After clinching a deal with a Chinese battery maker in 2016, James Brown figured bankers would be eager to fund his new lithium mine.
Altura Mining was racing to ship the raw material from Australia to the world’s biggest electric vehicle market as demand was surging.
Instead, while lithium prices kept rising, Mr Brown spent a Christmas holiday cold-calling lenders and jetted around the globe to raise the money. Eventually, Minneapolis-based Castlelake, a private equity firm, helped arrange $110 million in bonds. But there was a catch: an interest rate as high as 15 per cent, or almost double what banks normally charge for more conventional mining ventures.
“We’d been trying banks we’d known for years,” said Mr Brown, Altura’s managing director, who previously spent 22 years with coal producer New Hope. “They said: Guys we love it, we just don’t have a mandate [for lithium]. If you came to us with coal, gold or iron ore, you’d have no worries.”
Despite bullish forecasts for global demand - especially with accelerating production of electric vehicles - lithium may have a funding problem. Banks are wary, citing everything from the industry’s poor track record on delivering earlier projects to a lack of insight into a small, opaque market. Without more investment, supplies of the commodity could remain tight, sustaining a boom that already has seen prices triple since 2015.
Lithium companies will need to invest about $12 billion to increase output fivefold by 2025 and keep pace with the world’s growing appetite for batteries, according to Galaxy Resources, an Australian producer seeking to build further operations in Argentina and Canada. Developers say that, so far, projects aren’t getting financed fast enough to achieve that leap.
Battery producers and car makers “have absolutely no clue on how long it takes to be able to put a mining project into operation”, said Guy Bourassa, chief executive of Nemaska Lithium., which spent about 18 months piecing together a complex $830m funding programme for a mine and processing plant in Quebec. “There will be a big problem - it’s going to be an impediment” to raising supply, he said.
An “inability to access traditional funds has delayed the development of the sector”, said Richard Seville, CEO of Brisbane-based Orocobre, which began lithium sales in 2015 from northern Argentina, and experienced difficulty boosting output. “These projects aren’t easy -- so the banks just don’t want to go there.”
Part of the problem is that lenders remain cautious of the risk of another commodity slump, Commonwealth Bank of Australia, the nation’s largest bank, said in an August presentation. It declined to comment specifically on the lithium market.
While the amount of debt raised by miners, including loans and bonds, rose in 2017 to about $255bn, project-specific financing of about $13bn last year is more than 70 per cent lower than in 2014, according to data compiled by Bloomberg. So far this year, about $6.1bn in total has been issued for projects.
Some new deposits are being developed in riskier emerging markets or countries on the edge of investment-grade credit ratings, such as Argentina, according to Lee Garvey at Marsh & McLennan, an insurance broker that has seen an increase in requests for polices related to lithium projects.
“With lithium, there is the added complexity that there is not much clarity around the end product and what the royalty should be,” Mr Garvey said from Singapore, where he’s head of Marsh’s lenders solutions group, political risks and structured credit in Asia. “This probably makes the whole thing more challenging, particularly in frontier markets.”
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There’s also concern about pricing. Australia & New Zealand Banking Group has no project finance exposure to lithium. It’s considering opportunities on “a very selective basis given the uncertainty over future prices, exacerbated by the opaque nature of the market, the inability to hedge and forecast oversupply in the medium term, and the small scale of some of the local players”, the bank said.
Developers of some lithium projects declined in Tuesday trading in Sydney. Lithium Australia NL fell 5.1 per cent, Global Geoscience Ltd. traded 5.3 per cent lower and Kidman Resources slipped 3.7 per cent.
It typically takes two years to build a lithium operation and five years to repay the project loan, according to Simon Price, a partner and co-founder at Perth-based Azure Capital, which has advised miners on financing. That means lenders need confidence in a seven-year outlook for the market, he said.
That price outlook is an industry flash-point. Morgan Stanley says there will be a surplus as soon as next year because of rising output and forecasts lithium carbonate prices to halve through 2021, according to a note. Citigroup also expects prices to decline as production increases.
But boosting supplies may not be easy. By 2020, it’s possible that only a third of planned new capacity will be available at the processing plants needed to convert mined raw materials into battery chemicals, Orocobre says. Lithium demand is also being underestimated, according to Pilbara Minerals, a producer starting a mine in Australia.
Some alternative funding sources for lithium have emerged, including hedge funds offering higher-yield debt or credit funds formed to lend to projects. They’re more expensive, but “you build your project and you are in business now when the market is very strong”, Mr Price said. The sector’s biggest players are readying an IPO blitz, in part to fund expansions.
Lithium users also are stepping in with funding. Posco, the South Korean steelmaker that’s ramping up its battery-making business, and Great Wall Motor, China’s top 4x4 producer, have both invested in Pilbara Minerals to speed up project development. Tesla in May signed a supply deal with Kidman, a boon for the Australian developer as it seeks to finance a mine and plant.
Supply deals and investments with end customers mean lithium projects are being financed differently from traditional commodities, according to Westpac Institutional Bank, a unit of Australia’s second-biggest lender.
Some banks are lending. Perth-based Galaxy last year secured a $40m general purpose debt facility with BNP Paribas. BNP declined to comment on its stance on lithium projects. As new developments begin output, banks will be more willing to refinance loans, according to Mr Price. Altura will seek to replace existing debt as soon as August, says Mr Brown.
Still, electrifying the world’s vehicle fleet will require vast sums for new mines, and funding will remain a challenge for smaller companies, according to Nemaska’s Bourassa.
Volkswagen alone plans to spend $58bn on batteries as it seeks to build electric versions of 300 models.
“Imagine how many tons of lithium salts it takes to make those batteries,” Mr Bourassa said.
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
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