Orocobre set to make a mark in lithium

When over 500 people gather at a desolate salt flat in Argentina, it probably has something to do with mining.

This was the case in mid-March when a group of Argentine politicians, Japanese dignitaries and community leaders gathered at the Salar de Olaroz to celebrate the groundbreaking of Orocobre’s (ORL-T) future lithium mine.

While getting to this point is a major achievement at the best of times, it is all the more so when capital markets are as tight as they are now. And like all achievements, the celebration isn’t really about honouring the moment the shovel breaks dirt: it’s about honouring the long and dedicated process that the moment symbolizes.

For Orocobre chairman James Calaway, a Houston-native with roots in the oil industry, the process began when he first thought about alternative ways to drive vehicle propulsion.

“You can get electrons from a variety of means, not just gasoline,” Calaway said over tea during the Prospectors & Developers Association of Canada convention in Toronto during early March. “But as soon as you start looking at electric propulsion, you find yourself in batteries.”

From the battery world, it’s a short step to lithium ion and to the key component in batteries: lithium.

“There are arguments about packaging, control systems and what chemistries are to be used,” Calaway says about batteries. “But the one thing they all have in common is that they all need lithium.”

So Calaway hired a team to go out and find where the next great lithium producer would be, and after some searching, the team came back with Argentina’s Salar de Olaroz project as the top candidate on account of its excellent chemistry, good size, optimal weathering conditions and solid infrastructure.

But Salar wasn’t there for the taking. It was owned by a small Australian-based company named Orocobre, which had acquired it before any drilling had been done. Under the leadership of Orocobre CEO Richard Seville, this situation would change.

“By the time I picked up the phone to tell Richard that I wanted to buy a chunk of the company, he knew he had something. But it was still early on,” Calaway explains. “We bought as much as we could, which was a 15% stake.”

With this big investment came a seat at the board, and Calaway pushed for the company to spin out its copper, gold and silver assets so that it could focus on lithium. Seville agreed, and the formal partnership became something more.
“We became a team,” Calaway says. “He runs the company, and I’m a very active chairman.”

Calaway’s arrival proved a good omen for the company, as just six months after closing the deal, Toyota Tsusho — the supply arm of Toyota — came calling.

Searching for a low-cost lithium resource, Toyota Tsusho landed on Olaroz largely because of its chemistry. After a visit to the property the companies negotiated an option for Toyota Tsusho to acquire 25% of project, which has since been exercised.

This catalyzed the next level of development. The drilling got beefed up, and the results continued to be stellar.

“Everything kept getting good,” Calaway says. “The reservoirs are excellent and the consistency of the chemistry of the brine is excellent, with high lithium content and low contamination.”

Contamination in the lithium world generally refers to the ratio of magnesium (the contaminate) to lithium. In the case of Olaroz, this ratio comes in at 2.4, which is a lower ratio than Sociedad Quimica y Minera’s (SQM-N) famed Salar de Atacama mine.

With the chemistry of the deposit holding up and a heavyweight like Toyota on board as a partner, Orocobre pushed through to feasibility, which was submitted roughly two years ago.

The next item of business was getting the government on board, which the Argentine Feds dragged out while trying to make the terms of the arrangement more equitable, in their view. Calaway says that in the end a fair settlement was achieved, and he doesn’t share in the Argentine-government bashing that has become popular amongst many in the industry.

“Argentina gets a real bad rap,” he says. “But in this case we really did come to some mutually beneficial arrangements. But it took a long time. We were in negotiations for well over a year.”

The government approvals came last June, clearing the way for the company to enter into the final phase of financing — which has become onerous for most juniors, given the current risk-averse environment. But for Orocobre, having well-heeled partners helped.

With Toyota Tsusho and the Japanese state-controlled Japan Oil, Gas and Metals National Corp. (JOGMEC) backing the deal, Orocobre was able to raise 70% of the capital it needed to build the mine, and did so at a cost of just 4.5% annually over 10 years.

This unimaginably low-cost debt for a junior was achieved thanks to guaranteed financing by Toyota to complete construction, which would after time be secured by JOGMEC.

