17 Jan, 2021
IGO confident in lithium partnership voice with sustained bull market to come
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| The Greenbushes lithium mine operation in Western Australia. IGO will acquire a 25% stake in the mine through a new joint venture with owner Tianqi Lithium. |
IGO Ltd. expects to have greater control over its ability to benefit from a looming sustained lithium bull market via its new joint venture with Tianqi Lithium Corp., thanks to the experience gained as a non-operating partner with AngloGold Ashanti Ltd..
UBS mining equity analyst Daniel Morgan told S&P Global Market Intelligence that IGO's deal with debt-laden Tianqi to acquire a 25% indirect interest in the West Australian Greenbushes lithium mine and 49% in the Chinese group's Kwinana processing plant was a "stunning" result.
While this view was echoed by several analysts on a Dec. 9 call, several of them also probed IGO's executives about the "value component" given it will not operate either asset.
Morgan said "an asset you can control is always more valuable than one you can't. ... When you control an asset you can add value to it, change it, grow it, extract synergies with other assets, and dictate whether you're 'investing or harvesting' in terms of capital allocation."
Though conceding that "no deal is prefect," Morgan flagged conflicts from the "complex" deal structure could arise down the track. If, say, Tianqi and partner Albemarle Corp. expanded Greenbushes based on a differing market outlook to that of IGO, the asset "isn't as valuable as it would be in a cleaner structure."
The deal gives IGO a 49% noncontrolling interest in Tianqi Lithium Energy Australia Pty. Ltd., or Lithium HoldCo, which will become the exclusive vehicle for all lithium-related investments for IGO and Tianqi outside of China.
IGO CEO Peter Bradford said on the Dec. 9 call that while "we do not believe that we were the top bidder ... we were prepared to consider a transaction structure that worked for Tianqi."
"We were able to inform our view [on the Tianqi deal] based on our relationship with AngloGold at Tropicana [gold mine in Western Australia], where we've been sitting in a non-management position," he told Market Intelligence. "That's helped inform us on what we'd like to do differently in our relationship with Tianqi."
He said IGO identified the risk going into the transaction and tackled it by ensuring its right to appoint a CFO for Lithium HoldCo, as well as an independent director plus two nominees on Lithium HoldCo's board to join Tianqi's two.
Tianqi also saw value in working with IGO, which had the upstream experience and local presence that it lacked, Bradford said. The Chinese group therefore sees "IGO having a disproportionate involvement" in upstream activities to help optimize and maximize Greenbushes.
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| The Kwinana lithium hydroxide plant in Western Australia. Plant upgrades will further extend Greenbushes' life of mine. |
This will come into play in extending Greenbushes' life of mine, which will be cut to 25 years once the planned third and fourth chemical grade plants at Kwinana are online at an undetermined time in the future.
The mothballed first plant will restart in 2021 as lithium demand picks up. Construction of a tailings retreatment plant should be completed in 2022, further boosting production capacity.
Preparing for a bull market
Though 25 years is still a long way off, "heading into a lithium bull market that's going to be quite enduring, we'll want to do the exploration to identify those future lithium resources," Bradford said.
IGO was exploring to "deliver the next Greenbushes" even before the Tianqi deal and has identified similar targets across Western Australia, according to Bradford. The next step is to acquire tenements, he said, through open-file acreage or engaging exploration partners.
Galan Lithium Ltd. Managing Director Juan Pablo Vargas de la Vega, a former analyst with Patersons Securities, Foster Stockbroking and BHP Group, told Market Intelligence that the lithium price will jump before 2025 when the market will be "very tight" if demand growth continues apace.
On that front, on Jan. 14 Galan Lithium acquired 80% of Lithium Australia NL's Greenbushes South project 3 kilometers from Tianqi's mine and also has other ground pegged nearby. Lithium Power International Ltd. is about to restart exploration on its own acreage in the area.
While lithium producers struggled to sell their product, ratcheting down production and standing down project teams in 2020, "it feels like we've reached an inflection point" where inventory has been drawn down, the price has just started to increase and "renewed optimism" has arisen both within and outside the sector, Morgan said.