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

Brisbane-based Orocobre (ORL-T, ORE-A) is looking to become a significant new lithium producer 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. It plans to wrap up the remaining loose ends over the next two quarters and hopes to begin production by mid-2013.

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

Argentina’s salt lake “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 pegged cash operating costs for Orocobre’s Olaroz project at US$1,230 per tonne of lithium carbonate after potash by-product credits – a fairly competitive rate when compared with existing brine producers, and significantly less than new hard-rock lithium projects. Capital expenditure is estimated at US$221 million. 

Lithium carbonate prices

Although lithium is traded internationally, the spot price for the metal is difficult to ascertain because it is not traded on the public market, but rather is sold directly to end users for a negotiated price per tonne or pound. 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, TLH-V), suggest the price is much less. Talison produces technical-grade, or “high purity,” and chemical-grade, or “lower purity” lithium concentrates from its hard-rock Greenbushes mine just south of Perth. In its most recent quarter, the company received 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 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 contain 20 bores designed to produce at 10 litres per second, each with maximum depths of 200 metres.

At 632 milligrams lithium and 4,930 milligrams potash per litre of brine, the Olaroz project has a relatively high-grade lithium resource 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 building the mine next year. 

The company was 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 when the provincial government issued a decree declaring lithium a strategic mineral resource, and introduced a secondary approvals process for lithium projects in the province. 

Orocobre’s project is undergoing a secondary assessment by a committee of experts and 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 look to secure financing for the mine under a January 2010 agreement with Toyota Tsusho, the metals arm of Toyota (TOY-N). Toyota Tsusho can acquire a 25% equity interest in the joint venture at a cost based on the net present value of the project estimated in the recent feasibility study. It will also be responsible for securing a guaranteed, Japanese-government low-cost loan for at least 60% of the project’s capital expenditure.

The feasibility study calculated the project’s after-tax net present value at US$489 million, assuming potash is reclaimed as a by-product, and a 56% after-tax internal rate of return assuming 60% debt financing. The study used estimated prices for lithium and potash forecast by Roskill Information Services from 2011 to 2015. The prices rise over the mine’s 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 produced battery-grade specification lithium carbonate from Olaroz brines at its pilot plant facilities located on site. Its analysis showed the material has greater than 99.9% purity and exceeds 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 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.