Lithium-something happening here

carOrecobre owns 66.5% of the Olaroz lithium project being constructed near Cauchari in north western Argentina. The project sits at an altitude of 3,900m and requires development of evaporation ponds, bore fields and supporting infrastructure on the salt lake. The lithium resource lies in brine so there is no hard rock mining it is extracted via ponds and evaporation. Construction commenced in November 2012 after a fund raising that attracted little attention. In fact the lack of attention given to the first lithium development for twenty years makes it all the more interesting. The project plans first battery grade lithium carbonate production in 2014 with a target of 17,500 tpa.

The key to lithium developments are quality of resource, extraction technique, funding and off take agreements. Orecobre has secured all four of these steps and is well advanced in a $229m development funded by Toyota Tsusho Corporation (TTC), Mizuho Corporation and Japan Oil, Gas and Metals National Corporation. The off take and marketing agreement are with TTC.

The variable here is the lithium price. Lithium is not traded readily and like Uranium, the exact details of contracts and sales are opaque. Currently lithium trades at around US$6000 per tonne. Demand has grown at 6% per annum since 2001 and looks set to increase given the increasing interest in electronic vehicles and the need for lithium iron batteries.

Trading at $2.20 currently the stock is capitalised at only $266 m. Quest portfolios, subject to mandate limits, bought the stock last year at around $1.70.  The stock is rated “C” on our subjective screens while valuation is obviously leveraged to the lithium price which in turn is subject to sentiment surrounding the prospects for electric vehicles in the years ahead. If the value attributed to Tesla Motors is a guide, sentiment is currently positive.