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Lithium bubble set to burst, veteran banker warns

Singapore-based veteran investment banker Alberto Migliucci has called surging valuations for lithium miners and assets in anticipation of growing demand for electric car batteries a "bubble that's about to burst."

Addressing the ResourceStocks conference in Sydney on May 16, Migliucci, currently CEO and founder of boutique corporate advisory Petra Commodities, said lithium was passing through a "silly season," not unlike the period from 2009 to 2011 when the thermal coal price went from about US$30/tonne to US$150/tonne.

During that time he had been Credit Suisse's former managing director and head of Mining & Metals for Asia, and head of Southeast Asia Oil & Gas and Energy (Global Energy Group), and saw coal asset valuations "going berserk" as non-coal companies snapped up deals.

"During that period, power companies, which knew nothing about coal mining except they need to secure the supply, took stakes in coal mines and even bought whole mines," Migliucci, who also worked as an investment banker as Standard Bank PLC’s Head of Energy for Asia Pacific, said.

"I'm seeing the same now in lithium."

As evidence, Migliucci cited reports May 16 that China's Tianqi Lithium Corp. was looking to buy a stake in Chile's Sociedad Quimica y Minera de Chile SA, one of the world's largest lithium producers, for US$4.3 billion, which he said was an "amazing valuation" for 24% of a company.

"That offer values SQM at about US$20 billion if you include the 'control premium' [the extra amount paid to take control of a company]. This is the silly season," he said.

"When you start seeing car companies like BMW and Volkswagen and other Japanese, Korean and Chinese [automotive] companies and Tesla buying into mines, you know something is wrong, and the bubble is about to burst."

However, while he said lithium was a sector ripe for consolidation before the bubble bursts, he warned delegates to heed the lessons from the coal boom.

"It's like when the shareholders of Riversdale Mining had a lovely metallurgical coal asset in Mozambique and sold it to Rio Tinto [for US$3.7 billion] in 2011, then not more than three years later sold it to an Indian group [International Coal Ventures Pvt. Ltd.] for US$50 million. I'm seeing something similar here [in the lithium space]," Migliucci said.

He said the other battery mineral popular on the Australian Securities Exchange, cobalt, was different because it has a serious supply constraint problem with more than 60% coming from the Democratic Republic of the Congo, where concerns over "conflict metals" abounds.

"The trick now in terms of consolidation opportunities is to look for cobalt opportunities outside the DRC," Migliucci, who was also a project finance and advisory specialist in Asia at The Sumitomo Bank of Japan, Société Générale in Hong Kong and Westpac Banking Corp. (Australia).

"Australia has some good cobalt-bearing nickel, and there are also the nickel laterites in Southeast Asia like New Caledonia, the Philippines and Indonesia which have some cobalt-rich nickel laterites."

Fund manager sounds caution

When asked about the accuracy of that "bubble" prediction by S&P Global Market Intelligence on May 17, Melbourne-based fund manager Hedley Widdup of Lion Selection Group agreed that the market was overpaying for lithium, but it is not the first time such a thing has happened.

"The equity market will typically pay a lot more for something it doesn't understand than something that it does, and consumption of lithium is very poorly understood," he responded during a panel session at the conference.

"I've seen lots of great presentations on [lithium demand] and I'm sure it's going to increase."

However, Widdup said it was important to keep in mind how geologically common the battery metals in vogue really are.

"Originally I'm a geologist; I've never found anything in my life that was of economic consequence, having looked for gold, copper, nickel, and I've drilled through lots of spodumene-bearing pegmatites and graphitic-bearing shales, and some of them probably had cobalt close by," he said.

"Some of these things are very common so it's easy to supply. Whether it's a bubble or not, that's a pretty big call.

"The fundamental that there is a reason to produce it definitely exists, as it did with coal, but it's when supply and demand catch up with each other very rapidly, particularly after an intensive investment phase ... maybe that's what we're approaching."