This Emerging Lithium Producer Could Disrupt the Entire Industry

NEW YORK, Feb. 25, 2016 /PRNewswire/ - There may not be a more misunderstood commodity than Lithium. While the average investor likely knows that lithium is used in batteries, that's where the knowledge ends. Most people don't realize the extent of lithium's importance to the world. Furthermore, even fewer understand the dynamics of the lithium market.

Consequently, ignoring lithium is a dangerous idea for a shrewd investor. Goldman Sachs has called lithium "the new gasoline" which is surely a term not thrown about loosely by one of the world's largest investment banks. After all, oil has been the most important commodity in the world for over a century.  Could lithium be next? 

The lithium industry is extensive. Lithium is used in everything from glass and ceramics to grease and polymers. It's even used in medicine to treat bipolar disorder. Yet, the real growth potential for lithium is in batteries.  While batteries already make up 40% of the market for lithium, that number could grow to 65% over the next ten years. We're not just talking about laptop batteries here either. The most important growth areas are in transportation (electric vehicle batteries) and renewable energy (grid storage). Importantly, the growth in these areas will have a large impact on demand because the type of lithium batteries used in electric vehicles and grid storage use much more lithium than those used in our laptop computers and mobile phones – pounds versus ounces.

According to Credit Suisse, demand for lithium could outstrip supply in 2020 by 25%. At that point, the world is expected to need over 380,000 tons of lithium (reported as lithium carbonate equivalent or "LCE"). Considering the demand number was in the neighborhood of 190,000 tons in 2014, that's an eye-popping 100% growth in demand over a six-year period. Much of that growth will come from batteries.

Why the huge increase in lithium batteries? As we mentioned earlier, electric vehicles and grid storage are the most prominent reasons. With electric vehicles, we're in the midst of something of a revolution versus fossil fuel powered vehicles. Even with the price of oil dropping like a lead weight, many countries are focused on cutting carbon emissions and using clean energy as a matter of policy, regardless of oil price. Electric cars have already taken the market by storm and with companies like Audi, BMW, Mercedes, Lexus, Volkswagen, and others either producing electric cars or in the process of developing them. That doesn't even include tech giants such as Apple and Google entering the fray, which could reshape the automotive industry even further. Citi Research projects the global lithium battery market to be $40 billion by 2020. That's a 10-year growth rate of more than 250%.

Then there's grid energy storage. One of the main issues with renewable forms of energy is the problem of timing. The sun doesn't shine at night. The wind doesn't always blow. As such, fossil fuel energy generation is currently needed to fill the gap, especially in times of high demand. However, a robust yet affordable storage solution can change the entire dynamic. This trend could conceivably alter the entire energy infrastructure in the US and elsewhere. Green Tech Media estimates grid storage capacity in the US will be over 800 Megawatts by 2019. While that is a substantial increase from roughly 220 MW in 2015, installed capacity already more than tripled between 2014 and 2015. 

Lithium battery technology is only getting better. Because of the spectacular energy density afforded by the lightweight metal, there is nothing likely on the near-term horizon as a substitute for lithium-powered batteries in terms of economic feasibility. In other words, lithium is essential, and will only continue to grow in importance for the foreseeable future.

The Company

We've talked about why lithium is so important to the world, but what about the production of lithium? 

That's where Pure Energy Minerals (OTCQB: HMGLF - TSX.V: PE) comes in. The company is focused on lithium-enriched brines that can be processed into battery grade chemicals. This focus has led the company to secure over 9,300 acres of claims in Clayton Valley, Nevada. The lithium-rich land (see next paragraph) is directly adjacent to the only active lithium mine in all of North America, which is operated by a major player in the industry. 

Recent tests conducted by Pure Energy show that the chemical composition of its brine is similar to the published brine chemistry of its neighbor, the Silver Peak Mine. The Silver Peak Mine was the first lithium brine mine in the world, in operation since the late 1960's. So this brine has been well tested as a commercial lithium producer, so the prospects are good for Pure Energy's success. In fact, the company's exploration work to date indicates the project may hold lithium resources of more than 800,000 metric tons of LCE.

It's the significant amount of inferred resources (as well as the favorable chemistry) that has enabled Pure Energy to sign a conditional agreement to supply lithium hydroxide to the Gigafactory for a five-year period. High purity lithium hydroxide is the form of lithium becoming most common in new battery technologies. It definitely helps that Pure Energy's production facility will only be about a 3.5-hour drive to the new factory and the transportation infrastructure is already in place.

It likely goes without saying, but the first conditional supply agreement is enormous for Pure Energy.  It allows the company to progress its development towards production confident that its first customer is signed up. Having a deal like this in place should also help to secure capital in the future when the time comes.

Technology

Let's step back for a minute and look at a more general picture of lithium production. Essentially, there are two ways to mine lithium regularly being employed. One method is hard rock mining, which is basically your standard smash-rocks-find-minerals type of mining. This version of mining is expensive as it's heavily capital intensive. One of the largest producing lithium countries in the world is Australia, and all of the lithium mining there is of the hard rock variety.

On the other hand, most global lithium producers have turned to extraction of lithium through pumping and evaporation of brines. This process involves evaporating water from brines in large ponds, and refining the lithium from the resulting concentrate. While it's a far cheaper method of extracting lithium, it's not without its own set of issues. 

The evaporation process is inefficient, having a poor recovery of generally less than 50%. Moreover, the process is subject to the whims of the weather and can take months (or even years) to complete. The brine evaporation method also isn't good for the area's ecosystem as it may result in significant dust and other environmental hazards associated with the huge amounts of salt waste.

