Lithium Royalty Corp is a company focused on acquiring and managing royalties on lithium mining assets, aiming to capitalize on the growing demand for lithium in the electric vehicle and renewable energy markets.
Could you tell us a little bit about you and what brought you to Lithium Royalty?
I have been focused on lithium for over a decade. My career started as a research analyst in New York at Credit Suisse, where I covered the chemical sector, including companies like Rockwood and FMC. In 2014, I wrote a primer on lithium for Credit Suisse, which was my first in-depth exposure to the commodity. We had a bullish view on lithium back then, and fortunately, our supply-demand forecasts turned out to be accurate. This early involvement gave me the "lithium bug," recognizing the huge demand cycle from electric vehicles and battery growth.
After that, I joined an investment fund in Connecticut. In 2016, during a site visit in Argentina, I met Blair Levinsky, who co-founded Waratah Capital Advisors, the main sponsor behind LRC. We stayed in touch, and in 2017, Blair approached me about starting a group focused on lithium royalties. Along with our third co-founder, Mark Wellings, we launched the company in 2018, aiming to be the leading capital provider in the lithium sector. Fast forward to today, we are the largest public lithium royalty company, having completed the only IPO on the TSX last year and continuing our growth with multiple transactions since then.
Is it easier for juniors to access financing today than when you first got familiar with the industry?
I would say it is easier, but it is all cyclical. We are past the bottom of the cycle but still near the lows, making it tougher than a couple of years ago, though easier than in 2017. The industry is now three to four times larger, making it more visible with more capital providers involved. This year, the market is expected to exceed a million tons of lithium carbonate equivalent.
The growth of the lithium market and its increased visibility have attracted more capital providers, making it easier for juniors to secure financing. However, compared to the high point in 2022, it is still more challenging.
What differentiates the lithium space from that of other metals, from the point of view of a royalty company?
One key difference is the demand profile for lithium, which is among the best in class compared to other commodities typically financed by royalty companies. Lithium's growth rate is projected to be between 20-25% over the next decade, whereas other commodities usually align with GDP growth. The sheer growth of the lithium sector is a significant differentiating factor.
Additionally, over 100 new lithium mines need to be built by 2030, highlighting the large volume of mining expertise and development required. Lithium assets also tend to have long asset lives, particularly the ones we focus on, further differentiating them from other traditional mining sectors. These growth drivers and long asset lives make lithium a unique and attractive commodity for royalty companies.
You currently have three underlying assets in production. Can you briefly tell us about each of them?
Indeed, we have three producing mines: Mt. Cattlin from Arcadium, Core Lithium in the Northern Territories, and Sigma Lithium in Brazil. Our story is unique, as we have been generating revenue from day one, starting with the Mt. Cattlin royalty acquired from Red 5 in 2018. This asset has paid us more than its initial cost, showing the optionality in our business model.
Sigma Lithium in Brazil is the largest lithium producer in the country, with significant growth potential. When we invested, it had a 13-million-tonne resource; today, it is over 100 million tonnes. Core Lithium, the only lithium producer in the Northern Territories, Australia, has faced some challenges but plans to restart mining soon. These assets showcase our pioneering capabilities and potential for continued growth in the sector.
You also have a number of projects in development phase in your portfolio. Can you highlight a few key ones?
One of our key projects is Winsome Resources' Adina property in Quebec. We were early supporters in their IPO and hold a 4% royalty on the Adina project, along with a 2% NSR on the core part of the claims. The resource has grown to approximately 78 million tonnes, making it one of the largest in Quebec. Winsome Resources is well-financed and progressing the project rapidly, with plans to release a technical report in the second half of this year and increase the mineral resource in the first quarter of 2025.
Additionally, we are excited about the potential at Yinnetharra, led by Delta Lithium in Australia. We have a 1% royalty on this project. They announced their mineral resource in December last year and are undertaking a 150,000-meter drill campaign, one of the largest lithium campaigns globally. A scoping study is expected in the third quarter of this year, which should highlight the project's significant scale. Both projects are in favorable jurisdictions, Canada and Australia, making them particularly promising for us.
