Lithium variousDynamics

Hallgarten & CompanyChristopher Ecclestone19 October 2010

10/20/10 2

Not so simple

The Lithium wave may have washed over markets in recent years but the product is not new..

Amongst other things we would note:

The US has been an important producer in the past.. Both from spodumene in North Carolina and brines in Nevada (the latter are being expanded at the current time)

Zimbabwe was the world’s largest producer….but that was back in the days before lithium had much demand beyond ceramics

Argentina has been a brine lake producer for years in the form of FMC

Lithium exists in numerous places (mainly in spodumene form, brine occurrences are less widespread)

Certainly “more rare then Rare Earths”

10/20/10 3

The Cartel

There is nothing as broken as a cartel once it comes unglued. They can go dysfunctional and yet survive (e.g. OPEC). However, once production outside the cartel exceeds that within discipline starts to break down.

Cartel Rules?!

All big players must be within

If there is a major player outside then the cartel breaks down

Price discovery is the enemy of cartels

Lithium being quoted (e.g. LME) would start cartel erosion

What might happen

Stealth erosion (spodumene players converting into lithium producers

Increased price discovery (LME et al.)

Vertical integration (trade buyers securing exclusive offtake)

10/20/10 4

Sweet Spot?

There could very well be a sweet spot for lithium pricing

The cartel thus far has maintained prices that reward themselves handsomely

They may sabotage (or have been sabotaging) prices to deter new entrants

If a “right price” is established demand may expand faster

Alternative technologies may be permanently thwarted (or delayed for a long time)

Price war is a possibility.. But probably too late..

10/20/10 5

Vertical Integration

As per our long-held thesis, we expect (smart) end-users in most metals consuming industries to seek out secured supply…… I.e. vertical integration

A key truism: The Japanese and Koreans do not want have control (in absolute contrast to the Chinese attitude).. Thus JVs, sizeable percentage offtake agreements and large minority stakes (as well as funding agreements) are going to be the norm

Imagining one’s company is going to be taken over will be a fantasy for almost everyone in the space

This process will also erode the cartel, removing some of its best clients

10/20/10 6

Parting shots

The space is overcrowded. Rare Earths can support as many players as there are.. Lithium cannot..

Expect Rincon to be taken over.. Probably by a cartel member

Expect all Australian (spodumene) players to become mine-to-market, probably in next two years

Hopefully a transparent spot market will evolve

Bolivia may be the producer for the 22nd century

Recycling will appear when a large enough pool of used lithium products is available (but only if prices are high)