Africa and the battery revolution

2019-02-14T11:13:27+00:00 July 12th, 2018|Business|

Given all its endowments, one could conclude that Africa should be a world-class performer with respect to its natural resources sector, writes Lara Smith.

Africa is rich in a number of natural resources. Image credit

Africa is rich in a number of natural resources. Image credit: Core Consultants

Africa hosts more than a third of the world’s natural resources. The continent supplies 83% of the world’s platinum, two-thirds of its cobalt, and over half of the world’s manganese, chromium, and diamonds. As principal commodity trading partners, it boasts China, Japan, the US, and Western Europe as its main importers. Given all these endowments, one could conclude that Africa should be a world-class performer of its natural resources sector. Moreover, the fact that over the past 20 years, the ease of doing business in Africa has improved due to a variety of reasons, from more mature banking, finance, and legal institutions to increasingly investor-friendly policies and frameworks that demonstrate governmental support for sustainable development, gives even more reason for this assertion to be true.

However, the positive development in Africa does not extend to the natural resources sector. The natural resource sector is seen as the building block for the African economy, promising mass employment and infrastructure development. A resurgence of resource nationalism, high mining rents, and heavy social burdens call into question whether the investment risks match the derived benefit.

More recently, mining and policy changes in two major African mining countries, South Africa and Tanzania, call into question the stability of investment decisions related to Africa’s natural resource sector and bring political or location risk front and centre.

Source of FDI

Even though South Africa and Tanzania’s mining sectors are in turmoil, Africa still has a significant and thriving minerals industry that is a significant source of foreign direct investment (FDI). It is expected that the precious metals markets will continue to show upside, led by heightened political risk and demand for natural food ingredients, which is fuelling demand for agricultural crops such as vanilla, 80% of which is grown in Madagascar, and cocoa, where nine African countries make the list of the top 20 growers in the world.

Demand for raw materials to fuel the burgeoning battery and electric vehicle markets should help boost Africa’s natural resources sector as an investment hub. Lithium, cobalt, and graphite have attracted significant investment. In addition, investors have begun to take note of the demand for copper, fuelled by the manufacture of electric vehicles, resulting in copper breaching USD7 000 per tonne (t) on 24 October 2017. Therefore, Africa should continue to attract investors to the copper regions of the DRC and Zambia, and other key copper-producing regions, such as Botswana.

Battery market outlook

The lithium-ion battery market is undergoing a revival, with billions having been committed over the past two years and billions more to be committed over the next five years to expand production capacity. We are witnessing the birth of multi-gigawatt-hour production facilities, which is estimated to increase demand for lithium ion by over 100GW by 2021.

Tesla is developing its Gigafactory in Nevada — the largest of all new lithium-ion battery plants. This decision has arguably disrupted two mature industries, causing automotive giants such as General Motors and Nissan to re-evaluate their positions with respect to developing electric vehicles, while also disrupting the battery manufacturers, forcing them to consider their expansion plans and increase their scale.

Global battery market in 2014

Figure 1: The global battery market in 2014. Image credit: Core Consultants

If we focus on the battery market, we note that around 20GW of capacity is expected to be added by 2018 and a further 133GW by 2021, with the majority of this expansion originating in Asia. To provide perspective, by 2021, we expect there will be close to 270GW of capacity compared to the current 109GW of capacity.

Figure 1 shows current projects, projects under construction that are expected to be commissioned by the end of 2018, and then announced projects that are expected to come online by the end of 2021.

Leading the expansion in China, BYD is expecting to expand its capacity to 34 000MW from the current 16 000MW. Other significant expansions include Guoxuan High Tech, which will produce 25 000MW from the current 6 000MW capacity; Lishen is set to increase its capacity by 17 000MW, bringing its total to 20 000MW; and Amperex is expected to raise its capacity by 10 000MW to 17 500MW. Samsung is also looking to expand its capacity in China and is already well established in South Korea. LG Chem has announced an expansion of 19 000MW and is expanding its Holland Michigan cell plant to 36 000MW over the next four years.

Multi-gigawatt-hour production capacity changes

Figure 2: Multi-gigawatt-hour production capacity changes. Image credit: Core Consultants

Despite the fact that the sales revenues of many of these battery manufacturers have been quite poor, the choice is still to continue expanding. This means that there is a major drive to reduce battery prices, sell more batteries, and increase the utilisation to justify the capital expenditure.

Costs of producing a lithium cell has fallen from USD1 000/kWh in 2010 to about USD240/kWh in 2017, and Bloomberg New Energy Finance’s team calculates the production costs of Korean plants to be approximately USD162/kWh in 2017. The expectation is that this cost will continue to decline and that prices of cells will average USD88/kWh by 2030.

