Financing Lithium Projects Today Key for Energy Transition

Moving to greener sources of energy means more demand for batteries to power electric vehicles and energy storage systems — which in turn need key metals such as lithium.

However, lithium junior miners need investments to move their projects forward and bring new supply online, as any delays could significantly impact how fast the energy transition materializes and could delay countries around the world reaching their net zero goals.

When asked about the fundraising environment today compared to a year ago, Ernie Ortiz of Lithium Royalty (TSX:LIRC,OTC Pink:LITRF) said there are now many more parties at the table.

“The overall investment universe is growing, but at the same time the opportunities have grown alongside it,” Ortiz said during a panel discussion at this year’s Fastmarkets Lithium Supply and Battery Raw Materials conference. “We estimate well over US$50 billion in capital expenditure needs to be spent in the lithium sector for the rest of the decade, so that presents a lot of opportunities.”

Orion’s Philip Clegg said it all depends on which capital structure you are looking at.

“Certainly we’ve seen new forms of finance with government, banks, loan schemes and similar arrangements,” Clegg said. “I think that if you look at the original equipment manufacturers (OEMs) and what they are doing on the equity side of things, that is a potential new source of capital as well, but overall we need more capital to achieve what we need to achieve.”

From Tesla (NASDAQ:TSLA) to General Motors (NYSE:GM), the past year has been full of news about OEMs and EV makers jumping into the battery metals sector to secure steady and quality supply.

Dual-listed Lithium Americas (NYSE:LAC,TSX:LAC) inked the first-of-its-kind lithium supplydeal with General Motors at the end of January 2023 to develop the Thacker Pass mine in Nevada. Under the agreement, the Detroit-based carmaker will make a US$650 million equity investment in Lithium Americas, which is the largest-ever investment by an automaker to produce battery raw materials.

More recently, in early May Ford (NYSE:F) signed multiple lithium supply deals. Two were with producers Albemarle (NYSE:ALB) and SQM (NYSE:SQM), and the others were with Nemaska Lithium, Compass Minerals (NYSE:CMP) and EnergySource, all companies that are working towards bringing supply on stream.

Commenting on what OEMs have been doing in the past year when it comes to the lithium mining sector, Jonathan Beagle of Ridgeline Royalties pointed out there’s a limit to the amount of OEM capital that is out there.

“So whether it is private equity or royalties and streams, there are other options that need to be considered,” he said.

Risk profiles

Lithium demand is expected to increase to 3.7 million metric tons in 2030, according to top lithium producer Albemarle, and rival SQM is expecting demand to reach 1.5 million metric tons as soon as 2025.

“We are in unprecedented times — this is new territory for all of us,” Beagle said. “There’s a huge need for supply that needs to be addressed and we want to help.”

How investment risk profiles are changing was another topic of the discussion led by Cowen’s David Deckelbaum.

“Every single opportunity is different but it is fair to say that the risk profile that we are faced with today in this space is definitely growing,” Clegg said. “Volatility in prices and certainty in that regard, (as well as) human capital — quality management teams and quality technical people are extremely hard to find. Everyone is learning.”

Investors have also been requiring more transparency and higher performances from companies when it comes to environmental, social and governance (ESG) metrics and ratings.

“Investors talk about three things today: battery raw materials, ESG and inflation protection,” Clegg said. “We would not invest in a company if it doesn’t have best in class ESG practices and we can actually enforce that with our contracts.”

Regulatory change impact

A key theme discussed in the battery metals space for the past year has been the US Inflation Reduction Act and its impact on the sector. Lithium producers are optimistic about the legislation, which benefits EV makers that source critical minerals from the US or countries with which they have free trade agreements.

For James Gavilan of Gavilan commodities, the Inflation Reduction Act has opened a door, even though money hasn’t begun to flow in a meaningful way.

“Regulation is a double-edged sword — you have challenges with permitting,’ he said. ‘Without doubt it is a positive, but we are not quite there yet. We need mining funding much sooner.’

Ortiz agreed, saying the IRA has been a huge positive for royalties companies, “but this has been more by consequence than by design.”

The US is not the only country pushing for more domestic supply and stepping up to localize its supply chain. Europe launched the Critical Minerals Act earlier this year in a similar move to reduce its supply chain vulnerabilities and dependence on China.

“When you are looking at new investments opportunities, you are now looking at ‘does this product qualify?’ If it does it’s a positive,” Clegg said.

Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.

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