Juniors see glass half full in Chile’s new lithium plan

Plans by the Chilean government to strengthen control over the country’s lithium have sent shockwaves through the industry and markets.

As headlines warned of resource nationalism, shares in SQM (NYSE: SQM), Chile’s biggest producer, fell as much as 20% as investors digested the prospect of ceding control of its lucrative lithium business to the state.

However, companies on the ground are hopeful that the lithium strategy announced Apr. 20 by left-wing President Gabriel Boric could finally unlock Chile’s huge reserves of lithium after years of stasis.

“President Boric has had the courage to break the deadlock regarding government policy on lithium in Chile,” says Henk van Alphen, CEO of Wealth Minerals (TSXV: WML).

Under regulations dating back to the Cold War, Chile classifies lithium as a strategic mineral (due to its possible use in nuclear weapons), reserving its production for the state.

As a result, despite Chile hosting an estimated 40% of global reserves, only two companies have been able to produce lithium in the country, from tenements on the giant Atacama salt-flat that they rent from economic development agency CORFO.

Under Boric’s plan, Chile’s state copper giant Codelco will negotiate with Albemarle (NYSE: ALB) and SQM to take majority control once their contracts expire (in 2030 and 2043, respectively).

But while the Salar de Atacama hosts the bulk of Chile’s lithium riches, its northern highlands host dozens of smaller salt-flats which could bolster production in the medium term.

Previous administrations have sought to bolster production by granting special licences to produce a limited volume of lithium over a set period of time.

But these efforts have fallen flat.

In 2012, SQM was stripped of such a contract after it was found to have breached the tender rules (and to have been paying a stipend to the government official in charge of the auction).

Last year, a court blocked similar contracts awarded to Chinese electric vehicle maker BYD and mining company Servicios y Operaciones Mineras del Norte S.A., after Indigenous communities living near salt-flats complained that they had not been properly consulted.

Under the government’s new plans, the state will seek to partner with private investors to explore, produce and process lithium into value-added products. Until a new national lithium company is set up (which requires Congressional approval), Boric has ordered Codelco and state mining firm ENAMI to begin engaging with potential partners.

Rather than scaring off investment, prospective lithium producers in Chile say the proposal could pave the way for new projects to advance towards construction.

“These proposals create a greater degree of certainty for the lithium industry in Chile and therefore an improved climate for investment,” said Aldo Boitano, chief executive of Cleantech Lithium (AIM: CLT), which is working on a prefeasibility study at its Laguna Verde project, after releasing a positive scoping study in January.

With more clarity about how Chile plans to develop its lithium industry, multinationals are more likely to move in, firms argue.

“No doubt, this announcement will be noticed by multiple lithium consumers globally, who have been reluctant to enter Chile until this moment,” said Van Alphen of Wealth, which owns claims on two salares.

Although President Boric’s initial announcement suggested that the government would seek control over all the aspects, this message has been toned down in subsequent days.

Speaking to Chilean television Apr. 23, Finance Minister Mario Marcel said that the majority state participation would only apply to assets considered of strategic importance, such as the giant Salar de Atacama. At smaller salt-flats, the state could hold a minority stake, he said.

According to Clean Tech, the company has already received reassurances that its projects would not be subject to state control.

A major test for Chile’s new lithium policy will come at the Salar de Maricunga, where several firms are vying to develop the country’s second largest lithium reserves.

Australia-listed Lithium Power International (ASX: LPI) and Singapore-backed Simco are both advancing projects using minerals claims that predate the restriction on lithium production. With an environmental and export permits in hand, LPI is already in financing talks to begin construction later this year.

But Codelco has been exploring its own claims over the Salar with exploration work to measure a resource at the site close to completion. Speaking at its annual shareholders meeting on May 2, chairman Maximo Pacheco said that the company aimed to define a business model for its lithium project on the salar by the end of 2023, including estimates for investment and production.

“It’s a very attractive project,” he said. Moreover, Codelco is the only company to have been granted a licence to produce lithium by the government, covering almost the whole of the Salar, and expressed skepticism that the salt-flat can support multiple operations.

Responding to the new policy, LPI said it remains to committed to develop the first stage of the project (based on grandfathered claims) alone but is exploring an alliance with the government to develop a further expansion based on newer claims, “in what could be the first example of a public-private alliance under the new parameters established by the new policy.”

The coming months could be crucial for Chile’s lithium industry as companies assess whether it can strike a workable deal with Codelco and other state entities or would be better off under the more laissez faire regimes in Australia and Argentina.

Despite management’s enthusiasm, investors remain skeptical about Chile’s new policy. LPI’s share price has fallen almost a quarter since the policy was unveiled. Clean Tech and Wealth have suffered similar declines.