CleanTeq signs offtake agreement with Chinese company

Robert Friedland, co-chairman of CleanTeq Holdings (ASX: CLQ) and a major shareholder, with 16% of the company’s outstanding shares, has signed an offtake deal with a Chinese company to supply hydrated cobalt sulphate and nickel sulphate products from its Syerston cobalt-nickel-scandium project in Australia’s New South Wales.

Beijing Easpring Material Technology is one of the world’s largest producers of cathode material for the lithium-ion battery industry, servicing both Chinese and international markets. Easpring produces nickel-cobalt-manganese and lithium cobalt oxide cathode chemistries, and its clients include major lithium-ion battery makers Sony, Samsung SDI and LG Chemical.

The binding five-year purchase agreement will represent 20% of Syerston’s annual cobalt and nickel sulphate tonnage, and kicks in from the start of commercial production.

Under the agreement, pricing will link directly to London Metal Exchange and LMB quoted metal pricing for nickel and cobalt, with the “sulphate premia” agreed on quarterly based on the prevailing market price (the cost of converting metal units to sulphate form is often represented in the market price by a sulphate premia paid over and above the contained metal value).

In addition, the agreement will convert to a life-of-mine offtake if Easpring acquires a minimum 25% interest in the project, on terms to be agreed. The two companies also plan to investigate a potential partnership on downstream products, including battery-cathode production.

Syerston is one of the largest and highest-grade scandium deposits in the world, and one of the largest and highest-grade sources of cobalt outside Africa.

Sixty-five percent of all global cobalt production comes from the Democratic Republic of the Congo, and, of that, 45% is produced by artisanal miners, some of them children. Ninety-five percent of the world’s cobalt is made as a by-product from copper and nickel mining. Syerston, 350 km west of Sydney, will be the first mine ever developed that produces high-purity nickel and cobalt sulphate.

Li Jianzhong, Easpring’s CEO, said that the demand for lithium-ion batteries is growing rapidly due to the global shift towards electric vehicles. “The partnership with CleanTeq for the supply of these critical raw materials is a part of Beijing Easpring’s strategy to ensure that we remain a leading cathode supplier to the global battery industry,” he said in an Aug. 31 news release.

According to CleanTeq, the lithium-ion battery industry already consumes 50% of global cobalt supply and demand is expected to soar as the world switches from petrol and diesel cars to electric vehicles. In July, Britain followed several European nations in declaring a ban on the sale of vehicles containing internal combustion engines from 2040.

Cobalt sulphate and nickel sulphate make up the lion’s share of the raw material by cost in lithium batteries. By some estimates, just 4% of the raw material by cost in a lithium battery is actually lithium, while 15%, plus or minus, is cobalt sulphate and 80% is nickel sulphate.

According to figures from CleanTeq, the industry has seen a 20% annual cost reduction in electric vehicle battery pack systems over the last five years, and at the current rate of improvement, electric vehicle drivetrains are forecast to surpass the cost competitiveness of combustion engines within the next five to 10 years.

“China is pushing for an aggressive, California-style, Zero Emission Vehicle program: 8% electric vehicles by 2018, and 12% by 2020,” the company outlined in a corporate presentation in July. “Given a 1% electric-vehicle adoption rate in China today, that target translates to a 12x increase in the number of electric vehicles to be sold in China.”

A prefeasibility study in October 2016 estimated Syerston could produce 3,100 tonnes cobalt and 18,200 tonnes of nickel a year for at least two decades, with an initial capital expense of A$906 million (US$720 million).

CleanTeq expects to complete a definitive feasibility study on Syerston before year-end, and has already secured long-lead items. In July, it bought two autoclaves from Vale International S.A. — a subsidiary of Brazilian multinational metals and mining group Vale S.A. — for US$6.5 million.

Project financing shouldn’t be  too difficult, given CleanTeq’s ties to China. Pengxin Mining owns 16% of the company, and is part of the Pengxin Group, a privately held, Chinese conglomerate based in Shanghai, with interests in mining, real estate, construction, water treatment and dairy farms.

CleanTeq also notes that cobalt has been one of the best performing metals, with prices increasing 160% since January 2016.

The company will use proprietary, continuous resin-in-pulp technology to process the ore and produce nickel and cobalt sulphate for battery-cathode production. (Scandium will be used in lightweight aluminum alloys for transportation markets.)

The project has proven reserves of 55 million tonnes grading 0.71% nickel, 0.10% cobalt and 640 grams scandium per tonne. Probable reserves total 41 million tonnes grading 0.58% nickel, 0.10% cobalt and 557 grams scandium per tonne.

The resource is shallow (5 metres to 40 metres) and extends over a 2 km horizon. Ore reserves should be sufficient for a 39-year mine life, CleanTeq says, and over 1,300 drill holes have helped the company understand the resource.

The project’s environmental impact statement has been approved and the company has received consent for a 2.5-million-tonne-per-year mining and processing operation.

Andrew Mikitchook, an analyst at BMO Capital Markets, said in a client note that the offtake agreement “represents an important catalyst in contributing to the development financing package, as well as a vote of confidence in the project by a key battery-cathode producer.”

Mikitchook has a A$1.40-per-share target on the stock. At press time, CleanTeq was trading at A89¢ per share, and has a A$432-million market capitalization.

As of March 31, the Melbourne-based company had cash of A$92.7 million and A$3 million in liabilities.