One of the world’s biggest battery makers is moving aggressively into lithium mining with its new deal to buy two lithium carbonate salt lakes in South America
• Ganfeng Lithium is spending nearly $1 billion on two lithium carbonate-producing salt lakes in Argentina
• Deal would see Ganfeng take full ownership of little-known Dutch-owned mining explorer Lithea Inc., in one of the company’s biggest acquisitions to date
By Andrew Curran
Lithium continues to have its moment in the sun, trading near record highs as demand for the once exotic soft metal soars on booming demand for batteries used in a new generation of clean energy products. For companies in the sector, the boom has bought a dizzying mix of profits, acquisitions, and crossed fingers that the good times will last. One of China’s leading producers, Ganfeng Lithium Co. Ltd. (1772.HK), has been flexing its checkbook this year on various M&A, and hit the headlines again this week with its latest big-ticket buy.
The Jiangxi-based company announced it will purchase Argentinian miner Lithea Inc. in a deal worth up to HK$7.75 billion ($962 million), in what would become one of the company’s biggest purchases to date. Best known as a battery maker, Ganfeng is moving to become the world’s leading end-to-end lithium company, doing everything from mining and production through to sales and distribution of both the metal and the batteries that are its main application.
The Lithea acquisition locks in an integral part of that ecosystem – owning lithium mines. Ganfeng is no stranger to Argentina or lithium mines. The company already owns the Mariana lithium-potassium brine project and the Cauchari-Olaroz project in Argentina. That’s in addition to lithium extraction projects in various stages of development and production in Mexico, Australia, and China.
The Lithea assets use brine in salt lakes to produces lithium carbonate, a key raw material used to make lithium battery cathode materials. In a filing with the Hong Kong Stock Exchange announcing the deal earlier this week, Ganfeng said the purchase would secure lithium supplies, develop self-sufficiency and vertical integration, and build its core competitiveness.
The purchase also represents a big payday for Lithea, which explores and develops lithium mining rights. Lithea’s ultimate owner is Netherlands-registered PlusPetrol Resources Corp. BV, a privately held oil and gas company. Pluspetrol Resources is getting a huge return with its sale to Ganfeng, having purchased Lithea for just $85 million three years ago before the recent explosion in lithium demand. The Ganfeng transaction represents a 1,100% return for the Dutch company on that deal.
Investors seemed to worry that Ganfeng might be overpaying for the asset, sending the company’s Hong Kong-listed stock down 7.5% in the first four trading days this week. The stock could yet recoup some of those losses if sentiment improves, after the company issued a positive profit alert late Thursday saying its profits improved “significantly” in the first half of the year on skyrocketing prices for lithium and booming demand for lithium batteries.
Ganfeng is saddling up in hopes of riding a clean energy bandwagon to riches by tapping into the global transition from fossil to renewable energy – mostly solar and wind. The big challenge for electric vehicle makers and renewable power operators is energy storage, which is where Ganfeng’s batteries come in. And a key component of those batteries is lithium carbonate.
Demand from new energy power products and vehicle makers is driving investment in the battery sector, which is driving demand for lithium and propelling lithium prices. That’s providing a revenue bonanza for companies already in the sector with lithium assets.
Lithium carbonate currently trades around $70,500 per ton, off a historical high of just over $74,000 per ton earlier this year but still a four-fold increase on the price one year ago.
Flush with cash, Ganfeng can afford to go shopping, even if the asking price for its latest purchase is almost $1 billion dollars. Earlier this year, in a much smaller warmup transaction, Ganfeng purchased a 16.7% stake in tantalum and niobium producer Ximei Resources Holding (9936.HK) for HK$240 million ($31 million). Ganfeng said funding for the much-larger latest deal includes, but is not limited to, the company’s own funds.
Lithium carbonate, also known as lithium salt, comes from underground brine pools where mineral-rich water is pumped to the surface to be evaporated, leaving the miners to scrap and process the residue into lithium carbonate. A long north-south production belt in South America is the source of most global supplies of the metal.
The two salt lakes involved in Ganfeng’s latest transaction are around 250 kilometers west of the Argentine city of Salta and are Lithea’s two main assets. Those lakes, Pozuelos and Pastos Grande, are on around 13,500 hectares of land held by Lithea via an assortment of mining and exploration licenses with no expiry dates.
While Ganfeng is understandably bullish about the acquisition, it acknowledges the risks associated with assets that have yet to produce anything. After ponying up almost $1 billion dollars, there’s no guarantee the lakes will produce the forecast amounts. And since mining has not started yet, all forecasts are based simply on the word of consultants.
Ganfeng also notes the inherent risk of working in a foreign jurisdiction. It says if Argentina changes existing rules on mineral products, miner qualifications and environmental protection, among other things, the two lake projects may not be the revenue-generating machines the company is hoping for. But Ganfeng’s board is betting that won’t happen.
The company thinks the two lakes can produce 30,000 tons of lithium carbonate annually once mining starts, rising to as much as 50,000 tons if more optimistic targets pan out. Ganfeng says that the resource amount, quality, and capacity expansion potential of the two lakes is “excellent” and will be among Argentina’s biggest lithium salt lake projects.
When undertaking due diligence, Ganfeng’s external consultants compared the 30,000-ton target from Pozuelos and Pastos Grande against nine other lithium carbonate producers in Argentina. They found only one of those, the Lithium Americas Corp.-owned Cauchari-Olaroz salt lake, is producing more than 30,000 tons per year.
While Ganfeng has benefitted from booming lithium prices and demand for its batteries, its shares haven’t reflected that boom lately. The company’s Thursday close of HK$76.85 is down sharply from its 12-month high of over HK$132. While some financial analysts say the good times are only just beginning for lithium miners and battery makers, others say the rush into lithium is artificially inflating the price, and that won’t last forever. That latter sentiment, which would argue a correction could be coming for lithium prices, may be curbing enthusiasm for Ganfeng’s aggressive move into the lithium mining sector.
Ganfeng’s price-to-earnings (P/E) ratio of about 16 comes in significantly lower than local competitor Tianqi Lithium (9696.HK; 002466.SZ), whose China-listed stock has a P/E ratio of 33. International lithium miners like Pilbara Minerals (PLS.AX) and Albemarle (ALB.US) have even higher P/E ratios of about 82. Leading Chinese battery maker CATL (300750.SZ) also trades at a similarly inflated P/E ratio of 78 – suggesting Ganfeng could be significantly undervalued at its current price.
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