Western Lithium’s rare jewel: Kings Valley

SITE VISIT

RENO, NEV. — Jay Chmelauskas, president of Western Lithium (WLC-V), saw the potential of lithium over five years ago.

Chmelauskas, then-chief executive of Jinshan Gold Mines (JIN-T), was developing the CSH gold mine in China when he noticed the key role that the high-tech sector was playing in the country’s economic renaissance.

“I saw a new economy being created before me,” Chmelauskas says, relating that one of the world’s largest rare earth element mines was put into production while he was there, and entire cities were built with an emphasis on high-tech.

“It was clear to me that the future was in batteries,” he says.

Fortunately for Chmelauskas, he didn’t have to travel far in terms of corporate culture to enter the fray.

With Ivanhoe Mines (IVN-T, IVN-N) being a former controlling stakeholder in Jinshan, Chmelauskas had become familiar with such Ivanhoe heavyweights as its founding president Edward Flood and chief executive John Macken.

Both Macken and Flood also serve on the board of Western Lithium and saw Chmelauskas, with his mine-building experience, as a natural fit to guide Western Lithium’s Kings Valley lithium project in northern Nevada into production.

Chmelauskas agreed to take the reins roughly a year and a half ago and his timing couldn’t have been better.

“I had only a vision of the potential for electric cars at the beginning,” he says. “But, I have found that in just one year the market turned around 180 degrees from concept to reality.”

That turnaround came, in part, thanks to major announcements from car manufacturers like Toyota and Honda, which both announced that future hybrid cars would employ a lithium ion battery instead of the nickel metal hydride battery currently used.

Such changes have even conservative forecasts estimating a 10- 20% increase in lithium demand in the coming decade — an uptick that would require two to three times more lithium production.

“The fact is new supply sources are needed but they need to be economic. I expect the market to operate in a disciplined fashion with the best projects getting developed first,” Chmelauskas says.

Western Lithium is looking to prove that Kings Valley is one of those “best” projects, and it is touting the project’s quality, consistency, longevity and the security of supply as its distinct advantages.

But to get the project into production, Western Lithium will likely have to convince a lithium end user of those merits.

That’s because, in the lithium game, having a partner with a foot in the battery world is seen as a key component to building a mine.

The need for such a partner has to do with several factors. Not only is end users’ cash welcomed when a junior is sourcing capital to build a mine, but also mines are most successful when they have a guaranteed buyer that the end product is tailored to.

While it is still early, Chmelauskas sees the partnership game heating up in the near future.

“When it’s realized that consumers are buying these cars en masse that’s when strategic partners start stepping up to secure supplies,” he says. “But to develop a mine like ours, you need to make a decision years in advance. Strategic investors are starting to realize this, and we’re starting to see investment flow into these new sources of lithium in places like Argentina.”

The reference is to Lithium One (LI-V) and its recently announced partnership with a group of Korean investors.

But amidst all the talk of electric cars and the lithium batteries that will drive them, one element of the story has been lost in the shuffle.

Currently, the bulk of lithium carbonate production — a white powder that is used in the manufacturing of lithium ion batteries — comes from large-scale brines in South America. The rest of the global production comes from hard-rock mines in Australia.

But Western Lithium holds a project rich in the third style of lithium deposit — hectorite clays.

“The perceived place to go is towards the brines, but we’re going through an education process and we’re demonstrating to end users that where their perceived risks are in relation to clays could turn into advantages,” Chmelauskas says.

He lists such advantages as consistency of supply, competitive pricing, secure location and a high-quality product.

The higher quality has to do with the lower levels of impurities that hectorite has when compared to brines and hard-rock spodumene.

As for the secure location of the project, that point is reinforced by the current U.S. administration’s stated goal of securing more domestic energy sources in its bid to wean itself off foreign oil.

Ultimately, however, it will be end-user comfort with the deposit that will push it into production, and that won’t be solidified until Western Lithium demonstrates that its metallurgical process works on a large scale.

Here the uniqueness of Kings Valley works against it. Because there are no other known deposits of hectorite with such high grades of lithium, such a mine has yet to be brought into production.

The company is placing its faith in a process developed by the U.S. Bureau of Mines back in 1980. That process outlines putting the clay into a roaster with gypsum and limestone and caking it. The cake is then leached with water to produce lithium carbonate.

Western Lithium continues to test the process in labs in Chile and Germany.

Such tests have, thus far, given the company more confidence in terms of understanding the process on a larger scale, Chmelauskas says.

“Over the next several months, we’ll be doing more work in labs and in pilot plants and we’ll be giving the product to strategic end users and they’ll be testing it for themselves,” he says.