Li-ion battery prices

Competing technologies

As for the risks of competing technologies, we expect this to be minimal, which means that for the foreseeable future, lithium-ion batteries and the associated demand for the raw materials that comprise these batteries, are here to stay.

Figure 4 shows an estimated timetable as provided by major battery manufacturers, who seem to more or less concur when new cathode chemistries may be introduced. The most promising technologies — lithium sulphur and lithium air batteries — are only expected to be commercialised by 2025 and 2030, respectively.

An estimated timetable as to when new cathode chemistries may be introduced

Figure 4: An estimated timetable as to when new cathode chemistries may be introduced. Image credit: Core Consultants

As such, lithium-ion batteries are expected to be a mainstay with respect to cathode materials. Research about reagents in the cathode sector involving the migration from cobalt to nickel is currently being done. This current thinking is due to two main reasons, namely, to address the supply constraints in the cobalt market, and because cobalt does not enhance the performance of the battery and is mainly there to contribute to thermal stability; however, changes in technologies are not immediate.

Constituents of a battery

Constituents of a battery. Image credit: Core Consultants

A battery consists of a cathode, an anode, and a separator. These three components consume a wide variety of metals. The most intensive anode component is graphite, while the cathode is a blend of metals that are based on lithium, including lithium carbonate. Cobalt is used as an additive in mainstream lithium-ion cathodes and is critical, acting as a binder for the lithium ions and allowing the ions to move through the cathode to the anode during discharge.

Graphite

Graphite is the largest raw material input into lithium-ion battery cells by volume and comprises most of the anode. As such, many investors feel excited about the potential for graphite companies to supply the burgeoning battery sector.

The source of graphite could be naturally mined and processed (flake graphite / spherical graphite) or synthetic graphite. In general, the way the graphite is produced is very different, it is sold into different markets, and it fetches different prices. However, in the anode market, these two camps compete for the same piece of the action.

At present, China produces 100% of uncoated spherical graphite and accounts for 75% of the anode market. The main reason is that China is the low-cost source of flake graphite feedstock. The ability to compete with China on cost is what constrains diversification in the graphite market. However, there is concern that as China increases its environmental stringency, this could make way for other players.

Synthetic graphite is produced using petroleum coke or tar, which are by-products of the oil and coking coal industry, respectively. This graphite is typically used in the steel industry and is very energy intensive. To ensure battery-grade material, the higher-quality carbon raw materials are specifically chosen, formed into blocks, and baked at 700–900°C Once this is achieved, the stock is then graphitised by temperatures of up to 3 200°C to achieve a specific shape and density. The product is sold between USD10 000 and USD16 000/tonne — more than double the cost of coated anode spherical graphite material, which retails at about USD7 000/tonne. Major producers of synthetic graphite are the US, Japan, and China.

By 2020, Africa will have a significant share of the global graphite market

By 2020, Africa will have a significant share of the global graphite market. Image credit: Core Consultants

With respect to natural graphite, Africa is attracting considerable interest, with companies exploring Madagascar, Malawi, Namibia, Mozambique, and Tanzania. By 2020, we estimate that Africa will be one of the most important suppliers of natural graphite for the battery market globally.

We provide a brief overview of some of these companies below.

Battery Minerals (BAT), Mozambique

Battery Minerals is focused on developing the Montepuez Graphite Project in Mozambique. In addition, the company released a concept study for its Balama Central Graphite Project in Mozambique. The Balama Central Graphite Project is adjacent to renowned Syrah Resources, a giant graphite development (also known as Balama).

The Montepuez project has a proven ore reserve of 41.4 million tonnes (Mt) at 8% total graphitic carbon (TGC), and with an indicated and inferred resource of 105.9Mt at 7.74% TGC, presents significant exploration potential and the option for further upside.

The development of the project is expected to be fast-tracked, with all the necessary approvals expected by March 2018, construction by quarter two of 2018, and maiden shipment of around 50 000 tonnes per annum (tpa) at 96.7% TGC by quarter two 2019.

Doubling the capacity from 50 000 to 100 000 tonnes per year is estimated to require USD25-million to USD29-million for expansion, which demonstrates the scalability of the project and potential economies.

As an investment destination, Mozambique presents some sovereign risk due to liquidity challenges, owing to increases in public debt and the recent fall in mineral prices, gas, and coal. However, following the decline in energy prices, Mozambique’s government has actively tried to diversify the economy into other natural resource sectors and government has been proactively engaging resource companies to invest in the country.

In 2014, the country revised its mining law guaranteeing security of tenure and allowing companies to repatriate profits. Further pro-business reforms include deregulation and decentralisation of political power, which have attracted foreign investment.

