Editorial: Worries of lithium oversupply dog market

There’s no better example of how unhinged the junior mining market can get than the last few releases in August from Toronto-based Desert Lion Energy in relation to its assets in Namibia.

Desert Lion proudly describes itself as a “lithium development company focused on building Namibia’s first large-scale lithium mine. The company is currently in phase one of its production plan, producing and exporting lithium concentrate from stockpiled material.”

On Aug. 27, the junior reported it was pleased to announce the receipt of its phase-two mining licence by Namibia’s Ministry of Mines and Energy. The mining licence has been granted for an initial 10-year period, effective immediately, and covers 68.7 sq. km, including the area where the company’s current Rubicon and Helikon mines are located.

“We are excited to announce this key step in advancing Desert Lion’s Namibian lithium project,” said Desert Lion president and CEO Tim Johnston. “Receipt of this mining licence demonstrates the strong working relationship between our Namibian team, the Ministry of Mines and Energy, Namibia and various stakeholders. We look forward to building a sustainable project [that] the community where we operate, employees and investors, and Desert Lion will be proud of.”

Flash forward, er, four days to Aug. 31, and Desert Lion was telling the market it had “ceased all operations in Namibia in light of the continued decline in lithium carbonate pricing. The board is currently re-assessing the previously announced three-stage execution plan and is evaluating all available options to find a sustainable path to the continued development of its Namibian lithium project.”

The junior said it had started negotiating with its offtake partner, Jiangxi Jinhui Lithium Co. Ltd., to “amend the pricing metrics under its offtake agreement in light of the current lithium carbonate pricing environment.”

Desert Lion still intends to announce a maiden resource estimate and preliminary economic assessment for the project before the end of September 2018.

The sudden turn in Desert Lion’s fortunes is emblematic of the overarching worry that has beset the lithium industry this year: that grandiose projections of skyrocketing demand for lithium batteries in the decades to come will be overshadowed by a more immediate wall of oversupply that could lower lithium prices in the near- to mid-term.

The wider market seems to think so, as share prices for lithium stocks from junior explorers to seasoned producers have come under increasing pressure this year, even in the face of the Chilean government’s pending water restrictions for new lithium mines in the Atacama Desert.

Jay Turner, senior vice-president of mining at bond-rating agency DBRS, writes in a new report that there is “ample potential new supply from outside Latin America that will meet projected demand, but could also lead to oversupply in the mid-term.”

An example he gives is Rio Tinto’s Jadar project in Serbia, which he says could be a “medium-term disruptor of the lithium market, because it could supply low-cost, by-product lithium through its well-established marketing channels in Europe and Asia for its borate products.”

Metal Bulletin’s latest Lithium Price Spotlight records a 5.6% price fall just for this past week for 99.5% lithium carbonate in China to 80,000–90,000 yuan (US$11,640 to US$13,095) per tonne, with export prices and prices in Japan and South Korea following the Chinese domestic prices lower. This compares to prices for lithium carbonate in the range of 180,000 yuan (US$26,189) per tonne in China, as recently as December 2017.

DBRS’s Turner notes that during a presentation in August, major lithium producer SQM predicted that lithium demand should grow at a compound annual rate of 13–17%. But SQM also says this will result in an oversupply of lithium carbonate in 2022 (by which time SQM will have regained its crown as the world’s largest lithium producer), as its demand forecast is for 475,000 tonnes, while its supply forecast is for 735,000 tonnes.

This makes DBRS and other observers skeptical that new entrants can make a go of it in the newly difficult lithium space.

Desert Lion’s near-death experience in the Namibia desert in August backs up that view.