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.”