People-projects-capital are the three pillars of the mining business, according to Teck Resources founder Norman Bell Keevil. The formula is a simple but effective high-level filter to identify promising early-stage mining opportunities.
I was reminded of the formula with the emergence of Brian Paes-Braga as the CEO of Royce Resources, a new lithium exploration play. At 27, Paes-Braga is one of the youngest CEOs of a publicly traded junior miner.
In his early 20s, Paes-Braga transitioned from a stockbroker's assistant to vice-president and partner with an independent brokerage house to, most recently, managing director of a venture capital focused investment bank. He has climbed the ranks swiftly while maintaining a reputation as a client-focused professional with strong relationship-building skills.
One such relationship Paes-Braga fostered was with mining magnate Frank Giustra, whom he met at a party last summer and “clicked” with. Giustra, a Tesla fan, and Paes-Braga began to look at opportunities and that led to a partnership in the lithium exploration business.
With the beginnings of a lithium bull market emerging in recent months, Paes-Braga resolved to get a handle on the soft metal’s fundamentals. Shares of Nevada lithium play Pure Energy Minerals had appreciated 4X, Tesla was announcing plans for the Gigafactory, and Benchmark Mineral Intelligence had made a stop in town.
What Paes-Braga and his team discovered was a compelling opportunity driven by supply and demand fundamentals. About 90% of global lithium production is controlled by four players who essentially form a lithium cartel: Albemarle Corporation, FMC Corp, SQM (Sociedad Quimica y Minera de Chile) and Chinese lithium giant Sichuan Tianqi Lithium Industries.
Lithium is a lightweight, versatile metal used in everything from lubricants and medicines to stoves and fireworks. But its highest-profile use is lithium-ion batteries for electronics, electric vehicles, and energy storage. Electric vehicles use 44 pounds of lithium carbonate, compared to just an ounce in iPads and laptops.
According to a recent article by lithium expert Joe Lowry, demand for lithium hydroxide is set to double between now and 2020. The increase will be driven largely by the battery market, and Lowry says the big producers are not positioned to keep pace with demand. Market participants see electric vehicles as a major demand driver, and lithium prices have begun to rise.
While consumers rush to snap up the latest high-tech gadgets powered by lithium-ion batteries, producers are racing to lock up sources of the raw material. Albemarle upped the ante last summer when it paid US$6.2 billion to acquire Rockwood Holdings, one of the world’s largest lithium producers. Lithium companies have only two options to build their portfolios - organically through exploration or through acquisitions involving premium buy-outs.
After a global search, Royce settled on a 1,540-acre lithium brine property in the northern Clayton Valley. Royce is acquiring an option to earn a 100% interest in the NSP Lithium Claims Group properties in Nevada, one of the top-ranked mining jurisdictions in the world. The claims are north of and adjacent to properties held by Albemarle, which operates the nearby Silver Peak mine, the only producing lithium brine operation in North America. Albemarle shares are listed on the NYSE (ALB).
The proximity to Albemarle’s operation - which taps into brine-rich underground aquifers - brings with it infrastructure, power, and even a small community of lithium experts nearby. Royce’s site is also a short 3.5-hour drive from the Tesla Gigafactory, which by 2020 is projected to produce more lithium-ion batteries annually than were produced worldwide in 2013. The Royce team believes that being a low-capex and low-opex company is critical to success and is disciplined in this approach, Paes-Braga noted.
“We are convinced there will be a move in the lithium market and are bullish on spot prices,” Paes-Braga stated. One Chinese producer recently raised its prices to more than US$11,000/tonne, the second increase in a single month, according to research firm Industrial Minerals. Both Albemarle and SQM predict that demand could double over the next decade, with projections for 10% annual growth.
Elon Musk has emerged as a superstar of the lithium space and his sleek Tesla vehicles have brought sex appeal and signature branding to the retail investor. The free PR for Nevada-based lithium projects has been welcomed with open arms. Mr. Paes-Braga does not see any other commodity having that kind of appeal in the resource venture space.
However, the young executive is looking beyond Tesla for demand creation. Paes-Braga sees all major automobile manufacturers releasing electric vehicle lines in the near future. Even technology companies are getting in on the act - Google has announced plans for an EV and Apple has its own secretive electric-vehicle project.
Water restrictions in Nevada limit the use of evaporation ponds, the typical method for producing lithium out of a brine (and the process Albemarle uses). Traditionally, the salty water is brought to surface and settled in large evaporation ponds. Over a 12- to 18-month period, the water naturally evaporates due to the high temperature and dry climate, and the remaining lithium is refined.
But lithium solvent extraction may allow Royce to sidestep the issue of groundwater in Clayton Valley being already allocated if water is not consumed in the production process. Paes-Braga is closely following the new process technology, which is being developed by a metallurgical recovery manufacturer based in Israel. The technology could make evaporation ponds obsolete and reduce the processing time from months to hours. If functional on a large scale, it could dramatically reduce cost and increase tonnage, enhancing project economics.
Royce Resources isn’t the only lithium-focused junior with big plans for Clayton Valley. Pure Energy has an 8,000-acre-plus property that also borders on Albemarle’s land package. The company recently released an inferred resource at Clayton Valley South of 816,000 tonnes of lithium carbonate equivalent. Pure Energy plans to deliver a PEA on the property in the second quarter of 2016.
Another area player is Nevada Sunrise, which recently branched out from gold to lithium with the acquisition of the Neptune property southwest of Albemarle in the Clayton Valley.
Royce management went to the market in October, intending to raise $1.35 million in a private placement at 15 cents. Once that closes, Royce will have approximately $2 million in the treasury. In 2016, the company is expecting to spend $1 million exploring its lithium brine property. The company will have a low share count, with roughly 27 million shares outstanding. Paes-Braga sees Royce becoming a consolidator in the lithium market due to its tight share structure and high-calibre team.
Royce Resources is an early-stage, speculative exploration company, but one I will be adding to my watchlist. Mr. Giustra’s involvement brings credibility and a network of global contacts, while Mr. Paes-Braga’s millennial perspective and ambitious drive should propel the company forward. Giustra and Paes-Braga will each own stakes of more than 10%, and the stock is expected to start trading this month.
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Disclosure: This article is provided for entertainment purposes only and is not intended to be investment or professional advice of any kind. This article discusses a highly speculative security that is not suitable for most investors and could lose its entire value. Author is not a shareholder in Royce Resources however members of the CEO.CA team are long ROY at the time of writing. This may change in the future without notice. Always do your own due diligence and consult an independent investment advisor prior to making any financial decisions. Consult Royce’s profile on www.sedar.com for a full description of the risks facing the company.