China’s Chilean entry raises doubts about lithium price outlook

By Frik Els

Believers in the lithium sector’s brilliant future had their faith questioned on Thursday after China’s top miner of the battery raw material bought a stake in Chile’s SQM at a price below market expectations.

SQM (NYSE:SQM) trading in New York in the form of ADRs lost as much as 7% of its value dropping the market worth of the company below $15 billion.

Tianqi Lithium Corp is buying a 24% stake in SQM from Canada’s Nutrien (TSX:NTR) for $4.07bn in a long anticipated deal that was seen as a litmus test for the burgeoning battery market. Investors, which had hoped the company could acquire the full 32% interest Nutrien is disposing, pushed Tianqi shares listed in Shenzen (SHE:002466) down 2%.

World number two miner Rio Tinto was also said to be in the running to buy an interest in SQM, but the Anglo-Australian diversified miner is likely to focus on its 100%-owned lithium and borates mineral project in Jadar, Serbia, which is still in the early stages of development.

The deal was against the wishes of the South American nation’s development agency Corfo which contends the two companies will be too dominant in an industry that’s already controlled by a handful of big players. SQM supplies around a fifth of the world’s lithium carbonate and Tianqi 17%.

The deal was against the wishes of Chile development agency Corfo which contends the two companies will be too dominant in an industry that’s already controlled by a handful of big players

Today’s transaction may weigh on FMC Corp’s planned IPO in the fourth quarter of this year. The US company is spinning off its lithium operations centred in Argentina which constitutes less than a tenth of its overall business and plans to offer as much as 20% to the public.

China’s Ganfeng, which is also a dominant player in battery production and recycling of lithium, has filed for an IPO in Hong Kong hoping to raise not less than $1 billion.

Lithium carbonate prices have been drifting lower from highs in December but remain around the $20,000 level a tonne from $6,450 per tonne at the beginning of 2015.

The direction of lithium prices has attracted widely diverging views. While analysts agree that the booming electric vehicle market will dramatically boost demand, bears contend that a massive supply response could swamp the market.

Unlike cobalt, another crucial battery ingredient, lithium is abundant and existing brine producers in South America have the capacity to quickly increase output. Combined with many hard-rock projects coming on stream in Australia, last year’s roughly 220kt of production could more than triple within less than a decade.

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