How DLE will Change the Lithium Industry
The implementation of Direct Lithium Extraction (DLE) technologies has the potential to significantly increase the supply of lithium from brine projects (much like shale did for oil), nearly doubling lithium production on higher recoveries and improving project returns, though with the added bonus of offering ESG/sustainability benefits, while also widening rather than steepening the lithium cost curve.
Goldman Sachs, Metals & Mining Research
A research paper on an innovative technology about to be adopted in the lithium industry does not sound like the most exciting paper I have ever written. That said, the new technology (DLE) is a game changer, and I urge you to read what is about to come, as the implications are substantial. As DLE is rolled out in scale over the next few years, there will indeed be some big winners but also some sore losers. If you invest in lithium (as we do), it is important to know which horse to put your money on.
I should point out that DLE represents not one but several technologies, all of which have different pros and cons. It is beyond the scope of this research paper to go into any level of detail on this, i.e., in the following, I will refer to DLE in very broad terms and assume that lithium extraction companies will tend to use the same underlying DLE technology, which is not necessarily a given.
Today, almost all lithium comes from a handful of countries. Australia is by far the biggest producer, accounting for over half of worldwide production with the top three countries accounting for 90% of worldwide output (Exhibit 1).
As you can see, in 2021, lithium production amounted to 105,984 tonnes worldwide. In fact, it was the first time ever global lithium production exceeded 100,000 tonnes in a single year. As you may recall from some of my earlier papers on lithium, it can be extracted in one of two ways – either by adopting traditional mining techniques or by extracting it from brine water. When brining, you pour massive amounts of brine water into man-made ponds and wait for the water to evaporate, hence the long lead time. Once the brine in the evaporation pond has reached the warranted concentration of lithium, the brine is pumped into a lithium recovery facility for extraction. The word “recovery” will be used frequently in this paper. It is a measure of how much of the actual lithium content that can be collected.
Brining is more cost-effective than mining. Although DLE will increase the cost for brine extractors modestly, the much higher output when deploying DLE will more than compensate for that (more on this later). Worldwide, brine pools account for nearly two-thirds of all lithium resources but only 40% of all lithium extraction. South America is the world force on brining, and most South American lithium comes from an area known as The Lithium Triangle, which is the border area between Bolivia, Argentina and Chile. This area holds the largest lithium reserves worldwide. Traditional mining is the prevailing method in the rest of the world. For example, in Australian, no lithium is produced through brining.
Earlier this year, I wrote a research paper called Why Commodities May Defy the Odds in 2023, a paper which you can find here. In the paper, I argued that certain green metals will be in short supply, if the intention is to go 100% green over the next few decades (Exhibit 2). That led me to conclude that the six green metals in Exhibit 2 are about to enter a supercycle of potentially unfathomable proportions. As you can see, lithium is one of the six green metals. However, as you can see in Exhibit 3 below, lithium prices have been anything but strong this year, and that has caused me to revisit the topic.
In the following, I will argue that, although the bull story is intact, you can no longer assume that all companies involved in lithium extraction will come out on top. There will also be losers, and it is down to the new technology referred to earlier which is called direct lithium extraction or DLE for short.
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What is DLE?
As you can see in Exhibits 4a-b below, once DLE has been rolled out commercially, the amount of time from extraction to delivery of the final product will be dramatically reduced. The evaporation process, which can be up to 18 months, will be replaced by DLE which lasts a few days at most. The new technology will not only affect the ability to supply lithium but will also have a significant impact on the economics of lithium brining versus lithium mining.
In a recent research paper, Goldman Sachs summarised the most important implications of introducing DLE as follows:
1. In traditional brine projects, lithium recoveries are in the range of 40-60%. The recovery rate will improve to 80% (+/-), when DLE is adopted (see Exhibit 7 later).
2. As a result, total lithium output will increase significantly, once DLE has been rolled out. It is estimated that the output from DLE is almost twice as high compared to the output from brine ponds (see also Exhibit 7 later). Therefore, although the lithium price may drop somewhat, the profitability of brine extractors will improve significantly, provided they adopt DLE.
3. There are several sustainability benefits associated with DLE, most importantly a much reduced use of water (up to 20x).
