As EVs take over the world, the booming sector is facing yet another hurdle: nationalization of critical lithium supplies by mineral rich countries. Battery makers have scrambled to secure lithium supply through off-take arrangements in safer jurisdictions. Will this spur a boom in lithium exploration stocks, particularly those with assets in nationalization-free locations?
Mexico’s new law declares that lithium “is an asset of the nation and its exploration, exploitation, extraction and use is reserved in favor of the people of Mexico.” Specifically, no new concessions for the mining of the metal will be issued to foreign or private companies.
Bringing further uncertainty to the industry, Mexican President Andrés Manuel López Obrador also announced that all existing lithium contracts would be reviewed, contradicting previous comments in which he promised not touch licenses already granted if exploration work had already begun and all other license requirements have also been met.
The move threatens Bacanora Lithium, Mexico’s only viable private lithium mine that had been expected to start production in 2023. It is currently owned by Chinese lithium giant Ganfeng International. China, a major player in Mexico’s infrastructure and commodities sectors, has been noted by observers to be “very concerned” over Mexico’s nationalization plans.
In March, Chile’s constituent assembly, in charge of writing the country’s new Constitution, also approved an early-stage proposal that some would say is a step towards nationalizing some of the world’s biggest copper and lithium mines. The motion by the environmental committee received 13 votes in favour with three against and three abstentions. While true nationalization will require further votes from the full assembly as well as a referendum, the constituent assembly’s proposal clearly spells out the country’s plans:
“…strategic resources such as copper and lithium should serve the interest of all Chileans and therefore be incorporated into the full and exclusive domain of the state.”
Resource nationalization typically has occurred with populist governments seeking to shore up support prior to major elections. Nationalization of mining companies can also occur typically when there is a clear financial benefit for the particular government. This can be more likely when one or a few commodities account for a large part of a country’s economic activity and the tax base.
While the impulse for governments to nationalize may be strong, recent studies of nationalizations in South Africa’s mining industry have shown that nationalizing the resources sector can undermine support for those very market-based institutions required to achieve a higher long-run growth trajectory.
The lithium market is fairly closed as most of the world’s current lithium output is locked in long term deals as downstream chemicals producers, battery makers and electric vehicles makers have frantically secured future supply.
Recently, Tesla (NASDAQ:TSLA) signed five-year supply agreement with Australia’s Liontown Resources (ASX:LTR), which will provide the electric vehicle (EV) giant with more 100,000 tonnes of lithium spodumene concentrate a year, starting in 2024.
In October of last year, Sigma Lithium and LG Energy Solution signed a milestone six-year binding term sheet for lithium offtake agreement. The six-year offtake for battery grade lithium concentrate scales from 60,000 tons per year in 2023 to 100,000 tons per year from 2024 to 2027 subject to Sigma Lithium and LGES signing a definitive agreement in the future.
As battery makers are scrambling to deal with the wave of resource nationalism, investors should pay attention to lithium exploration stocks operating in safe jurisdictions.
United Lithium Corp. is an exploration and development company identifying lithium projects in Finland, Sweden and Canada. The company’s stated mission is to work in politically safe jurisdictions with advanced infrastructure that allows for rapid and cost-effective exploration, development and production opportunities.
Disclaimer: The company described in this article is a customer of NAI Interactive Ltd. This material is for informational purposes only and is not intended as a recommendation or offer or solicitation for the purchase or sale of any securities or financial instruments, or for transactions involving any financial instrument or trading strategy.
