BESS - Lithium's Second Act

Podcast Transcript

Ed Coyne: Hello, and welcome to Sprott Radio. I'm your host, Ed Coyne, Senior Managing Partner at Sprott. I'm pleased today to welcome a new guest to Sprott Radio, Federico Gay, Economic Geologist specializing in lithium at Benchmark Mineral Intelligence. Federico, thank you for joining me on Sprott Radio.

Federico Gay: Thank you. It's absolutely a pleasure to be here.

Ed Coyne: Federico is a new guest at Sprott Radio. I thought it would be interesting for our listeners to hear a bit about you and your background, and also talk about what you do as an economic geologist and your day-to-day work at Benchmark Mineral Intelligence.

Federico Gay: Yes, absolutely. My work has changed a bit since I started as a geologist. As you can tell from my accent, I'm not from around the UK where I'm based. I'm Argentinian. I studied there and moved to Chile to work at SQM, one of the major producers of lithium, iodine and other products. I started as an exploration geologist, then moved into the copper business.

I was in the field acting as an operational or control geologist, and then I moved into resource estimation and geological modeling, so boots on the ground and seeing what the day-to-day looks like in the mines. Then, roughly nine years ago, I moved to the UK, where I started as an analyst or desk geologist. My landscape changed quite a bit. I was covering precious metals and joined Benchmark almost three years ago, mainly covering lithium.

Ed Coyne: Desk analyst doesn't sound quite as exciting as being a field analyst going out there and looking at the mines. Is that just because technology has allowed you to do much more of the work behind the screen? Talk a bit about that. That's a fascinating term. I've never heard of a desk geologist before.

Federico Gay: That's absolutely true. I think the technology has evolved. We can see what's happening in the ground from satellite imagery, but the financial and operational reports also tell quite a lot. It's interesting to have that concept or mixture of experience in the field, seeing what the rock looks like, and then going to the paper. It's different, but it's still exciting.

Ed Coyne: Talk me through Benchmark Mineral Intelligence. Who are your clients? What kind of work are you doing for them? What's your day-to-day existence as a firm, and how do you operate within this industry?

Federico Gay: While in the operation, I was building feasibility reports and operational data for one particular mine; I collect it for several hundred mines now. I work in the forecasting team with several colleagues. What we build is databases for supply, demand and prices. In particular, we try to forecast prices for different chemical products, including lithium carbonate, hydroxide and spodumene concentrate. Also, we take quite a deep dive into costs. We spend quite a lot of time in our day-to-day lives building models at the company or at the mine, trying to predict what is expected to happen regarding costs, cash flow, et cetera.

Ed Coyne: You mentioned Argentina being one of the primary markets for lithium. Who else out there is also a hotbed, as it were, for lithium?

Federico Gay: The status quo hasn't changed much in the last few years. We still have the top three producers: Australia, Chile and China. Market share has changed significantly in the last few years. Now, we have new players, particularly in Africa and Argentina, who weren't as prevalent five years ago. Now they’re becoming one of the main producers. Then, we also have quite a lot of interests heating up in the European Union, the U.S. and Canada. It's a more diversified world for lithium supply.

Ed Coyne: Is that largely because these countries are now recognizing the need for it, and they're allowing for this to happen now? What was that primary driver? I can't imagine that, all of a sudden, you woke up one day and said, "Hey, we have lithium here." They probably knew it was there, but they weren't supportive of extracting it. What's driving that today?

Federico Gay: As a geologist, I am bound to tell you that lithium is very common in the Earth's crust, but the concentration of lithium varies quite significantly in several countries. I think the main variable supporting the lithium story is the strategic component. For several years now, it's no surprise. I imagine none of the listeners will find this new, but it's been considered one of the main strategic metals. That's mainly because of the importance of batteries and the way we use lithium. Lithium has been mined and extracted for several decades now, but lithium-ion batteries have a particular strategic importance now that they didn't have some years ago.