Pure Energy has joined forces with Tenova Group's Bateman Advanced Technologies to facilitate a change in the way lithium is produced from brine deposits. Bateman's technology involves pumping the brine into a solvent extraction facility to selectively target the lithium-bearing salts. So far, the preliminary test results have far exceeded the efficiency and efficacy of conventional lithium brine extraction technology. Take a look:

• Lithium recovery from the brine is greater than 99% compared to 40%-50% recovery from conventional methods
• The resulting lithium chloride is 99.9% pure
• The process is not weather dependent and can take just 8 hours as opposed to 1-2 years
• The footprint is substantially smaller (no need for thousands of acres of ponds)
• The process produces no significant waste products because the brine is safe to be put back into the ground and the solvent is recyclable and is re-used

The difference between this technology and conventional methods are night and day. At this point you may be wondering why lithium extraction technology like this isn't already widespread. After all, lithium has been a useful industrial element for half a century and critical to the battery industry for most of the last decade. You'd think greater efficiencies would be well in place by now. The answer is the lithium market is controlled by an oligopoly, and the members have had no compelling reason to make these big improvements.

Four companies control approximately 90% of the world's lithium supply. One of those companies, Albemarle Corporation, operates the Silver Peak Mine, directly next to Pure Energy's property.  Albemarle also has a partnership with Tianqi Lithium based in China. The other two major players are SQM (from Chile) and FMC (American). These four companies have essentially dictated the pricing market for lithium. Given their oligopoly (and rising demand), they've no reason to make big changes to their operations. 

However, with several newer companies getting into electric vehicles and batteries, the industry dynamic has changed. For instance, GM plans to mass produce the Bolt a $35,000 electric car by 2017-2018. The only way this can be accomplished is by keeping costs low.  

This supply/demand dynamic gives small, upcoming lithium producers like Pure Energy a chance to make inroads with big clients looking to pay a lower price for lithium. Importantly, with Bateman's technology, Pure Energy should be able to produce battery-grade lithium at a much lower price than current methods – so charging a lower price shouldn't squeeze future margins.

Reasons to Invest in Pure Energy Minerals

• Market Growth:  We talked about the explosive demand for lithium in terms of tons, but the price of lithium has also been rising at a rapid rate.  According to Citigroup, the price per metric tonne of lithium carbonate has climbed from an average of $6,000 in 2014 to over $10,000 in 2015.  A supply shortage suggests these prices aren't going to abate anytime in the near future.  (Both FMC and Albemarle claim to have sold out of key lithium products in 2015.)  Moreover, with Pure Energy's technology advantage, the company stands to have cheaper production costs than many of its competitors. 
• Conditional Supply Agreement:  Having a five-year supply contract in place (as long as conditions are met) means the company can focus on growing their resources and optimizing lithium production.  
• Milestones:  In February of 2016, Pure Energy was able to conclude its Phase 2 drill program in Clayton Valley South with five successful wells completed.  Plans for the first half of 2016 will include; proposed pumping tests, the start of Phase 3 drilling, larger scale process testing in a mini-pilot plant, a host of internal studies and updates, and the start of the Preliminary Economic Assessment.
• Management:   Pure Energy has a strong, experienced management team.  The CEO, Robert Mintak, has over 25 years experience in multiple industries, including public and private lithium companies.  Patrick Highsmith (Director) is a geochemist and business development specialist; and he was the founding CEO of Lithium One, which was acquired through a friendly merger with Australia's Galaxy Resources in 2012.  Dr. Andy Robinson (COO) and Alexi Zawadzki (VP Business Development) are both technically trained with backgrounds in hydrology and a successful company sale in their backgrounds.  Dr. Leeann Munk (Technical Advisor) is a Professor of Geological Sciences and a globally recognized expert in lithium brine deposits.
• Location:  According to the US Geological Survey, the US is the fourth largest country in the world in terms of identified lithium resources.  That's 14% of total global resources.  Yet, there's only one operational mine in North America (directly adjacent to Pure Energy's land).  Clearly, there's massive room for production growth in the US.  Perhaps more importantly, US companies looking to save on shipping costs will prefer to source locally.  Nevada remains the top mining jurisdiction in the US and they are certainly open for business.
• Not in the Oligopoly:  Companies prefer to have a say in the cost of their supplies.  That's not the case in the lithium industry with the current lock on the market by the four biggest players.  As Pure Energy develops its production, it will have the flexibility to make deals with companies who want to avoid the oligopoly. 

Valuation

The table below shows Pure Energy's closest competition.  This doesn't include the oligopoly companies who don't make a reasonable comparison at this point in time.  Pure Energy is earlier in the development process than some of their direct competition, but could very realistically produce the same tonnage of lithium per year down the line (if not more).

In other words, the current market caps of these companies are very realistic goals for the company moving forward.

For comparison purposes, the average market cap of the companies (not including Pure Energy) is $167 million, or 5x than current price of HMGLF shares (ref. $0.46). 

While share pricing is a more complex scenario than basic comparisons make it seem, the primary point is clear.   With Pure Energy having a conditional supply agreement in place for the world's biggest battery factory, plus partnerships to use highly promising new technology, the company appears substantially undervalued compared to its peers.

Legal Disclosure: Annual Information Form and the risk factors contained therein and the technical report on its properties filed on Sedar. Mineral resources which are not mineral reserves do not have demonstrated economic viability. The category of inferred resource is the least reliable resource category and is subject to the most variability. Until mineral reserves and resources are actually mined and processed, the quantity of mineral reserve and resource grades must be considered as estimates only.

This report is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. No information in this report should be construed as individualized investment advice. A licensed financial advisor should be consulted prior to making any investment decision. The author makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. A fee was paid for this report. Expressions of opinion are those of the author only and are subject to change without notice. No warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, we assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided.

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