High Lithium margins push a concentrate-to-chemical plant upgrade

High Lithium margins push a concentrate-to-chemical plant upgrade

In 2020, lithium chemical plants made an extra $2,325 profit per tonne of lithium carbonate equivalent, or LCE, compared with concentrate plants. The 2020 weighted-average margins of lithium hydroxide, lithium carbonate and lithium concentrate products were $3,897/t LCE, $2,660/t LCE and $457/t LCE respectively. Although concentrate producers usually have lower costs, a typical 4%-6% lithium concentrate generates a lower product value. The higher-cost chemical producers tend to have better margins. In this article, we have defined chemical plants as operations that produce lithium hydroxide, lithium chloride and lithium carbonate

Latin American chemical operations were the most profitable mines in 2020 and were positioned at the top third of the margin cost curve. The year was challenging for smaller concentrate producers, with their total of 46,300 tonnes of LCE production having a negative total cash margin. Overall, 20% of total concentrate production fell into negative margins within the year and impacted financing plans.

An S&P Global Market Intelligence study of 30 lithium projects expected to come online in 2022-25 found that the difference in cash margins between chemical plants and concentrate plants is often large enough to justify the additional capital requirements of constructing conversion plants. In this analysis, we calculated the weighted-average initial development capital and life-of-mine LCE production of pipeline projects, based on assumptions laid out in feasibility studies for the selected projects.

We used consensus forecast prices to calculate the margins for each project type and assumed an annual discount rate of 8%. We considered an overall recovery rate of 75% for the hydroxide plants and 85% for the carbonate plants, based on the feasibility studies.

The results showed that the increase in cash flows generated by selling higher-value products will make the payback periods of concentrate and chemical projects similar. Over time, a carbonate chemical plant will generate a higher return within its operational period. By year 19, when the modeled average concentrate plant ceases production, the average carbonate plant will have generated around $550 million more in free cash flow.

If a concentrate project plans to produce lithium chemical products, it will have lower payable production compared with the original concentrate plans. We input these factors and the discount rate to the "average concentrate plant", the results showed that adding a hydroxide plant will generate more—although not significantly higher—cash flows than a carbonate plant from the ninth year. This implies that hard rock miners will have more flexibility in plant development planning, as hydroxide and carbonate plants will bring similar economic returns. Brines can usually only be processed into carbonate, and then further processed into hydroxide at additional cost.

Latin America, North America and Africa host most of the lithium project pipeline. Production guidance from companies' technical studies and presentations indicate that most potential lithium chemical projects are in Latin America, specifically Argentine brines. Additional concentrate production will come from Africa, mainly from the Democratic Republic of Congo, or DRC, and Mali.

The large difference in margins between chemical plants and concentrate plants may also push operating concentrate producers to seek opportunities for adding new conversion facilities to produce lithium chemicals; for example, IGO's Greenbushes. The mine currently has three plants with total capacity of around 1.6 million tonnes per year of concentrate, and IGO has spent $700 million on a hydroxide plant in the Kwinana Industrial Area of Western Australia. The company reported that hydroxide plant construction is complete and that the plant is expected to complete its ramp-up by The December 2022 quarter, with a potential increase in hydroxide production to 48,000 t/y.

Based on S&P Global's consensus forecasts, margins of chemical products will remain strong for the next five years. We expect more concentrate projects to move forward with supporting chemical conversion facilities. This may push up the cost curve but will increase margins due to the higher product value.

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