High risk/high reward lithium bet drives Argentina Surge

High risk/high reward. That’s the bet being made by global lithium miners in Argentina who are brushing aside a recession, a currency crisis and political uncertainty in their hunger for the mineral that helps power electric cars.

Rising demand and limited supply have resulted in lithium prices tripling over four years. In response, companies have been scrambling to build new mines, putting Argentina and Chile, two of the world’s largest producers of the mineral, squarely in their sights. Uncertainty about the outcome of next October’s presidential elections means that there is a relatively high level of risk for those willing to invest in the country

But while Chile may be more economically stable, top producers there — Albemarle Corp. and Soc. Quimica y Minera de Chile SA — have struggled to obtain licenses to expand. Meanwhile, Argentina President Mauricio Macri is pushing a more pro-market agenda.

"Looking at the recent experience of SQM and Albemarle, I’d much rather do business in Argentina than in Chile," said John Kanellitsas, executive vice chairman of Canada-based Lithium Americas Corp., which is undertaking a nearly $500-million joint project with China-based Jiangxi Ganfeng Lithium Co. Ltd. in Argentina’s Jujuy province.

"In Argentina a little patience is required over the long term,” Kanellitsas said in an interview. “But we think the situation will be resolved favorably."

Lithium boom

The country is in the early stages of a lithium boom, according to an Economist Intelligence Unit report. Two mines are currently in production and over 60 projects are in development, with five close to coming on stream, the report said. Investment in lithium projects has increased tenfold in the past five years, according to an August report from Argentina’s undersecretary of Mining Development, Mariano Lamothe.

Argentina and Chile are part of the so-called lithium triangle, a vast Andean area peppered with salt flats that also spans across Bolivia to the north. Home to the world’s second-largest lithium resource, Bolivia has attempted to mine it for years –and failed. The country has produced 250 tons this year, but is investing in several projects that, it says, will bring production capacity to 150,000 tons in 5 years’ time.

Chile has traditionally been among the top producing nations, with Albemarle and SQM operating there for more than two decades. Junior companies have not been able to set up new mines there yet due to complex regulation and opposition from local communities.

Albemarle was only allowed to increase production after agreeing to pay a higher royalty in 2017, while SQM obtained its license to raise output earlier this year and will also be paying a higher royalty.

"There is a very complex regulatory environment in Chile," said Andrew Miller, a senior analyst at Benchmark Mineral Intelligence. "But I don’t think any of the major producing regions of lithium at the moment are immune to some disruption and volatility."

Investors have long looked at Argentina from afar as the country was hit by political and economic uncertainty, including nationalizations by former President Cristina Fernandez de Kirchner such as oil and natural gas producer YPF SA. Macri’s pro-market views have changed this, according to Fiona Mackie, regional director of Latin America and the Caribbean at the Economist Intelligence Unit.

"Under the Macri administration we are seeing progress that will attract long-term investors in the lithium mining industry," Mackie said by phone. "Argentina is in a Goldilocks situation where it might have got the regulation just right, plus huge resources of lithium in a context of growing demand."

Business certainty in Argentina is at the highest in 20 years, Paul Graves, chief executive officer of Livent Corp. said earlier this month. The company is a spinoff of FMC Corp., which has been operating in Argentina for decades. Livent sources all of its lithium from the Hombre Muerto salt flat and is the only pure-play lithium company on the New York Stock Exchange. The stock is up 3 percent since the company listed in October.

To be sure, uncertainty about the outcome of next October’s presidential elections means that there is a relatively high level of risk for those willing to invest in the country as Macri will be facing either Fernandez de Kirchner or another Peronist candidate.

Argentina lithium should trade at discounts to Chilean, Australian and U.S. assets as political uncertainty and economic instability make the country relatively less attractive for lithium investment, BMO analyst Joel Jackson said in a report.

"Key risks relate to economic volatility, inflation and currency, as well as political instability," said Reg Spencer, an analyst at Canaccord Genuity Australia. "The long-term demand outlook for lithium, Argentina’s excellent resource potential, and open permitting and approvals process, does offset some of this risk."

(By Laura Millan Lombrana and Jonathan Gilbert)