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Pedal to the Metal, Lithium Demand in the Fast Lane

· Australia,lithium,canada

The market for lithium is rapidly growing as politicians around the world are beginning to mandate a migration away from internal combustion vehicles. There is currently no way for investors to directly capitalise on this trend as there is no commodities market for lithium. A lithium producer will be better off capitalising on the rapid growth of lithium consumption ad increase production volumes rather than raise funds on an implied valuation of those production volumes.

Burgeoning demand presents a tremendous opportunity for the lithium market. Luckily we find ourselves in the beginning of an industrial revolution, driven by adaption of industrial 4.0 and electric vehicles, which has not left the mining and processing world behind. In the 16 years that I have been working in this industry, I've never seen as much pent-up demand for minerals such as lithium as we have today. The torrent of new innovations in battery technology can be grouped into three primary categories: Victors, Victims and Survivors, along with advances in processing and refining technologies and a better understanding of challenges in the entire supply value chain. Today, lithium projects are making progress that wasn't economically feasible a few years ago as we are beginning to better understand how the lithium metal is affecting many clean energy initiatives promoted by various governments today and beyond. We are starting to bring online many projects that help governments realise these clean energy initiatives - all of which will have a significant near-term implications on quality supply of the lithium metal. The list of fast-moving developments in Lithium processing and refining is long and growing.

To take advantage of this boon requires a large amount of information, resources and personnel upon which good mining and good investment decisions can be made. While mining and processing data is beginning to flood in with the advent of new projects becoming more advanced, catching up with investment data in the lithium industry, especially real figures of the entire supply chain, has until now, proved tricky. This is why InProved Electric Vehicle Vertical (EVV) is one of the pre-eminent venture capital and vertical chain development firms dedicated to realise metals used in clean energy and electric vehicles.

InProved has launched EVV, to proof that we can deal with Chinese battery manufacturers and realise the implied valuation of any mine that can provide battery-grade metals to these manufacturers.

Well-designed policy to boost demand

Our counterparts in Beijing has predicted China lithium demand to register 28% CAGR for 2018-2020. China government has mandated an EV production target of 2 million units by 2020 and we believe that is achievable, given the credit-based system and subsidy plan being well-designed, as these should boost EV sales, encourage technology upgrade and leave room for competition.

Credit Suisse in a July 2018 report has predicted that EV battery shipments (in GWh) are expected to grow by 46% for 2018-2020, with LCE demand expected to grow by 45% CAGR from 85kt in 2018 to 169 kt in 2020.

China government's EV production target is achievable

According to China’s 'Mid to Long Term Auto Industry Development Plan' released in April 2017, in order to cut air pollution from combustion engines, the government plans to boost annual EV production to 2 million units by 2020. The Chinese government has set up a credit-based system for auto makers, requiring EV production to be at least 10% of total output in 2018 and 12% in 2019. Automakers will have to purchase EV credits if they fail to meet the minimum EV production requirements.

Refineries in China are not running at maximum capacity

A recent visit by EVV to a refinery in Chengdu shows that the facility is not running at full capacity. Currently China's lithium supply relies largely on imports. There are no new spodumene mines in China coming online. Salt lake ramp-ups are also significantly slower than announced schedule, due to: poor resource quality, disputes with local communities and less optimal environments. Due to the spodumene mining's faster construction and ramp-up process, the recent new supply usually comes from hard rocks. This particular refinery imports spodumene from Mt Cattlin spodumene project, located two kilometres north of the town of Ravensthorpe in Western Australia. Galaxy Resources wholly owns the mine and is currently mining pegmatite ore and processing on site to produce a spodumene concentrate and a tantalum by-product. At full capacity, ore can be processed at a rate of 1.6 million tonnes per annum (tpa) with lithium oxide concentrate production of 180,000 tpa.

Galaxy Resources reported in Q3 that their average cash margin from Mt Cattlin production fell to $411/t from $534/t in April-June because of higher unit costs as a result of lower production. Mt Cattlin's grades average 1%, while Galaxy's cost of producing a 5.75% concentrate is $325/t, excluding marketing and royalties. At these numbers we estimate their actual sell price to be $868/t for a 5.75% concentrate, demonstrating the strength of the supplier's market, which explains why refineries such as the one EVV visited are not running at full tilt.

EVV business model will always put the company at the lower end of the cost curve

EVV is compiling a preliminary economic assessment which sees us producing 6% spodumene at less than Galaxy's OPEX. Our business model sees us being aligned with the mining contractor, processing contractor, refinery and freight forwarder. Each of our contractors are on a "cost+margin" structure, and reimbursed only when they realise the pre-agreed tonnages designed to meet the buyer's sales and purchase volumes. EVV disseminates contracts with liabilities for non-performance to our contractors, when we receive sales contracts supported by letters-of-credit from the buyer's bank. In this structure, we utilise the balance sheets of our contractors, all of whom we worked with for over 10 years in the mining and processing industries, and only require very little working capital requirements (5-10% of total CAPEX) to start-up. EVV always starts on a trial basis first, ramping up to full production within 3 years on a staged basis.

EVV has by far the lowest capital requirement to realise metals at their purest-form (battery-grade). EVV cuts out the exploration risk because we pass that risk on to the mining contractor who have the local geological knowledge and can affirm whether they can meet Ore tonnage volumes. EVV cuts out the processing risk because we utilise non-performance liabilities to mandate processing contractors to produce the required concentrate tonnages. EVV cuts out the purification and refining risk because they are subjected to the same non-performance liabilities and must produce the required tonnages before they are remunerated. We utilise the by-gone financing model of traditional trade financing to ensure our contractors are remunerated when they meet and exceed production volumes. We aim to provide flexibility in pricing, reliable and sustainable high-quality products to our end-consumers. EVV is changing the game.

EVV utilises a by-gone era of doing business, using the lowest capital intensity and the balance sheets of our development partners, to realise prices at the highest pure-metal level. - Managing Partner, Huan Johnson Koh

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