Once the metallurgy is locked down to the satisfaction of those end users, the company will have put the final polish on its crown jewel of clay deposits.

The Kings Valley project — which sits 100 km northwest of Winnemucca in northern Nevada — hosts five significant lithium deposits, that together comprise one of the world’s largest stores of lithium.

The project formed in the mid- 1970s when oil giant Chevron stumbled upon it while looking for uranium.

The talk back then was that lithium was going to be used in the next generation of nuclear reactors that would produce energy via nuclear fusion instead of fission.

Wanting to stay ahead of the curve, the oil company put 250 drill holes into the ground and delineated five separate, near-surface lenses, which combined for an inhouse resource estimate of 11 million tonnes of lithium carbonate. All of the lenses are within 90 metres of the surface.

But with nuclear fusion proving to be much further away than anyone at the time thought, lithium prices failed to gain any momentum and Chevron got out of the lithium game.

Despite its huge potential, Kings Valley lay dormant for several decades… that is until Western Uranium, reasoning that rising oil prices would be beneficial to lithium batteries, picked it up in 2005.

The manoeuvre proved to be a shrewd one and by 2008 with oil prices high and lithium demand on the upswing, the company chose to spin the project out into a pure play on lithium under the Western Lithium banner.

Western Lithium’s own drilling bolstered its confidence in Chevron’s results, and the company has, thus far, defined a compliant resource for the two southernmost lenses that are in-line with Chevrons’ numbers.

The company will spend another $10 million on definition drilling this year, and will make a construction decision before the end of 2011.

As for the geology of the project, the deposits occur within sedimentary and volcano-sedimentary rocks in the moat of a caldera where lithium was deposited some 15.7 million years ago.

As mentioned earlier, the five areas of lithium mineralization are found in hectorite-lithium-bearing clay
that occurs in thick, continuous accumulations along the western edge of the caldera.

The clay beds are 30 or more metres thick and contain up to 0.65% lithium.

With so much lithium on its hands, Western Lithium has decided to focus on the southernmost deposit, known as PCD lens, as it lies just a few hundred metres from a paved highway.

A prefeasibility study on the deposit envisioned a mill that will produce 28,000 tonnes of lithium carbonate a year and 115,000 tonnes of potash at a cost of US$1,967 per tonne of lithium carbonate equivalent — which considers a potash byproduct credit. Lithium carbonate is currently selling for roughly US$5,500 per tonne.

Over an initial mine life of 18 years, the mine would yield a net present value of US$714 million using an 8% discount rate. Total capex for stage one is estimated at US$427 million. The project could be producing lithium carbonate equivalent by 2014, which, if current forecasts are correct, would coincide well with the rise in demand.

The deposit has an indicated resource of 48.1 million tonnes grading 0.27% lithium for 688,000 tonnes lithium carbonate equivalent and an inferred resource of 42.3 million tonnes of 0.27% lithium for 606,000 tonnes lithium carbonate equivalent.

And if demand keeps on rising, Western Lithium will have little trouble ramping up supply.

The company recently released a resource estimate on the next deposit to the north of PCD, which is known as the South lens.

The South lens sits roughly 8 km north of PCD and has an indicated resource of 95 million tonnes grading 0.27% lithium for 1.4 million tonnes lithium carbonate equivalent and 3.66% potassium for 3,477 tonnes potassium. It has an inferred resource of 47 million tonnes grading 0.26% lithium for 650,000 tonnes lithium carbonate equivalent and 3.83% potassium for 1,800 tonnes potassium.

According to the work done by Chevron, the other deposits look equally as enticing.

Of the 11 million tonnes of lithium carbonate outlined by Chevron, 800,000 tonnes were from PCD, 5.6 million tonnes from the South lens, 700,000 tonnes from lens three, 1 million tonnes from lens four and 2.9 million tonnes from lens five. The average grade of the lenses ranges from 0.30% to 0.37% lithium.

Considering that only 100,000 tonnes of lithium carbonate is currently being used in a year, that’s enough lithium to allay any end-user’s supply concerns for a long time.

Now all that is left to do is to get those end users comfortable with clay deposits — a task that will no doubt be made considerably easier should lithium demand pick up as expected.

With each electric car consuming anywhere between 25 and 50 lbs. lithium carbonate (depending on if the battery is a hybrid or full-electric battery), even conservative industry experts expect a quadrupling of demand by 2020.

Should that occur, the feelings Chmelauskas had about the industry back in China some five years ago could turn out to be more prescience than premonition.