Orocobre – Argentina’s next low-cost lithium producer?

Brisbane-based Orocobre (ORL-T, ORE-A) is looking to become a significant new producer of lithium with its advanced-stage Salar de Olaroz lithium-potash brine project in northwestern Argentina. The company already has a definitive feasibility study, positive pilot-plant production tests, environmental approvals and a major Japanese partner in place, and is looking to wrap up the final few remaining loose ends over the next two quarters in the hopes of beginning production by mid-2013.

The Olaroz project, located in the “Golden Triangle” of Argentina’s Jujuy province, is scheduled to produce approximately 16,400 tonnes of battery-grade lithium carbonate and 10,000 tonnes of potash as a byproduct each year over a 40-year mine life. The U.K.-based consulting group Roskill Information Services estimated total global lithium production was 120,000 tonnes in 2010, with demand forecast to rise strongly to between 300,000 and 500,000 tonnes per year by 2025.

Argentina’s salt lakes (salars) contain some of the world’s largest reserves of lithium alongside similar regions in Chile and Bolivia. Other major suppliers of the metal include Australia and China, though those countries primarily extract it from hard-rock sources hosted in spodumene.

A feasibility study released in May 2011 pegged cash operating costs for Orocobre’s Olaroz project at roughly US$1,230 per tonne of lithium carbonate after potash byproduct credits, a fairly competitive rate when compared with existing brine producers and significantly less than new hard-rock lithium projects. Capex is estimated at US$221 million.

A Closer Look at Lithium Production

Although lithium is traded internationally, the spot price for the metal is difficult to ascertain as it is not traded on the public market but rather is sold directly to end users for a negotiated price per tonne or lb. Some reports suggest the metal has fetched up to US$6,500 per tonne in recent years, though the financial statements of one of the world’s leading lithium producers, Talison Lithium (TLH-T), suggest the current price is much less. Talison produces both technical-grade (high-purity) and chemical-grade (lower-purity) lithium concentrates from its hard-rock Greenbushes mine just south of Perth. In its most recent quarter, the company received roughly US$2,200 per tonne of lithium carbonate produced (for both types combined), compared with a 12-month average of US$2,070. Operating costs for the mine came in at approximately US$1,400 per tonne last quarter.

Orocobre plans to produce lithium at Olaroz using the standard Silver Peak processing sequence, a treatment method developed for the world’s first lithium brine operation in Nevada in the 1960s. Slightly modified to suit the different climatic conditions and chemical properties unique to the Olaroz deposit, the company will use solar evaporation and precipitation of waste products with the addition of locally available lime, followed by potash recovery via differential flotation and production of lithium carbonate with soda ash. Brine will be pumped from the salar bore field into solar evaporation ponds located on the southwest margin of the salar. The bore field has been designed to initially contain 20 bores designed to produce at 10 litres per second, each with maximum depths of 200 m.

At 632 milligrams lithium and 4,930 milligrams potash per litre of brine, the Olaroz project has a relatively high-grade lithium resource currently standing at 6.4 million tonnes of lithium carbonate and 19.3 million tonnes of potash measured and indicated. An updated resource estimate for the project is expected later this year, following a program of infill auger drilling.

What remains to be done

Orocobre is now looking to obtain the final government approval required to begin construction of the mine next year. The company was all set to go ahead with the project at the end of 2010 after receiving environmental approval from the province of Jujuy, but was handed a setback in March 2011 when the provincial government issued a decree declaring lithium to be a strategic mineral resource and introducing a secondary approvals process for lithium projects in the province. Orocobre’s project is now going through this secondary process entailing an assessment by a committee of experts and then a final joint approval decision by the Minister of Production and the Secretary General of the provincial government.

Once the process is complete, the company will then look to secure financing for the mine under a January 2010 agreement with Toyota Tsusho, the metals arm of the car manufacturer Toyota. Toyota Tsusho can acquire a 25% equity interest in the joint venture at a cost based on the NPV of the project estimated in the recent feasibility study. It will also be responsible for securing a Japanese government-guaranteed low-cost loan for at least 60% of the project capex.

The feasibility study calculated the project’s after-tax net present value to be US$489 million, assuming potash is reclaimed as a byproduct, and the after-tax internal rate of return to be 56%, assuming 60% debt financing. It is important to note the study used estimated prices for lithium and potash forecast by Roskill Information Services from 2011 to 2015. The prices rise strongly over the mine life and average US$6,160 per tonne for lithium carbonate and US$592 per tonne for potash.

Earlier this year, Orocobre announced it had successfully produced battery-grade specification lithium carbonate from Olaroz brines at its pilot plant facilities located on site. Its analysis showed the material to be of greater-than-99.9% purity and to exceed specifications of battery-grade material sold by existing producers.

The company’s share price has fallen dramatically this year and, at $1.36, now sits slightly up from its 52-week low of 93¢ but well down from its 52-week high of $4. It has 103 million shares outstanding and had $38 million in the till as of June 30, 2011.