounting for 94% of the total demand. According to expert analysis, the average demand for lithium carbonate in China is expected to be 690000 tons and 1.03 million tons in 2030 and 2035, respectively.

Thirdly, the development costs of lithium mines in China vary greatly due to different varieties, and the production models of imported lithium concentrates and low-grade lithium mica face difficulties in profitability.

Firstly, spodumene mainly relies on overseas resources, and the cost of imported ore is significantly higher than that of self-produced ore.

Domestic lithium salt manufacturers mainly import Australian spodumene, and if all ores rely on imports, the comprehensive cost of producing 1 ton of lithium carbonate is about 156000 to 178000 yuan, with almost no profit margin. The production cost of self owned lithium mines can be significantly reduced. The cost of fully self supplied lithium mines for enterprises is approximately 70000 yuan/ton to 100000 yuan/ton. Participating in lithium mine development overseas and processing locally can significantly reduce costs.

Secondly, there is a significant difference in the grade of mica lithium ore, and the development cost is negatively correlated with the grade. The average grade of Jiangxi lithium mica ore is about 0.45%~0.5%, and the total cost of lithium extraction is about 70000 yuan/ton~80000 yuan/ton. Ningde Times and Guoxuan High tech have acquired a large amount of low-grade mica lithium ore in Yichun, with a grade of about 0.25% and a cost of 150000 to 200000 yuan per ton. Low grade mica lithium is the most expensive source of lithium ore, difficult to generate high profits, and more often used as a balancing force against high lithium prices.

Thirdly, the cost of lithium extraction from salt lakes is lower and the profit margin is greater. The cost of lithium extraction from salt lakes is generally between 20000 yuan/ton and 80000 yuan/ton, which is greatly influenced by the type and composition of salt lakes and has a large profit potential. The domestic Lanke Lithium industry has the most mature technology, with a cost of about 40000 yuan/ton, and the cost in other regions is generally less than 50000 yuan/ton.

Fourthly, China has already formed or is about to form multiple resource producing areas, greatly enhancing its capacity for resource supply and security.

One is the salt lake lithium production area in the Qinghai Tibet region. Salt lake brine type lithium deposits in China are mainly distributed in Qinghai and Xizang. Salt lake lithium deposits can be divided into carbonate type and sulfate type. Among them, lithium, rubidium, cesium and other metals in carbonate type are easy to extract, and the comprehensive development and utilization cost is relatively low.

The second is the lithium mineral area of pegmatite in Sichuan (western Sichuan). The scale of granite pegmatite type lithium deposits is generally not large, with significant changes in their occurrence. The mining, selection, and metallurgical processes are mature, and the investment recovery period for mining construction is short. The lithium mines in Sichuan are mainly concentrated in the two major mining fields of Mekka in Garze Prefecture and Kerin in Aba Prefecture. Currently, there are mainly six mines with mining rights. The Kangding Methyl Ka Lithium Mine of Rongjie Co., Ltd. and the Yelonggou Lithium Mine of Shengxin Lithium Energy have officially been put into operation for mining, with a total designed production capacity of over 850000 tons/year for spodumene mining and selection.

The third is the lithium mica production area in Yichun, Jiangxi. Yichun, Jiangxi has the world's largest lithium mica resource. In recent years, well-known enterprises such as Ningde Times, Fulin Precision Industry, Jiangte Electric Machinery, Yongxing Materials, Guoxuan High tech, and Tianhua Super Clean have continued to settle in Yichun, resulting in a clustering effect in the industrial chain. In 2021, Yichun produced 81000 tons of lithium carbonate, exceeding a quarter of the national output. As of July 2022, Yichun has a lithium carbonate production capacity of 180000 tons, accounting for nearly 40% of the national total. According to the official forecast of Yichun, the production will reach over 500000 tons by 2025.