Ed Coyne: This kicks us off and into the general market. Can you talk a bit about the current state of the market? It seems like the last 12 months or so have been volatile, but we've had a nice rally, up over 180%. Can you talk about the state of the lithium market today? What's driving that? What news flow is happening? Why the volatility? Why the most recent run-up in the market?

Federico Gay: Yes, absolutely. If I were to pull up my chart, I would see lithium carbonate prices, which is potentially the top reference point for prices. One year ago, it was $8 per kilo or $8,000 per ton. We are currently sitting on over $21,000 per ton. It's been a very interesting rally. We have to consider that the lithium market is immature. As I mentioned, the way we use lithium has changed quite dramatically in the last few years.

That is leading to constant market evolution. We have different players and producers, and demand is increasing. I'm sure the listeners have been hearing about BESS, which stands for battery energy storage systems. Now, it's often heard in several discussions. It's because of that strategic component and the narrative of AI, the way we store energy from renewable sources, and, of course, how we drive our cars.

Ed Coyne: Let's talk about BESS a little. That seems like that's the future for lithium demand. Of course, we're going to have EVs, and that technology will continue to evolve. This new concept or this new application with the stationary energy storage, the BESS that you're talking about. Talk about that because I think that could be groundbreaking or change the way lithium gets consumed. What are your thoughts on that?

Federico Gay: I think renewable energy has been in the spotlight in terms of BESS. When we are talking about renewable energy, particularly solar, the electricity is generated outside peak consumption hours. BESS is the perfect addition or complement to renewable energy because it stores energy generated by renewables and other energy sources as well.

It's particularly relevant for those countries. We have a strong pipeline of renewable energy projects. Also, it serves as an add-on for several energy-intensive projects. Particularly, we're talking about data centers, for example. They use BESS to store energy and draw on it during periods when demand exceeds what they can get directly from the grid. BESS helps level the playing field.

Ed Coyne: That's happening now, right? This is being applied to the data centers and stuff as we're having this call, correct?

Federico Gay: Yes, absolutely. The end of last year was a surprising quarter or month for overall battery demand, with BESS at the center of that movement. We saw magnificent growth in BESS demand last year that really changed the market. It managed to change not only the market's sentiment but also its fundamentals. BESS is a growing segment. I wouldn't say niche. It's an important part of the lithium-ion market. Last year was the reconnaissance year. It was when BESS started to be a central part of the lithium-ion supply chain.

If we look at the global BESS market, demand represents only 20%-25% of total lithium demand, depending on the year. If we dissect it by region, particularly in the U.S., it accounts for roughly 40% of domestic demand. It's considerably more important in the U.S. than in other geographies. That is something to consider. It depends on how you tell the story. When you look into the different regions, BESS can be very significant.

Ed Coyne: You mentioned China, and I did a podcast about a month ago on rare earths. They control that market in a lot of ways, shapes and forms. Is that also true as it relates to lithium? Are they still the primary driver from a technology, supply or inventory control standpoint? If they are, is that a risk or an opportunity for other parts of the world to step up and take ownership?

Federico Gay: I think you pointed out very correctly. I think it's both a risk and an opportunity. The reality is that, yes, when we talk about midstream and downstream in particular, China is decades ahead of several other competitors in lithium-ion development. If we go back in history, LFP[1] was actually a Western technology.

Now, China develops the majority. The lion's share of the LFP comes from China. If we take a look at the global lithium market, China is not self-reliant. They do need feedstock from elsewhere, particularly Australia, Africa, and Latin America, and they have been investing heavily in developing both upstream and downstream, and in mainstreaming the lithium-ion supply chain. That really gives them a huge advantage against other geographies.

Ed Coyne: Is there any new tech out there? Are there any new ways to extract it? What's happening in that space that's making other countries maybe catch up or become more relevant?

Federico Gay: Absolutely. The majority of lithium is still extracted using traditional methods such as hard-rock mining. That's where, for example, Australia continues to lead. The evaporation ponds, which are mainly in the lithium triangle between Chile, Bolivia, and Argentina. Those are where the majority of lithium comes from.