You refer to the transition to electric vehicles (EVs) as a global megatrend. Are you confident that it is indeed a megatrend that will persist?
Yes, we believe it is a megatrend, driven by affordability and improving technology. In 2010, battery costs were around $1,000 per kilowatt-hour, but last year it was about $135 per kilowatt-hour, with some producers in China below $75-80. This trend towards lower-cost batteries is making EVs more affordable, driving consumer preference for EVs over internal combustion engines.
For instance, last year, two-thirds of electric vehicles in China were cheaper than their internal combustion counterparts, leading to significant growth in the EV market there. We expect this trend to continue, especially as more affordable EVs are introduced to Western markets. Despite recent demand fluctuations, we remain confident in the long-term growth of the EV market, with projected 28% growth in the lithium market this year, indicating strong underlying demand.
What is the reason behind the volatility of the price of lithium?
The volatility in lithium’s price is primarily due to it being a nascent and rapidly growing market. In 2024, we will surpass a million tons, but compared to markets like copper or nickel, it is still relatively small. The market's annual growth rate of over 20% also contributes to the volatility. Additionally, mine financing typically aligns with favorable capital market conditions and high lithium prices, leading to supply being added in a step function. This timing of supply additions can impact prices significantly.
For instance, from 2017 to 2020, prices dropped by 80%, only to surge over a thousand percent in the spot market later. At Lithium Royalty, we model and invest with a long-term perspective to ensure profitability regardless of short-term price fluctuations. The market is maturing, evidenced by the introduction of new futures exchanges like L&E and the Chicago Mercantile Exchange, which will enhance price transparency and stability over time. However, we are still experiencing the growing pains of a small but fast-growing market.
Is there a possibility that supply will eventually outmatch demand significantly?
Yes, depending on the time horizon, there could be periods where supply outpaces demand. However, over the balance of the decade, we anticipate a balanced to tight market up to 2030. The industry needs 300,000 additional tonnes of demand annually, equating to 10 to 12 new mines per year operating at full capacity. Given the rising costs across the industry, this is a significant challenge. Recent U.S. producers reported CapEx intensities of $70,000 per tonne, while the current spot price is $15,000, indicating that current prices are below reinvestment levels.
Major producers have noted that current prices do not support substantial supply growth in the next two to five years. While there are cyclical dependencies, we expect a relatively balanced market in the long term, especially considering the market's growth rate of 20-25% per year. We are to see demand increase from one million tonnes to three million by 2030, highlighting the need for sustained supply growth.
What would you pinpoint as the main challenge for Lithium Royalty?
One of the main challenges has been navigating macroeconomic factors since going public. We went public in March last year, and by the end of 2023, lithium prices had declined by 70%. Elevated interest rates also impact us, as they reduce the discounted value of cash flows. Despite acquiring additional assets and receiving positive news, the challenging backdrop of declining prices and high interest rates has been a significant headwind. However, we believe these macroeconomic conditions are turning into tailwinds, with central banks easing and lithium prices stabilizing.
Another challenge is increasing awareness and marketing of our company. As a new public entity, we need to grow our presence and ensure investors know about us. Recently, during a trip to Europe, we realized many people were unaware of our existence. We are committed to improving our visibility and are excited to share our story with a broader audience. Speaking with you is part of our effort to reach more people and highlight our achievements and potential.
What are your strategic priorities for the next couple of years? Do you envisage new acquisitions in different geographies?
Yes, we aim to be the best-in-class capital allocator in the lithium sector, becoming the go-to provider of capital in lithium. We have already built a strong brand, with companies actively seeking our involvement in their capital decisions. We plan to remain aggressive in pursuing growth opportunities and maintaining momentum. Over the next three to five years, we expect to see many more mines in our portfolio coming into production. Currently, we have three producing mines, with three more expected by the end of the year, and additional ones in 2025 and 2026.
Our goal is to generate significant free cash flow, enabling us to fund acquisitions and potentially return capital to shareholders, enhancing returns. We see a significant inflection point in the second half of this year as we increase from three to six producing mines, transitioning to a free cash flow positive enterprise. This transition should be a major catalyst for our continued growth and success in the sector.