Fourthly, Chinese enterprises actively participate in international mining cooperation and have achieved significant results. Australia and Africa have abundant resources of spodumene and South American lithium salt lakes, with high grade, low development difficulty and production cost, making them hot investment areas. More than 15 Chinese enterprises, including Tianqi Lithium and Ganfeng Lithium, are conducting lithium mine development overseas, investing in or participating in over 22 projects, and are about to form overseas production areas.

Global lithium market investment is hot, competition intensifies, mining companies need to be vigilant about investment risks

Firstly, the enthusiasm for exploration investment remains high, and the amount of newly discovered resources is expected to increase rapidly. The global lithium exploration budget and number of companies have skyrocketed in 2022, reaching historic highs. The annual exploration budget increased to 467 million US dollars, a year-on-year increase of 88%, which is 68% higher than the highest level before the epidemic. The number of exploration companies was 194, a year-on-year increase of 75%, which is 42% higher than the highest level before the epidemic. The exploration budget and the number of participating companies are both at the highest level since 2010.

Secondly, the M&A market continues to be hot, but high-quality large-scale projects are rare. The global lithium M&A market continued to heat up in the first three quarters of 2022, showing a trend of "increasing quantity and decreasing price". The high lithium price operation has led to a significant increase in the volume of M&A transactions for small and medium-sized projects. In the first three quarters of 2022, the global lithium resource M&A transaction volume decreased by 10.7% year-on-year, and the number of M&A projects increased by 56.7% year-on-year. Among them, the number of small and medium-sized M&A transactions increased by 59.2% year-on-year.

Thirdly, downstream enterprises in the industrial chain have a strong willingness to layout upstream resources, leading to intensified market competition. In 2022, some downstream enterprises and non industry enterprises in the industrial chain will enter the market to acquire lithium resources and companies, such as Jixiang Shares, Yiwei Lithium Energy, Yahua Group, BYD, etc; In addition, large mining enterprises continue to expand their resource layout and acquire mining projects, such as Ganfeng Lithium, Zangge Mining, and Zijin Mining. In 2022, the merger and acquisition transactions of Chinese enterprises in lithium mines continued to grow, with 13 M&A transactions throughout the year, with a total transaction amount of 3.007 billion US dollars.

Fourthly, the concentration of global lithium mining development enterprises is high, and new entrants will face competitive barriers. In 2022, the top three production companies are Albemarle in the United States, SQM in Chile, and Pilbara in Australia, accounting for 52.6% of the global total production; The total proportion of the top ten global production enterprises is 88.9%, with high industry concentration. Among them, Tianqi Lithium, Ganfeng Lithium, and Salt Lake Group, three Chinese funded enterprises, account for a total of 17.9%.

Fifthly, the future lithium salt production capacity will be closer to resource areas. From the perspective of the industrial chain, both upstream and downstream parties are attempting to create integrated collaboration in their own businesses, in order to expand revenue and increase pricing power. Europe and America have resource advantages and a large terminal automotive market, and are making efforts to improve processing capacity and try to build their own supply chain closed-loop. The previous cooperation model of "overseas resources+Chinese processing" may face challenges. In addition, due to geographical limitations and transportation costs, various enterprises are more inclined to carry out lithium extraction processing nearby.

Sixth, breakthroughs in salt lake lithium extraction technology will greatly reduce costs and change the global supply and demand pattern. A large amount of global salt lake resources have not been developed and utilized. In the future, breakthroughs in lithium extraction technology from salt lakes will greatly reduce average costs and change the supply and demand pattern. The research and development of lithium extraction technology for emerging salt lakes/brine continues to make progress, and the future supply capacity will be greatly improved.

With the significant decline in lithium prices, the situation of profit differentiation in the upstream and downstream of the new energy industry chain is expected to be further alleviated. The cost reduction caused by the price reduction of raw materials is beneficial for the healthy development of the entire industry downstream, including positive electrode materials, batteries, and vehicle manufacturers. However, for upstream mining enterprises, especially those who purchase ores and projects at high prices, there may be profit contraction or even losses