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As Lithium Scramble Continues, Here Are 2 Players to Watch

- By George Ronan

Goldman Sachs Group Inc. (GS) recently referred to lithium as the new gasoline.

Lithium, a reactive, lightweight metal, is used industrially to create heat-resistant glass, ceramics, lubricants, polymers and is used as part of the steel and aluminum production process. In the field of medicine, it is one of the most widely used medications for treating bipolar disorder, believed to help strengthen nerve cell connections in the brain and help regulate mood, thinking and behavior.

The real growth potential, however, and the reason the lithium industry is drawing so much attention, media and otherwise, is the exponential growth in demand for lithium ion batteries (LIBs) as driven by their roles in transportation (electric vehicles or EVs) and renewable energy (grid storage).

These two arenas will significantly impact the demand for lithium over the next decade, simply because the type of LIBs used in EVs and grid storage utilize considerably more lithium than those used in smaller electronic devices or for industrial purposes (i.e., the current technologically driven demand).

According to Credit Suisse, demand for lithium could outstrip supply in 2020 by 25%. At that point, analysts expect global lithium demand to exceed 380,000 tons, reported as lithium carbonate equivalent (LCE). Demand was around 190,000 tons in 2014, which equates to 100% growth in demand over a six-year period. As we will discuss in a little more detail below, much of that growth will come from LIBs.

With the mounting growth of EVs, we're in the midst of something of a revolution. Worldwide, many countries are focused on cutting carbon emissions and using clean energy as a matter of policy. Major auto manufacturers are currently producing EVs or are in the process of developing them. Further, but just as importantly, tech giants like Alphabet Inc. (GOOG)(GOOGL) and Apple Inc. (AAPL) are tooling up to enter this booming market with their own EVs, which could reshape the automotive industry beyond recognition.

On a grander scale, nations such as China are investing in LIB-powered transportation systems - a prime example being the latter's electric trains into which the government has already invested hundreds of millions of dollars and for which this sum accounts for just a fraction of total planned spend across the next 30 years.

This is all happening now, and there are a number of opportunities to take advantage of the movement in the public markets.

After the projected EV market, the second-largest source of demand for lithium is rooted in energy storage. An inherent problem with renewable forms of energy is storing this energy for later use - that is, when the sun is not shining on solar panels or when the wind is not powering turbines. Grid storage is helping to change that.

Grid storage makes it possible to store the electrical energy that is generated through solar or wind power, which can then be utilized on demand as and when required. As this worldwide movement toward greener energy continues, LIB-powered grid storage could alter the entire energy infrastructure in the U.S. and elsewhere in a robust yet affordable manner. With regards to the numbers, just as is the case with EV-related lithium usage, grid storage is projected to skyrocket. Green Tech Media expects grid storage capacity in the U.S. to reach more than 800 megawatts by 2019.

So where are the opportunities?

Anyone with even a minor interest in lithium or LIBs will be aware of and quietly monitoring the development of a number of projects and prospects in Nevada. Rooted in its Clayton Valley producing real estate, industry insiders regard Nevada as a lithium hot-spot. The U.S. Geological Survey (USGS) has called the just mentioned Clayton Valley the best known deposit in the world.

Clayton Valley isn't the only area of focus, of course. Areas such as the Great Basin region, East Nevada, have been demonstrated to hold sizable deposits by the USGS.

So, before we take a look at some companies with a focus is in Nevada's lithium regions, let's consider lithium production from a logistical standpoint.

Producers can extract lithium using two different methods. The first is the more traditional method, rock-based lithium drilling, which is a process similar in cost and process to metal mining. It involves expensive exploration efforts to ascertain resource estimates and potential, and equally extensive capital resources to fund the mining and processing of the resources in question.

Second - and from an investor standpoint our preferred method - is a process called brine extraction.

Far more cost-effective, lithium brine extraction allows for, simply, easier access and extraction of the mineral. The process involves first pumping the brine into evaporative ponds; then, over 12 to 18 months, brine concentration increases to 6,000 ppm through solar evaporation. When the lithium chloride reaches optimum concentration, the liquid is pumped to a recovery plant and treated with soda ash, precipitating lithium carbonate. This is then filtrated, dried and shipped.

That said, let's get to some potential exposures.

First up, Pure Energy Minerals Ltd. (PE.V).