The first of those three dynamics will have a significant impact on the overall supply of lithium. Therefore, all else equal, the lithium price will be affected negatively by the introduction of DLE, which will hurt miners, given their higher costs and the fact that DLE is not an option for them.
The second dynamic will encourage briners to convert to DLE as soon as possible, and those that do will see an almost immediate impact on the bottom line. The third dynamic will impact investors and their choice of lithium companies to invest in, i.e. it will affect the performance of your portfolio.
The choice between the two extraction methods available today – hard rock mining or evaporation of brine water in ponds – is almost exclusively a function of availability. Take for example Australia. This country does not have a meaningful amount of brine water. South America, on the other hand, is gifted with vast brine water resources. Therefore, in both of those regions, the choice has been obvious. Going forward, DLE, will provide another option to brine extractors but not to miners.
There are pros and cons associated with all three extraction methods. Goldman Sachs has summarised the most important distinctions in table 5 below. Which method extractors choose to go for will, apart from availability, mostly be a function of costs, which again will depend on recovery rates. Therefore, there is no simple answer to this question. What is optimal for one geographical area and one company may be suboptimal for another.
Obviously, in areas without brine pools, neither evaporation ponds nor DLE are valid options. With that caveat in mind, the conclusions I can draw from Exhibit 5 are that:
1. the choice between evaporation ponds and DLE is a function of recovery rates; and
2. environmental considerations favour DLE.
The second point is important. At a time where climate-related disasters happen more frequently, the pressure on politicians to ‘do something’ is rising by the day. As a result, DLE could be forced upon extractors, even if the numbers suggest otherwise. See also my comments on Chile later.
The costs of implementing DLE
Critics of DLE argue that, although the new technology is superior, the vast implementation costs make an industry-wide rollout economically unfeasible. It is indeed correct that implantation costs (capex) are much higher in DLE projects than they are in evaporation ponds (Exhibit 6). As you can see, total capex is not far from being twice as high in DLE projects.
However, according to Goldman Sachs, higher recovery rates more than compensate for the higher capex. Analysts’ estimates suggest that total lithium output will nearly double amongst those brine extractors that choose to convert to DLE, and the reason is (much) higher recovery rates (Exhibit 7).
You cannot assume that the recovery rate will be the same for everyone, though. If a brine pond recovers 60%, and this can only be improved to 70% if converting to DLE, the conversion makes no economic sense. However, according to Goldman Sachs, most brine ponds recover around 50%. If that can be improved to 80% by converting to DLE (as preliminary data suggests), a conversion makes plenty of sense. Therefore, you should expect a high proportion of existing brine pond projects to convert to DLE (brownfield conversions). In addition to that, a number of greenfield projects, which make no economic sense under the brine pond model, could become profitable as DLE projects.
As stated earlier, converting to DLE is not an option for lithium miners. Therefore, and given the much more appealing sustainability credentials of DLE vs. mining, it is not entirely impossible that DLE will eventually squeeze out miners completely. Having said that, for another 10+ years, demand for lithium will be so strong that this risk is negligible. In the foreseeable future, it is more relevant to compare the earnings outlook of the different methodologies.
According to industry insiders, the rollout of DLE appears to be only a few years away. However, our main source on lithium has advised us that the pilot schemes are not running as smoothly as they had hoped, i.e. time to completion could still be further away than the DLE bulls suggest. According to one of them – Goldman Sachs – Chile and Argentina are furthest down the DLE road and could establish the first sizeable DLE processing plants in 2025 or 2026. The analysts at Goldman Sachs further argue that the DLE rollout is likely to have been largely completed by 2030 in most brine-producing regions. However, as I just said, one is entitled to question that time schedule.
Recent developments in Chile
On Saturday the 22nd of April, the following was posted on cnbc.com: “[Chilean] President Gabriel Boric announced in a national broadcast Thursday night that private companies will have to partner with the government in exploiting Chile's lithium, a metal used to make rechargeable batteries”.