In the last few years, there's been some development in what I would call unconventional lithium sourcing: DLE, or direct lithium extraction. This helps unlock some of the resources that previously couldn't be extracted. There are mainly three types of DLE. One is involved or directly linked to traditional salt flats mainly in South America. Also, there's potential to develop those in the U.S., particularly in California.

There are also two other types of DLE linked to geothermal brines. The U.S. is leading in that front, with Germany and France as well. Then, we also have oil brine DLE, which technically separates the oil brine and extracts lithium from the non-organic part of that brine. There's huge potential for oil brine development in the U.S. Some major oil and gas producers are keeping an eye on the lithium market and developing their assets to become producers soon.

Ed Coyne: Is there any concern in the short term, like the next market cycle or two, that as these technologies come online, is there any risk of oversupply then in the space, or are we still too far behind on that to even be concerned with that right now?

Federico Gay: I think the lithium market has evolved quite significantly since the last upcycle, which was in 2022, when prices briefly touched the $80,000-per-ton mark. The market has evolved since then. We are not seeing a massive oversupply or a massive deficit coming shortly, at least, because the economics are more in charge now.

For example, this year, prices have recovered quite significantly. We've already seen some restarts in some of the mines that were mothballed or idled in Australia. It's a more dynamic landscape. Also, we are building mines faster. That is happening in Africa, in particular, but in other regions as well. I think supply is currently more closely linked to the economy, in terms of both costs and prices.

Ed Coyne: If the economy continues to chug along and strengthen versus soften, EVs will still be part of it. BESS will certainly be part of it. There seems to be a disconnect right now with how much electricity we need, regardless of whether the economy is growing or shrinking. We hear that all the time in the copper narrative. We need more copper, regardless of the economy's short-term direction, because we have to electrify the entire globe. It sounds like that's a similar narrative for lithium. Whether we're selling more EVs in the next quarter or two or not, demand seems to be continuing to grow. Is that fair to say, also, in the lithium market, the similarities you're seeing?

Federico Gay: Yes, absolutely. When we look at the bigger picture, you start to draw parallels with other commodities. Copper is one of them, being essential for transmitting and generating electricity. Lithium is essential for storing it. We need both.

Ed Coyne: Then from your perspective, then from an investor's point of view, clearly, it's been volatile. I think you mentioned the high was around $80,000 a ton. The low reached about $8,000 over the last couple of years. We're sitting at, correct me if I'm wrong, you said around $21,000 today on a per-ton basis. That's a lot of price movement. If someone's looking to invest in or be part of the lithium narrative going forward, what would you recommend they do to participate?

Federico Gay: I think the market has matured so much that, now, we can invest both in developers and producers. A few years back, it was more difficult to do so, particularly on the producer's side. You always had Australia, of course, and they are in the stock market. Elsewhere, it was very difficult to escape China. Now, there are very strong competitors, both in the U.S. and in Latin America, that are more open to the market.

I think there's this opportunity. There's a mix of producers, who are more experienced now than they were a few years ago, and new players who are participating now. They started producing only a few years ago. Also, there's a huge pipeline of projects from developers who are trying to build very interesting projects, potentially even Tier 1 projects in Canada and the U.S. I think it's a more diversified market. There are several interesting and robust stories to invest in there as well.

Ed Coyne: The demand side clearly is taking care of itself. We feel confident that the demand's going to continue, particularly from everything from EVs to data centers to AI to all these things that we need. I thought you said, "Great, we're talking about copper." You need to transport electricity, and you need lithium to store it. There are a lot of symbiotic relationships there with this whole electrification narrative. What are some of the risks that could potentially have this go back to, say, $8,000 versus going back up to $80,000? What are some risks out there that we should be aware of that you're focused on, or you're paying attention to, or following?

Federico Gay: The major risk is policy. Demand is growing quite robustly. When we look at what we're expecting in the next 15 years, which is a double-digit compounded annual growth rate, it's quite unique in the market. When you look at other commodities that grow 3% or 4%, there's a very strong narrative for lithium. It's very much policy-linked or policy-driven and policies can change.

