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The Shifting Landscape of South America's "Lithium Triangle"

In 2012 Chilean President Sebastian Piñera, a billionaire entrepreneur, tried to kick-start the country's lithium industry amid fast-growing demand for batteries found in mobile phones and tablets. Armed with growing evidence that the world's leading automakers had chosen the lithium-ion battery as the engine of electrical vehicles (EVs), Piñera sought to sidestep a 1979 law that made lithium mining the exclusive preserve of the state by offering a one-off license to a new company to extract the resource under a special operating contract.

His vision ended in failure. Santiago-based SQM, the world's largest lithium producer at the time, won the contest that was aimed at encouraging a new investment in the industry. An eagle-eyed lawyer from another firm that lost out in the auction spotted SQM was in contravention of bidding terms, because of an ongoing legal dispute with the government. The auction was declared void and the government officials entrusted with the bidding process were accused of negligence. 

The debacle may have cost Chile its leadership status in the global lithium market, at a moment when EV demand is taking off. Australia overtook Chile as the world's top lithium supplier in the past decade, and even neighboring Argentina is set to overtake Chile by 2020, according to a study by Morgan Stanley.

Several top lithium producers and exploration companies that have strategically positioned themselves in Chile's salt flats - salares - are waiting for a signal that the government is ready to award contracts to tap the country's reserves. While the current government of Michelle Bachelet permitted current producers Albemarle and SQM, which have operating contracts that predate the 1979 law, to increase output, it will be up to Piñera, re-elected for a second term starting March 2018, to allow new entrants to finally become involved.

"What you see is a country that is falling behind although it has no reason to," says Tim McCutcheon, the president of Wealth Minerals, a Vancouver-based exploration company that holds the rights to 45,000 hectares of prime exploration territory in the Salar de Atacama, where SQM and Albemarle operate. "There's a limited amount of dollars going somewhere and they are not competing."

SQM's operations in the Salar de Atacama. Credit: BNamericas

That "somewhere" is neighboring Argentina, and Australia. The election of Argentine President Mauricio Macri in 2015 brought investors back to the South American country en masse. In the case of lithium, Macri's policies have made Argentina the most active of the three countries comprising the so-called lithium triangle of Argentina, Bolivia and Chile in capturing new investments.

Australian miner Orocobre, in partnership with Japan's Toyota Tsusho, started output at the Salar de Olaroz in Argentina in 2015, adding to the country's lone lithium operation operated by Philadelphia-based FMC, which has been in production for two decades. Several companies, including a joint venture between SQM and Canada's Lithium Americas as well as a number of junior explorers, are progressing with a group of projects that will collectively exceed Chile's output.

The outright loser in the lithium triangle to date is Bolivia. Blessed with the world's biggest lithium resource in the Salar de Uyuni, investors have mostly skipped the landlocked country because of President Evo Morales' insistence that any venture must make car batteries in the country, not to mention requirements around majority state ownership of projects and the President's nationalization of a number of mining and other assets. Morales has diverted some of the country's oil and gas revenues into a state lithium company to develop supplies, with inching progress.

At face value, finding and exploiting a lithium asset is much easier than pinpointing, say, a new copper deposit in northern Chile and bringing it into production. The lithium triangle's salares can be seen on Google Earth. The salt lakes act as a sponge and collect moisture from higher ground, which is found as brine below a crust that is several meters thick.

"A salar asset has relatively low data points," says McCutcheon. "With salar geologies you can get a pretty good idea of what the basin is" with a low amount of drill holes.

The chemistry can be significantly more complicated than simply finding the resource. High magnesium content in the brine complicates refining processes, a problem faced by the Bolivians in Uyuni, for instance. So-called dirty brine requires further refining. In Argentina, Orocobre is unable to produce battery-grade lithium carbonate, as per its feasibility study, without a carbon dioxide plant and may fall short of its equity capital requirements in 2018, according to Morgan Stanley analyst Rahul Anand.

Inside Orocobre's plant. Credit: Orocobre

Budding lithium participants also face an untrodden path to capital, as the world's biggest producers are all multi-billion dollar companies that produce lithium as part of a portfolio of other chemicals or commodities, according to Evy Hambro, the portfolio manager of the BlackRock World Mining Fund. The chemistry of car batteries may change over time and require different amounts of EV raw materials including cobalt and graphite, he told Bloomberg TV.

Lithium's widespread and growing use in electrical batteries, particularly for electric vehicles, has directly led prices to more than double in the last two years. But the jolt in prices could test the choice of lithium as an ingredient in polymers, lubricants, pharmaceuticals, ceramics and construction materials including window frames. Those end uses currently account for more than half of global demand.

Figure: Lithium End Use Forecast

Figure: Top Suppliers' Share of Lithium Market

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