This immediately invoked fears of nationalisation of the lithium industry in Chile, and lithium companies exposed to Chile reacted in kind. I have done a fair amount of homework on this topic, and I can emphatically state that this is not a first step towards nationalisation. Not only have the facts been misrepresented by the media worldwide, but President Boric was also guilty of using some poorly chosen words to describe his intentions. Furthermore, he chose to present a collection of half-baked ideas without emphasizing that any such plans must be passed by Congress in Santiago, and that doesn’t look very likely, following the recent election results (see later).
According to industry insiders I have spoken to, here is what President Boric meant to say: Chile’s government and the Chilean lithium industry should work together to enhance Chile’s prominent position in lithium [as governments and private industry do in all civilised countries, I might add]. One way forward would be to introduce royalties on lithium extraction [something governments in most other countries do when private companies extract natural resources, and nowhere else is it considered nationalisation].
Another way forward, Boric suggested, would be to make the implementation of DLE mandatory. This would save massive amount of water, be good for the environment in general, and it would improve the profitability of the lithium industry as a whole, he said. This would increase the royalty income to the government, which could be spent on the poorest in the country.
Are those words akin to a desire to nationalise? I don’t think so. It is also worth pointing out that Chilean lithium companies reacted overwhelmingly positively to his remarks, which is hardly the reaction you would expect, if they feared nationalisation was coming.
Latest on Chile:
In a blow to President Boric and his left-wing government, on Sunday the 7th of May (shortly before this paper went to print), elections were held for the Chilean Constitution Assembly, and the right-wing parties secured a controlling majority. According to a source of ours, this development implies that Boric’s lithium strategy, as it stands, will not pass through Congress.
Although they have begun to perform better again following the election results in Santiago, most lithium stocks have performed poorly over the past few months. This is, at least partially, a function of weak lithium prices in early 2023 (see Exhibit 3 again); however, other factors might also be in play, for example widespread concerns about nationalisation in Chile as mentioned earlier.
I think that fear would have been unfounded, even if Boric had come out on top. Now, where his majority in Congress has been lost, it is simply not going to happen. For that reason, my search for good investment opportunities starts in Chile. We are currently invested in nine companies involved in lithium extraction. Three of those nine companies operate almost exclusively in Chile:
- Lithium Americas (HQ in Vancouver, Canada): -17% since 7 February
- Lithium Chile (HQ in Calgary, Canada): -36% since 8 March
- Sociedad Química y Minera de Chile (HQ in Santiago, Chile): -27% since 2 February
Another three of our holdings have significant activities in Chile:
- Albemarle (HQ in Charlotte, North Carolina): -33% since 2 February
- Ganfeng Lithium Group (HQ in Xinyu, China): -27% since 27 January
- Mineral Resources (HQ in Perth, Australia): -28% since 24 January
The final three have virtually no activities in Chile:
- Allkem (HQ in Brisbane, Australia): +1.1% since 26 January
- Livent Corp (HQ in Philadelphia, USA): -7% since 15 February
- Pilbara (HQ in Perth Australia): -14% since 26 January
Note: All performance numbers are calculated from the first quarter peak through the 12th of May 2023.
It is noteworthy how much better those companies with little exposure to Chile have performed so far this year. If my reasoning is correct, this is where the biggest buying opportunity lies. Sociedad Química y Minera de Chile (SQM) is the blue-chip of the Chilean lithium industry. Albemarle, although not a pure play on lithium, is another blue-chip play on lithium. Those two names would be at the top of my buy list. They can both comfortably afford to convert to DLE and will probably both do so as soon as a conversion is feasible. Therefore, those two names will most likely be amongst the early winners in the conversion process. If you want to be exposed to DLE but you do not buy my no-to-nationalisation argument, Livent Corp is the obvious name to own.
Mining companies stand to lose the most from the rollout of DLE. Even if it may take a considerable number of years for lithium miners to feel the full brunt of DLE, the new technology could begin to affect miners’ bottom lines adversely as early as 2025. The biggest and best-known lithium mining companies are all Australian. As you can see above, they have performed far better than anything to do with Chile this year but stand to lose out longer term. Therefore, for investors already invested in lithium, if you don’t want to increase your exposure, you should consider selling names like Allkem and Pilbara to raise capital for the name(s) you want to add.
Niels C. Jensen
15 May 2023