For example, the European Union is flexibilizing its 2035 targets. That is always a risk. EV demand growth depends heavily on expected penetration rates. If there's a moving target in terms of what is expected in EV demand or EV penetration, that can challenge the demand story. Regarding supply, we briefly discussed DLE. Two or three years ago, DLE was seen as the silver bullet that would fix the market and challenge it.

Those promises are meeting reality at the moment, even though it's unlikely to become the top source of lithium, at least in the next 10 years. There are several bottlenecks and challenges there. In terms of supply, there is significant growth in Africa, particularly in Nigeria, Zimbabwe, Mali and the DRC. This year, we expect the supply side of the market to grow by roughly 220,000 tons of LCE (lithium carbonate equivalent). Almost half of it will come from Africa.

Africa is often overlooked and misunderstood. When we look at the economics of production in Africa compared to Australia, for example, production in Africa is quite cheap. We have very cheap labor and very cheap energy in some countries. It is true that potential infrastructure bottlenecks might suffocate some very ambitious growth plans. Still, with less money, you can do more in the region.

That's why we've seen a dramatic surge in lithium output from the region, as well as financial support. Africa is supported by Chinese capital. They've been investing in the region for several decades in several other commodities, including cobalt, platinum, palladium, gold and copper. We've seen a lot of Chinese investment in the region, which has also impacted lithium. The majority of African output is dominated by Chinese capital.

Ed Coyne: I know this is a lithium podcast, but one more risk that you can't seem to go to an investor conference and talk about lithium and not have people bring up sodium, right? Sodium ion. How real is that? Is there a risk of sodium ion replacing lithium ion in the next decade or next 20 years, or the next market cycle? What's the reality, the fact or the fiction behind sodium ion versus lithium ion?

Federico Gay: I will start with the footnote that I'm not a sodium-ion expert. Luckily, Benchmark does have some of the top analysts and expertise in-house. I did my research internally. What I gathered is that there is a lot of noise there. We have to separate marketing from the actual specifications.

Sodium ions are real, and they're currently being commercialized. CATL, which is one of the top battery producers globally, is a Chinese firm. It's also quite big and one of the leading companies in the lithium-ion supply chain. They started mass production of sodium EVs this year, with models set to hit the market soon. We're talking about the second half of this year. What we've gathered is that some of CATL's claims about battery performance may be overstated. That doesn't mean that it's not a good technology.

It's a very good technology, but the genuine advantages are, for example, cold-weather performance, which is excellent, particularly in the BESS sector, and safety, which is arguably better. The claims I would push back on are on energy density and range. For example, the best mass-produced sodium cell today is roughly on par with the mid-range LFP but remains below the high-energy lithium LFP. It's competitive to the medium or small tiers of LFP, but not the premium segment.

Also, there's a lot of talk about costs. Sodium is cheap, but the cost advantage of sodium ions depends on lithium prices. When the lithium price crashed, sodium-ion batteries were more expensive than LFP batteries. That's why, for example, CATL shelved it last year, or why there was less development in the sodium-ion supply chain. Now that prices are higher, sodium ion is back on track. My honest answer would be that sodium ions are a challenge to lithium, but more of a complement than a replacement.

Ed Coyne: I think it goes hand in hand with what we hear a lot in the commodity market, which is that it's not one versus the other. We've got parts of the world that are building nuclear power plants. At the same time, they're still building coal plants. It really depends on where you are in the world, the technologies available and the applications. Sodium is certainly part of reality, and it's going to continue to expand. If you're looking to invest capital today, lithium still has a real story to tell. Is that fair to say, then, that you still like lithium as an investment and a technology going forward?

Federico Gay: 100%. In terms of the lithium-ion supply chain, there are some Western producers and Western developers, both in the upstream, such as mining or DLE or processing, but also in the midstream. You have some Western companies that are producing, or are expected to produce, cell manufacturing and EV companies, of course.