The company’s marketing strategy is well underway, having secured memorandums of understanding (MoUs) with Japan’s Meiwa Corporation and Chinese graphite producer Qingdao Guangzing Electronics Materials for the development and execution of a marketing strategy.

NextSource Materials (NEXT), Madagascar

Previously known as Energizer, NextSource Materials is focused on producing 15 000tpa of premium flake graphite concentrate from the Molo Graphite Project in Madagascar before stepping up to 53 000tpa at full capacity.

The project has a 20-year life of mine and boasts one of the largest and highest-purity graphite resources in the world. It represents the first significant graphite discovery in Madagascar in over 50 years.

Sovereign Metals (SVM), Malawi 

ASX-listed Sovereign Metals is developing the Malingunde graphite resource in Malawi. The deposit has an enviable location in Malawi, close to key infrastructure, located just 15km south-west of Lilongwe, Malawi’s capital city. Furthermore, it is 25km from an operating rail, 20km from a major power substation, and has plentiful freshwater supply nearby.

The project’s economics is compelling across key metrics, including a relatively low stripping ratio and relatively low capital requirements and processing costs. Unlike its peers with resources in hard rock deposits, the presence of graphite in a soft saprolite means that the material would not require primary crushing or grinding, removing the need for a crushing or grinding circuit and thereby reducing the processing costs. Furthermore, the absence of sulphides offers tailings and waste management advantages.

In October 2018, the company negotiated an infrastructure term sheet agreement with the Central East African Railways (CEAR), an infrastructure and logistics consortium in which Vale SA and Mitsui & Co have significant ownership, with both parties also involved in the operational management of the transport facilities. The agreement covers the provision of rail, freight, port, and port handling services for the movement of about 100 000tpa of concentrates, providing upside to SVM’s initial target of 44 000tpa. It is envisaged that graphite concentrates will be shipped by mid-2018.

The company has the full backing of the Malawi government to progress the Malingunde saprolite-hosted graphite project to production.

SVM has confirmed an indicated and inferred saprolite resource estimate of 28.8 metric tonnes at 7.1% total graphitic carbon and a 4% cut-off, rendering the Malingunde Project as the largest reported soft saprolite-hosted graphite resource in the world. It has been further confirmed that its graphite has a strong potential to meet the specifications of major graphite end-user markets, including lithium-ion batteries.

Syrah Resources

Syrah Resources is developing the Balama Graphite Project, in Mozambique, which is regarded as a tier-one asset. The project is the only major, fully funded, natural graphite development project globally and will become the largest global producer orientated towards the battery market.

The deposit has the largest defined graphite reserve in the world, boasting 114.5Mt at 16.6% TGC or 19.9Mt of contained graphite, is amenable to opencast mining with a low stripping ratio, and envisages a conventional processing method.

The project is now heavily de-risked with the company having shipped its maiden production in late October 2017.

Other Africa-based graphite developers, explorers, and producers

Company Country Projects
Bass Metals Madagascar Graphmada graphite mine
Lithium Australia Madagascar BlackEarth Minerals
Triton Minerals Mozambique Grafex, Balama North, South, and Ancube,
CKR Carbon Namibia Aukam
Kibaran Resources Tanzania Epanko
Magnis Resources Tanzania Nachu
Volt Resources Tanzania Namangale
Walkabout Resources Tanzania Lindi and Kimoingan projects

Lithium

When one considers investing in a commodity market based on fundamental analysis, we prefer a demand-driven deficit market, rather than a supply deficit. When it comes to lithium, the market is facing a ‘perfect storm’ in that severe underinvestment in the sector has left severe supply constraints, while demand is unprecedented.

The lithium market is around 200 000t a year of lithium carbonate equivalent (LCE), which is a relatively small market by metal industry standards and around 1% of the copper market by volume. The expectation is that electric vehicle (EV) penetration rates will be 8%, which is one in 14 passenger vehicles. If you apply these assumptions with respect to types of battery chemistries and the lithium requirement, you get around 500 000 tonnes of LCE, or more than double current market supply.

It normally takes about seven years to bring a hard-rock producer into production, so how the industry plans to remedy the supply constraint within eight years is a real conundrum among investors. For this reason, lithium is garnering huge investor interest.

Supply of lithium by deposit type

Figure 5: Supply of lithium by deposit type. Image credit: Core Consultants

Lithium is extracted from two sources: brine and hard rock. Brine is found predominantly in South America, with 50% coming from Chile and Argentina. Most of the hard-rock lithium is mined from one large mine in Australia, Talison Lithium, which produced 65 000t of LCE in 2016.

Like with cobalt, China does not have any significant commercially viable lithium reserves. There was an investment by BYD into the Qinghai Salt Lakes recently, but this resource, while extensive, has complex geology and despite several attempts has failed to produce any significant volumes. As such, China will remain a net importer of lithium for its battery manufacturing facilities.