With the debt deal done and more capital coming from Toyota earning into to its 25% (details of which were not released) Orocobre only needed to raise another $20 million, which it did with relative ease.

The capital will go towards building a mine and a processing plant that is expected to cost US$229 million to build, which is a figure that includes a 10% cushion on top of a contingency. That investment will get Orocobre a full-blown chemicals plant that can take the material all the way to a pure, battery-grade final product.

The company expects to be in production by the second quarter of 2014. From there, it looks to turn out 17,500 tonnes per year of battery-grade lithium carbonate.

The ownership structure of the project breaks down as a 65.5% stake for Orocobre and a 25% stake for Toyota Tsusho, while JEMSE, the provincial mining company, holds the remaining 8.5%. JEMSE earned its stake by way of a loan from Orocobre, which is to be paid back, without interest, out of a third of their production.

There is no offtake agreement on the future production. Calaway says there is no shortage of demand, with the material likely ending up in South Korea and Japan.

“I know where most of it is going,” he says. “We have no concerns about putting it all away.”

The project’s 17,500 tonnes of annual production is also a figure that could easily rise — especially when considering that the current resource comes from an area that reaches down to just the 200-metre level.

The deposit shows signs of extending all the way down to the 600-metre level, although there isn’t much motivation to find out exactly how far down it goes, since just 15% of the current resource provides enough production for 40 years.

“It’s huge,” Calaway says of the deposit’s scale. “It is forever in my world. We’re not going to just be 17,500 tonnes a year — as we expand, capex cost is 40% less per tonne. So as soon as we get the first facility up and running, we’ll be planning an expansion. It could easily be 30,000 to 35,000 tonnes annually.”

As for the much talked-about contention that SQM is sitting on a deposit that could flood the market and put all competitors out of business, Calaway has some ­reservations.

“We were always skeptical about their claims to supply endless amounts of material,” he says. “A lot of people who work for us used to have senior positions there. Salar de Atacama is a big resource. It’s the best right now. It’s like Saudi Arabia, and I don’t want to diminish it. But the field itself doesn’t seem to expand as they have said, so we think they are much closer to the limits of what the reservoir can give up than what they
admit.”

As evidence of this, Calaway points to the fact that SQM didn’t ramp-up production at Atacama when Orocobre announced it would get Olaroz into ­production.

“If it was so easy, why wouldn’t they have done it? Why let in a new entrant? They’re not our friends, they don’t own any of us,” he says.

So in a sense, Orocobre is calling SQM’s bluff, and it’s a bet that looks all the more promising in light of a recent acquisition attempt by Rockwood Holdings (ROC-N).

Rockwood, which operates on a different section of the same Salar de Atacama, tried to acquire Australian-based Talison Lithium (TLH-T) for $724 million late last year.

If the Salar de Atacama mine had unlimited lithium, a costly acquisition wouldn’t make sense. The Rockwood bid was eventually undone by a superior offer from Chinese-based Chengdu Tianqi Industry that valued Talison at $847 million.

“I’m not sure if SQM can add another 20,000 tonnes of lithium production per year, but the idea that they can just turn on the taps and produce whatever the world wants? That is not likely,” Calaway says.

As for the extraction process at Olaroz, as with Salar de Atacama, solar evaporation will play a key part.

While brines pulled from Salar de Atacama have a higher lithium grade than those that come from Olaroz, the latter’s lower magnesium content means that Orocobre’s brine won’t have to spend as much time in the evaporation ponds — and that will translate into cost and time savings.

SQM uses evaporation ponds to bring its brine up to a 6% concentration of lithium over an 18-month period, before it goes for more processing in its plant. But Orocobre would only run its brines through evaporation ponds for six or seven months. This will be enough time for the company to upgrade its material to 0.8% lithium, which is all it needs, since the magnesium grades are so low.

Olaroz has a National Instrument 43-101 compliant resource that outlines a 93 sq. km zone with a 197-metre thickness, holding an average grade of 690 mg per litre lithium and 5,730 mg per litre potassium, for 1.21 million tonnes lithium and 10.1 million tonnes potassium.