North American collaboration in the effort to catch up with China

Although the United States and China announced a preliminary “phase one” trade agreement in December 2019, the future of their economic relationship remains uncertain. A defining feature of the Trump administration’s economic policies has been its embrace of international trade protection, and while the United States holds the upper hand in most markets, China’s dominance in the battery metals supply chain is indisputable. Electric vehicle (EV) sales grew to more than two million units globally in 2018: an increase of 63% on a year-on-year basis. Comparing the 2019 adoption rates for EVs, China leads comfortably with 6%, compared to 2.6% in Europe and North America, and 2.2% for the rest of the world. However, adoption rates are less of a cause for concern than the fact that China currently dictates the supply dynamics for the majority of metals used in the production of EVs and batteries.

The fact that Tesla chose Shanghai as the location of its Gigafactory, built the plant in less than one year in 2019, and quickly raised an additional US$1.6 billion (through a consortium of state-backed Chinese lenders) in December for a plant expansion, is emblematic of the speed and assertiveness being shown by the Chinese in the battery race. The new plant is expected to double production capacity of Tesla's Model 3 sedan, will be the company's first manufacturing site outside the US, and China’s first vehicle plant wholly owned by a foreign company.

On January 9, 2020, Prime Minister Trudeau and President Trump announced the Canada-US Joint Action Plan on Critical Minerals Collaboration had been finalized, aimed to advance the countries’ mutual interest in securing supply chains. Canada is already a leading producer of nickel and cobalt and has another 70 advanced projects for both metals, according to a July 2019 presentation by Hilary Morgan, director of international affairs at Natural Resources Canada. Additionally, Canada is home to 16 advanced rare earths projects and 17 advanced and near-stage lithium projects.

“Governments are now recognizing the need to create critical minerals supply chains outside of China,” reflected Don Bubar, president and CEO of Avalon Advanced Materials and one of the leading North American voices in the field of rare metals and critical minerals. “There is more urgency for other countries to develop their own critical minerals supply chains due to the risk of China restricting supply,” he added, continuing: “We have all of these minerals in the ground in Canada, and the time has come for us to take advantage of the opportunity by extracting these minerals and creating the value-added in Canada.”

Mark Warner, lawyer at Pilot Law LLP, suggested that Canada has the potential to be one of the countries to benefit from the current trade war by becoming a reliable alternative supplier for the United States, but such a context depends on the Canadian mining industry actually being able to get resources out of the ground. “The trade war has shown the need for a counter point to China. The demand and need is definitely there, but the question is if there is political will from North America, including Canada, to take advantage of this opportunity,” Warner pointed out, noting that Canada has seen a significant amount of mining investment coming from China, which could create challenges in the development of a North American supply chain.

Janice Zinck, director of green mining innovation at CanmetMINING, part of Natural Resources Canada, commented that China’s dominance in the critical mineral space started 30 years ago and their long-term strategy allowed them to overtake competitors: “At that time, everybody was comfortable allowing China to supply products. Our resource strategies are not nearly as long term in the Western world as they are in China,” she remarked.

“Canada is well-positioned to occupy a greater space in the value chain, but we need to be more strategic and invest in developing those resources,” added Zinck, commenting that Canada is rich in mineral resources and has the necessary expertise, but needs to accelerate the pace at which it is advancing projects. “We have to look at supply-chains and value-chains in terms of what is driving the development. Instead of driving development from the resource, it should be driven from the magnet, battery or end product.”

Breaking the DRC/China stranglehold on cobalt

Currently, 72% of cobalt mine supply is controlled by the DRC and 60% of refinery supply is Chinese. At the Pilot Law LLP round table held in October titled “Trade and other International Law Issues Which May Impact Your Mining Business,” discussion centered around how the North American automotive industry is exposed to battery supply squeezes by way of political instability in the DRC or Chinese trade tactics. Robin Goad, president and CEO of Fortune Minerals, echoed the conference’s mood when he stated: “Having control over the critical minerals used in the batteries and the other parts needed to make EVs, means [China] can also influence where new factories will be built to produce these vehicles.”

Through investments in infrastructure and business interests from state-owned enterprises, China has accrued considerable influence over the vast Central African nation. Although efforts are being made to diversify production, the DRC’s role within the cobalt supply chain is expected to increase to 75% of global mine supply in 2020 rather than decrease. However, Goad highlighted the growing importance of transparent cobalt supply from a consumer standpoint: “Ethical raw material procurement and supply chain transparency are also important to global manufacturers that do not want their brands tainted by materials that are associated with conflict, child labor, dangerous working conditions or environmental degradation.”

From 2016 to 2018, the price of cobalt more than doubled, climbing above US$42/lb in early 2018 before increased artisanal supply from the DRC caused the price to drop and plateau to its five-year median of around US$16/lb. However, the fundamentals for cobalt are robust with demand accelerating incrementally due to its use in the cathodes of lithium-ion batteries needed for automotive electrification, in stationary storage cells to make electricity use more efficient and in portable electronic devices. Frank J. Basa, president and CEO of Canada Cobalt Works, gave his take on cobalt’s outlook: “This price move [from October 2016 to January 2018] is generally regarded as the beginning of a mega trend with stable supplies forecast to fall short for several years.”

While a number of high-potential cobalt projects are located in North America, an absence of near-term supply looks set to be rectified by Toronto-based company First Cobalt, which recommissioned its cobalt refinery in Ontario in partnership with Glencore in early 2019. Glencore said in August that once a definitive feasibility study for a planned expansion is completed, which is expected to happen in early 2020, it would invest another US$40 million into recommissioning and expanding the refinery, located 600 km from the U.S.-Canada border. “The intention is to complete the feasibility study by Q1 2020 and recommission the plant under its current 12 tonnes per day (mt/d) throughput rate in late 2020. Thereafter, we expect to permit and commission a 55 mt/d expansion, which will take approximately 12 months,” elaborated Trent Mell, president and CEO of First Cobalt.