Supply of Lithim by Company 2017

Figure 6: The global producers of lithium. Image credit: Core Consultants

In 1997, SQM changed the lithium market when it commercialised the process of extracting lithium carbonate from brines. This relatively cheap source saw the price of lithium fall by 50%, driving hard-rock producers out of the game.

However, since then, lack of expansion from brine resources has meant that the industry has again turned to hard-rock potential. To this end, a number of producers have entered the lithium market, including Galaxy Resources and Neometal, which have been developing their respective resources since 2009.

Pilbara Minerals is the newcomer to the space, which boasts significant resources and has tied up supply agreements. Canada has pushed exploration, especially in the Quebec region, which has been very supportive of new mining juniors.

The US has been focused on the Clayton Valley in Nevada. This region used to be a leader in lithium production before the industry moved to Australia and then to South American brines.

Other promising sources include clays and there is also the potential to extract lithium from geothermal brines.

Tesla has made a play for Simbol Materials, a geothermal brine source, and Bancora Minerals in Mexico is another potential partner of Tesla. However, the automotive industry looking to invest in lithium sources is not new or unique to Tesla. Back in 2009, when I wrote my first book on the lithium market outlook, we had the likes of Honda and Toyota investing directly in acquiring lithium reserves to ensure its supply.

Lithium demand by application

Figure 7: Lithium demand by application. Image credit: Core Consultants

Going forward, we are at the cusp of a disruption in the traditional vehicle market. France and the UK have committed to going fully electric by 2040 and it looks as if China may follow suit. It is unlikely that new cathode material replacing lithium will be used and lithium batteries are sure to be the beneficiary of this new age of automotives.

Africa is endowed with underdeveloped hard-rock lithium deposits. Some projects currently being developed include the following.

Montero Mining and Exploration

Montero Mining has a well-established track record of bringing niche Africa-based projects to the market. Most recently in October 2017, the company entered into a letter of intent (LOI) with Frovio Investment, a Namibian company, to acquire up to 80% interest in its wholly owned Soris Lithium Project in the Soris pegmatite field in Namibia.

The Soris Lithium Project pegmatites were intermittently mined for tantalum and tin between 1960 and 1990. Montero has identified lithium-bearing spodumene mineralisation in a number of pegmatites and intends to confirm initial lithium grades of up to 5.6% Li2O with further sampling and mineralogical studies.

With respect to available infrastructure, Namibia is an enviable mining jurisdiction and the project is located about 220km north of Walvis Bay, Namibia’s largest commercial deep-water port. The project is located in the Erongo region and is connected by dirt and asphalt road to the Port of Walvis Bay.

Regarding contained lithium, the Soris Lithium Project reveals that the pegmatite hosts more than 30% spodumene by volume, with values of up to 5.6% Li2O obtained from grab samples. While we understand that a grab sample is not representative of the mineralisation, the fact that it has received these results, coupled with the tantalum grading from 1960 to 1990, warrants further investigation as to the project’s potential mineralisation.

Prospect Resources, Zimbabwe

ASX-listed miner Prospect Resources is developing a USD52.5-million lithium project in Zimbabwe, the Arcadia Lithium Project, which is speculated to become operational by next year.

Based on an initial reserve estimate of 15.8m tonnes and grading at 1.34% lithium oxide, it is believed that the project may be developed into a 1.2Mtpa mining and processing operation, with a life of mine of 15 years.

The concern of course is the jurisdiction in which the Arcadia deposit finds itself, which specifically arouses concerns as to whether the company will be able to repatriate its profits.

However, for now the project has no debt, is a near-term developer with maiden production expected within 12 months, and Zimbabwe is a proven jurisdiction for hard-rock lithium mining and the fifth-largest producer of lithium.

Other lithium projects under development in Africa

Company Country Projects
Brimian Mali Goulamina Lithium Project
LCME Botswana Botswana Lithium Project (“BLP”)
Kodal Minerals Mali Bougouni Lithium Project
Premier African Minerals Zimbabwe Zulu Lithium
Australian Vanadium South Africa Blesberg Lithium/Tantalum Project

Cobalt

Battery demand has become the single biggest use for cobalt. The limiting factor with cobalt is that it is produced as a by-product of either nickel or copper and there are no significant production hubs outside of the DRC. Therefore, cobalt is vulnerable to supply insecurity. This was seen in 2008 when cobalt prices increased from USD11/lb to 52/lb on the back of instability in the DRC.

The sheer number of projects in the graphite, cobalt, and lithium sectors suggests that African investment in the resource sector is alive and well, with investors willing to take on the risk. However, whether these projects will be fully realised largely depends on the policies of the particular host country.

About the author

Lara Smith is the managing director at Core Consultants.