Ed Coyne: It sounds like lithium is really here to stay, which I would agree with as well from everything I've read in the research. Wall Street's funny in that when something new comes out, all the capital, all of a sudden, flows to that, even though it's not a reality. Then, the dust settles and says, "Oh, wait a minute. Maybe we should go back to this." It's funny to watch the Wall Street view of a commodity versus its actual application. I'm always fascinated by that, how they react at different times. Federico, what else would you like to talk about, maybe that I haven't brought up that you were hoping to highlight on today's call? Anything else you'd like to leave us with before we sign off?

Federico Gay: Yes, absolutely. What we're seeing in the market currently is structural tightness. We are expecting a deficit in the market this year. We are forecasting strong prices to continue, at least this year. We expect a price cooldown next year because we expect the market to enter surplus. Over the next few months, we expect very strong pricing. The fact that it again caught Sprott's attention means we are in a good position for lithium at the moment. You mentioned, Ed, that you haven't covered lithium for a couple of years.

Ed Coyne: That's right.

Federico Gay: Watch out. I think there's a lot more news to be told about lithium. We have our eyes on developments in China, particularly the restart of mines, including CATL's Jianxiawo mine and other mines in Jiangxi. We are expecting some positive news regarding DLE development, not only in South America but also in increased interest in developing DLE in North America, so things to watch.

Ed Coyne: Are there three or four things that a more casual investor should be paying attention to from a news flow standpoint? What would be some things that you would recommend someone to focus on or stay up on?

Federico Gay: Yes, I would say DLE, particularly California, and the Smackover in the next few months, I think we'll have some potential tryouts to go to final investment decision (FID). Argentina and Chile are also very strong competitors. I think there will be some positive news coming from those countries soon. I think the U.S. can be very competitive in terms of lithium production.

I think not enough time is being spent on discussing midstream. Once the U.S. produces lithium, well done. If the current trend continues, they will likely have to sell to China. I don't think that's in the best interest. Developing what we call the missing middle, pCAM[2] facilities and cell manufacturing as well; that's going to be a very important discussion to have in the near future.

Ed Coyne: The missing middle, just expand on that for a minute. It sounds like as countries like the U.S. start producing more lithium, it's creating maybe a midstream opportunity for manufacturing. What are you saying there? That's an interesting term, the missing middle.

Federico Gay: Yes, absolutely. We heard a lot of discussions about developing the smart cover, Thacker Pass, and other projects in the U.S. Once those projects are producing lithium carbonate or lithium hydroxide, what happens then? That has to be packed into a pCAM, and afterward into a CAM (cathode active material). Currently, there are no discussions about developing that midstream domestically.

That's very critical because the other producers of pCAM and CAM are in Asia: China, Japan and South Korea. I don't think it's in the U.S.'s best interest to outsource that very strategic part of the supply chain. There are a lot of opportunities, both upstream, of course, but I think it's even more critical to develop the midstream. That's where there are not enough discussions currently.

Ed Coyne: Yes, it's interesting. There are many parallels between what's going on in geopolitics and technology and what we're hearing on the rare earths side as well. Rare earths, obviously, are a hot topic as well. It does seem like there are a lot of parallels to what's happening in the lithium market from a supply, demand and tech standpoint to what's happening in rare earths. Certainly, a lot to pay attention to, for sure. Well, Federico, this was awesome. Thank you for taking the time today. Some fascinating comments, and they really helped us understand a bit more about what's happening in this market today.

Federico Gay: It was an absolute pleasure. Until next time.

Ed Coyne: Yes, until next time. Once again, I'm Ed Coyne, and thank you for listening to Sprott Radio.

1 An LFP battery (Lithium Iron Phosphate or LiFePO₄) is a highly stable, exceptionally long-lasting type of lithium-ion battery. Known for incredible safety, they dominate off-grid solar storage and are widely used in standard-range electric vehicles (EVs). 

2 pCAM (precursor cathode active material) is the raw, powder-like mix of transition metals (like nickel, cobalt, and manganese) used to manufacture CAM (cathode active material). pCAM is an intermediate stage; it must be combined with lithium in a process called lithiation to become CAM.