Lithium’s supply and demand outlook

“Despite volatility, the market for lithium is robust,” assessed Paul Fornazzari, partner at Fasken, observing that there is now clear and likely irreversible growth in demand for lithium as car companies, spurred by the success of Tesla, undergo a process of completely switching production to EVs or bringing out new electric car lines. “If production of EVs rises to just 30% of total vehicle production, there is not enough lithium production to meet the demand created by this growth,” he added, noting that only a relatively small amount of lithium is used in each battery and so it is unlikely to run the risk of being “engineered down” in the various battery formulations.

The production of lithium comes from two main sources – extracting lithium concentrate from brine waters, a complicated but low-cost process, and hard rock lithium, which is easier to explore, mine and process, but often comes at high production costs. The lithium triangle that straddles Chile, Argentina and Bolivia possesses 54% of global lithium brine resources, whereas Australia possesses the “mother of hard-rock lithium deposits” – the Greenbushes deposit. Trevor Walker, president and CEO of Frontier Lithium, stated that the company’s PAK asset in the Electric Avenue district of Northern Ontario contains drill intersections with grades and thicknesses comparable to the Greenbushes deposit. “Electric Avenue is the premier hard rock lithium jurisdiction in North America. It boasts the highest grade and the lowest impurity resources on the continent,” he said.

Walker went on to mention that establishing a stable and secure supply chain in the West will not happen overnight and should be approached in steps. For Frontier Lithium, the first initial market to target will be the industrial market, supplying clean high-grade concentrate for the large glass manufacturers, as the use of lithiated glass in mobile phone screens has become widespread. “If you have the opportunity to build a mine, first producing concentrate for the industrial market is how to build a reliable feedstock that allows access to downstream,” he added, noting the convenience of the OEMs present in Detroit and Southern Ontario.

On the lithium brine side, Toronto-based Neo Lithium is developing its Tres Quebradas project in the province of Catamarca, Northern Argentina, having raised C$90 million in under four years, US$40 million of which has been invested in the property, according to Carlos Vicens, Neo Lithium’s CFO. Acknowledging that the investment climate has been challenging for juniors regardless of metal value, Vicens explained that lithium investors tend to come from a different pool to precious metals specialists: “Financial markets are not buoyant at the moment, however lithium is a strategic asset,  which sets it apart. Instead of attracting typical corporate financing such as bank financing and equity capital markets, the asset is interesting for a partner with a strategic vision for the resource. For example, a battery producer, a cathode-material maker or an OEM.”

While creating a North American battery metals supply chain would benefit governments in the region, exploration companies these days can rarely afford to pick and choose where investment dollars come from in the interests of politicians. Therefore, proximity to the Chinese market has clear advantages, and strategic Chinese investment often comes with a more long-term vision that North American money has lacked. With this in mind, Ion Energy’s Baavhai-Uul project in Mongolia is ideally located a mere 20 km away from the largest consumer of lithium in the world – China. Additionally, the Mongolian authorities are supporting mining projects that can provide a cleaner source of energy, according to Ali Haji, CEO: “Ion Energy has received a significant amount of government support as lithium is deemed a green metal. Ulaanbaatar is not only the coldest city in the world, but also the most polluted as it sits in a valley powered and heated by coal.”

Echoing the thoughts of Carlos Vicens, Haji mentioned the attractiveness of strategic investment in the lithium space: “We have been speaking to the Japanese, Koreans and Germans as they are the drivers behind EVs and the demand for lithium in the future. Obtaining strategic capital at the early stages of the project brings in partners that want to be with us through the course of the project lifetime.”

Nickel: the electric base metal

Nickel was the best performing base metal in 2019, spurred on by the announcement from the Indonesian government in September that a ban on the export of raw nickel ore would be brought forward from 2022 to January 2020. While the bulk of the nickel market is currently driven by stainless-steel demand, it is estimated that as much as 50% of the nickel market could serve EV and energy storage applications moving forward, which would result in US$70 billion having to be invested in new nickel mines over the next decade, revealed Justin Cochrane, president and CEO of Conic Metals Corp (Conic).

Conic, the spin out of Cobalt 27 Capital Corp that was acquired by Pala Investments in October 2019, owns an 8.56% joint venture interest in the Ramu project in Papua New Guinea, run by the Metallurgical Corporation of China (MCC), a subsidiary of the China Metallurgical Group Corporation, a Chinese state-owned enterprise publicly listed in Hong Kong and Singapore. Speaking of the difference between Chinese and Western investors, Cochrane observed: “The Chinese go into countries long term and help communities by providing infrastructure and other services. At Cobalt 27, we found that the investment horizon was very short for many of our investors, and this trend can be seen more and more in the mining sector today.”

Ontario is also famous for its nickel production, with majors Vale and Glencore dominating supply from the Sudbury Basin, home of the Big Nickel – a landmark on the bucket list of every Northern Ontario-enthusiast. Jason Jessup, CEO and director of private Sudbury-based junior Magna Mining, noted that when his company acquired its flagship Shakespeare project in 2017, nickel was C$4/lb, and the price has almost doubled since. Expanding on supply and demand dynamics for the base metal, Jessup remarked: “To make projections on the price it is important to look at the stock piles. They have been coming down steadily in the past two years, and we are at a point where we can expect the price will begin to reflect that,” further pointing to the impact supply issues from Indonesia and the Philippines will have moving into 2020.