A deal opening up potential lithium supply for one of the sector's dominant producers may squeeze the flow of capital to less advanced or well-positioned lithium juniors, according to analysts.
After years of trying to secure a new contract from the Chilean government to produce more lithium, and bearing down on a production cliff if it could not, Sociedad Quimica y Minera de Chile SA, or SQM, in mid-January signed an agreement with the Chilean government's Production Development Corp., or Corfo. The deal gives it access to more lithium from the Salar de Atacama, one of the dominant lithium brine deposits in the world.
The contract was critical for SQM, a major lithium producer, as it faced the prospect of losing the right to produce lithium from the Salar de Atacama in the early 2020s. Its previous lease agreement extended to 2030 but capped lithium carbonate equivalent production at 958,672 tonnes. At recently expanded production rates, SQM was expected to reach the cap around 2023.
The new agreement, which also extends into 2030 and raises royalties on SQM, lets SQM produce about 2.2 million tonnes of lithium carbonate equivalent. It means the company could further expand production, should it decide to do so and subject to any expansion project passing through permitting.
Losing luster?
Given the turn of events, some analysts expect the deal to mute investor appetite for earlier-stage lithium companies seeking funds. The new deal raises the prospect of an established player expanding production from a low-cost lithium-rich brine using proven processing technologies in a sector dominated by a few producers. It also puts the brakes on SQM's need to seek or fund other deposits to maintain production, an issue it faced under the old production cap.
"Certainly, it could be a crusher for an element of industry players," said a Chilean based analyst. The analyst, who preferred not to be named, watches the sector closely and sees SQM's new deal keeping supply and demand more in balance.
"I think for the established players it's a non-event," he said. "But for the emerging guys, or those that are actually at the stage of resource delineation or going into some sort of engineering stage, they can be in trouble. Those are the guys that likely will not receive any sort of funding."
Joe Mazumdar, an analyst with Exploration Insights, also sees the SQM/Corfo deal beating back some of the investor hype for the lithium sector with less of a possible production gap for juniors to fill or promote. "You're going from playing anything with lithium in its name to now playing the alpha play," he said.
For Mazumdar, it shifts the investment focus to more advanced-stage projects and juniors. "You don't want them to be in an isolated salar that nobody is in, and they have to do it themselves or have someone buy them," he said. "Because now the impetus to buy that kind of play, a greenfield, is probably less."
Demand question
Still, Mark Ferguson, head of mining studies with S&P Global Market Intelligence, said making a prediction is difficult, in part because future lithium demand, bolstered by an expanding electric vehicle market, is hard to pin down.
"The challenge is timing on the demand side," Ferguson said. "A wide range of electric vehicle predictions over the next decade leaves the needed supply uncertain."
Ferguson also wondered if the broader hype for juniors associated with battery metals such as lithium and cobalt might help prop them up. "Given the recent fervor surrounding battery metals, it also makes it tough to assess the impact on those projects farther out, certainly those held by juniors," he said. "They've been ramping up exploration efforts, and I'd be surprised if that didn't continue for this year."
One thing Mazumdar is watching for is whether lithium prices cool down as a result of the deal, putting pressure on the cost curve. He said that if prices decline, it may squeeze nonbrine projects or mines the most. "That stuff tends to be on the higher part of the cost curve, and anything on the higher end of the cost curve will be impacted," he said.
Mazumdar also warned that investors in the lithium sector should be increasingly wary. "You've got to be really selective," he said. "And that's a change in investor sentiment."
