Banks won’t fund new lithium mines, but that could be about to change
For small caps looking to build their first mining operation, securing project finance is a tough slog.
It’s even harder for companies with lithium projects because, unlike gold or base metals, lithium contracts are ultimately decided between buyer and seller behind closed doors.
Commercial banks aren’t willing to risk big dollars on such an opaque market.
And it’s not as simple as asking ‘what’s the price of lithium?’, either, because there’s numerous product categories adding another layer of complexity.
Benchmark Minerals Intelligence, for example, tracks about 11 different grade-specific prices for lithium carbonate, lithium hydroxide, and spodumene concentrate.
Independent corporate law firm Gilbert + Tobin has advised on almost all major lithium project developments in Western Australia in the past two years.
Partner Justin Little says the absence of published index prices for spodumene concentrate means banks are snubbing major lithium project investments, due to a lack of confidence in their ability to hedge in an ‘opaque’ market.
“With up to 30 different reporting agencies offering lithium price bulletins according to lithium content, chemical state, the location of the buyer and whether the lithium is sold on long-term contracts or the spot market, it is easy to understand why uncertainty exists in the market,” says Little.
“In our experience with lithium clients, we have seen this uncertainty result in Australian banks only opting to provide short-term credit provisions rather than major project investments.
“If banks maintain this reluctance to get involved in lithium projects prior to production, it has the inevitable consequence of pushing companies towards far more expensive offshore bond markets, large private equity groups, or pursuing funding options with customers, as many have already done.”
“Capital markets don’t understand Lithium or they do but see risks everywhere. Industry to rely on Chinese chemical converters for funds. They’re willing to take bigger risks with more money.” @sdmoores shares his thoughts at #BNEFSummit
— Logan Goldie-Scot (@LoganGoldieScot) March 26, 2019
Some Australian banks have recently been showing greater appetite for potentially financing lithium projects, says Little.
“We … anticipate the debt finance dynamics around lithium and other battery chemical projects will shift quite quickly once one or more of the big four lenders in Australia commits to a major project or two in this emerging sector, which we think is likely to happen,” he says.
“Foreign and local banks are currently nibbling at the hook with smaller amounts, with BNP Paribas providing small working capital facilities for both Pilbara Minerals and Galaxy Resources, while Westpac is also active in the sector.”
The London Metal Exchange says that its new lithium cash-settled futures contracts will be released in Q4 of FY2019.
It is hoped that an industry-accepted futures price will encourage investment from commercial lenders and reduce the cost of capital.
“The real advantage of having a spodumene concentrate contract price on the LME would be the ability for mainstream debt providers to hedge pricing risk,” says Little.
The LME has asked companies like Fastmarkets and Benchmark Minerals Intelligence to submit proposals for the supply of a lithium index price.
Earlier this year, Benchmark senior analyst Andrew Miller told Stockhead that the opaque nature of the lithium market was an obstacle for attracting finance for expansions and new operations.
It’s hoped that the LME’s vision for exchange traded lithium will lead to deeper liquidity on the spot market and clearer pricing so that larger lenders — like banks — are more comfortable lending to new mining operations.
“Exchange traded lithium does have the potential to accelerate investment into the lithium sector and add more avenues for financing additional supply,” says Miller.
“The key part of this is having industry acceptance of a contract to make sure there is sufficient contract liquidity to be representative of the wider market.
“Industry acceptance and participation in the development of a contract is crucial.”
This is a key part in establishing a forward market and something Benchmark says it is working very closely with the industry on.
“From an industry perspective, it is important that companies across the supply chain are willing to commit volumes to this contract and understand the benefits to their business,” says Miller.
“This is a process the LME already has underway and is consulting with the industry to understand market requirements.”