The company has secured more than 9,300 acres of claims in Clayton Valley. What makes this particularly relevant to the market is that its land is adjacent to the only active lithium mine in all of the U.S., the Silver Peak Mine, currently operating and producing under the watch of lithium and chemical behemoth, Albemarle Corporation (ALB).

Recent tests conducted by Pure Energy show that the chemical composition of its claims' brine is similar to the brine chemistry of its neighbor, demonstrating that the geological makeup of Pure Energy's claim will, because of its proximity to the Silver Peak Mine's proven lithium source, likely posses similar, large amounts of LCE.

The Silver Peak Mine is one of the oldest lithium mines in the world, having been in operation since the 1960s. Given that this location is a tried and tested commercial lithium producer, Pure Energy's chances of a succesful commercialization run look good, and initial exploratory efforts seem to reinforce this suggestion. According to the company's exploration data, the project may hold lithium resources of more than 800,000 metric tons of LCE. With these numbers as leverage, Pure Energy has been able to sign a conditional agreement to supply lithium hydroxide to Tesla Motors Inc.'s (TSLA) Gigafactory for a five-year period once it kicks off production at the site.

The importance of such a partnership for a company like Pure Energy, which has a current market capitalization of just $44 million, needs no explanation.

Next, let's look at Horizon Minerals Corp. (HZNM).

Horizon is currently actively involved in the identification of potential lithium resources in Nevada. This one is an early stage exposure, but with similar focus (lithium brine extraction) and target location (Nevada) as Pure Energy. Given that the major players in the space (i.e. those that are likely to be the major absorbers of supply in the near future) are already staking claims, Horizon is a potential rights-deal or takeover target, and further, that this makes it an attractive addition to this list and - in turn - a junior lithium portfolio.

The company has an agreement in place with an entity called Gold Exploration Management, which is basically an exploration consultant entity. It has a track record of identification in Nevada, and it's going to help Horizon identify and negotiate claims to what it deems the most promising resource areas in the state.

Further, and subsequent to the company announcing it had taken on the services of Gold Exploration, the company announced that the latter's CEO, David Bending, had joined Horizon's board of directors, and had transferred the rights to 1,003 claims covering 20,600 acres of land in the Great Basin region of Nevada in return for 30 million restricted shares of the company's common stock and a 2% carried gross production royalty on any mineral production. This is important because the low royalty rate roots the vast majority of Bending's interest in the growth of Horizon's market capitalization.

To put this another way, it suggests he has faith that the region can produce successfully, and that this production will be substantial (and economical) enough to boost Horizon's share price going forward.

Of course, an investor's faith in Bending is important here, and he's got the track record to reinforce his opinions. He serves on the board of directors, of Mahdia Gold, a leading gold exploration company with active prospects in South America, and a company for which he once served as president. He has served as exploration manager for Homestake Mining, which was once one of the largest mining operations in the U.S., and still is, counting legacy assets but doesn't hold the title since it merged with Barrick Gold Corporation (ABX) back in 2002.

More recently, and lending credence to the strength of Horizon's leadership, the company just announced two more major hires. The first, a former diplomat and now energy conservation lawyer and consultant, Gilberto Arias, to its board of directors. The second - and a hire that is indicative of the company's forward plans - is the addition of former Mexican Minister Francisco Alfonso Flores Aguirre to the company's advisory board.

Flores has agreed to serve as an advisor to the company in its Mexican operations, which points to an expansion in exploratory efforts beyond Nevada, which should secure further claims medium term.

Why focus on smaller, younger companies like Pure Energy and Horizon?

Consider this.

Currently, the lithium supply is oligopolistic - four companies pretty much control the entire global supply. There is an ongoing a scramble to secure rights to future supply, so much so that the companies involved are wiling to take a punt on producers that might not ever reach economic production. We don't see this in the gold space - a punt on a gold explorer is just that, a punt.

In lithium, right now, however, companies like Tesla are taking the punts on our behalf, and we've just got to identify those companies that are most likely to attract the big names. Companies that can benefit from sharp upside revaluations without ever reaching production, based on the securing of what essentially amount to futures contracts between them and LIB demand entities.

These companies are the under the radar explorers that are securing claims, which they can then explore, put some resource estimates together and use these estimates as leverage in negotiations with the companies that are going to need large scale supply over the next decade and beyond. Pure Energy has already done just that, and Horizon could very easily be next.

Disclosure: The author is long Tesla.

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