Nemaska Lithium is planning one big mine…

Nemaska Lithium (NMX-V, NMKEF-O) has made a splash twice in the first week of October with the release of a preliminary economic assessment for its Whabouchi lithium deposit in the James Bay region of northern Quebec and news of an off-take and collaboration agreement with Phostech Lithium, part of the Switzerland-based Clariant AG group.

The PEA outlines capital costs of $454 million, a mine life of 18 years, payback in just under four years, a pre-tax net present value of $567 million, and an internal rate of return of 23.3% at a discount rate of 8%.

Nemaska describes Whabouchi as the second-richest lithium deposit in the world and according to the scoping study, Whabouchi will produce about 213,000 tonnes of spodumene concentrate a year, which would be transformed into about 20,700 tonnes of lithium hydroxide and about 10,000 tonnes of lithium carbonate, both of battery grade.

Should market demand for hydroxide outpace that of lithium carbonate, the processing plant the company plans to build is designed with the flexibility to produce 27,000 tonnes of lithium hydroxide and 4,000 tonnes of lithium carbonate.

Nemaska plans to complete a feasibility study on the project by the end of the year and expects the environmental impact assessment, including an environmental and social baseline study should be completed by the end of November.

“This is one big mine, perhaps one of the biggest,” writes Jonathan Lee, a battery materials and technologies analyst, at Byron Capital Markets in New York, adding that the PEA also contains big numbers relative to the company’s market capitalization of $59.5 million.

“Based on our math, 20,700 tonnes of lithium hydroxide contains 6,037 tonnes of lithium, which is equivalent to 31,913 tonnes of lithium carbonate,” Lee says. “All told, Nemaska envisions this mine producing 41,913 tonnes annually of lithium carbonate equivalent (LCE).”

But the analyst also reasons that the current market is between 155,000 tonnes per year of LCE and 165,000 tonnes of LCE, of which about one-quarter, or 40,000 tonnes of LCE, represents demand for batteries.

“Even at a high growth of 20% per annum for the next four years, battery demand would increase to 83,000 tonnes,” he continues. “At almost 42,000 tonnes per annum of LCE production, Nemaska envisions itself supplying over 50% of the battery market, or all of the market growth for the next four years. We find this highly unlikely given that the company will be on the higher end of the operating cost curve so it will not be able to compete on price, and there are already approved suppliers of lithium product. Thus, we believe that a lower production profile would be more appropriate but would lower NPV, IRR and lengthen the payback period.”

According to the PEA, the average cost of lithium hydroxide from Whabouchi will come in at about $3,400 per tonne and $3,500 per tonne for lithium carbonate. 

For its part Nemaska is bullish on battery demand in the industry. Based on a study completed last month for the junior by Roskill Consulting, production of lithium ion batteries has grown by 20% a year between 2000 and 2011, surpassing production of nickel-cadmium type batteries.

Roskill forecasts demand for lithium hydroxide from the lithium ion battery industry will grow  at a rate of 30% a year between now and 2020, fueled by electric cars, electric bikes, and grid storage, increasing to 42,000 tonnes in 2020.

Nemaska also notes that statistics put out by SignumBox Market Research in March of this year, demonstrate that the market for lithium hydroxide from all applications is expected to grow to 99,000 tonnes by 2020.

And Nemaska believes the price of battery grade lithium hydroxide will remain strong. In 2010 and 2011 the price of battery grade lithium hydroxide was running between US$7,500-8,000 per tonne. The price has jumped to about US$8,500 per tonne this year and Nemaska forecasts prices could go as high as US$9,000 tonne next year, rising to US$10,475 per tonne by 2020.

China’s Chengdu Tianqi Industry Group holds a 20% stake in Nemaska.

Under Nemaska’s off-take agreement, Phostech agrees to evaluate and purchase the output of the lithium hydroxide monohydrate from Nemaska’s Phase 1 plant. The two companies also agree to collaborate in order to determine the economic and technical feasibility of tailoring the lithium hydroxide fabrication process to Phostech’s specifications.

The agreement is Nemaska’s first with an end-user. The Clariant group focuses on specialty chemicals including battery cathode material manufacturing.

At the time of writing Nemaska was trading at 54¢ per share within a 52-week range of 30-65¢.