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Summary

2017 Argentina Lithium Tour - Part of a short series of documents covering my journey high into the Andean Mountains.

Orocobre continues to cement its position within the global lithium supply chain; only new brine operator in 20 years.

The Olaroz facility is now in the final stage of ramp-up; shareholders well positioned to be rewarded in 2018-19.

Company outlook and what will drive shareholder value in 2018 including; strong lithium prices, ongoing tight supply, increasing lithium production and investment activities in the Olaroz-Cauchari basin.

On an early November morning, buses full of research analysts, reporters, investors, executive teams and paramedics departed San Salvador, Jujuy, Argentina on a journey through the Andean Mountains to tour the facilities and properties of Orocobre (OTCPK:OTCPK:OROCF), Lithium Americas (OTCQX:OTCQX:LACDF) and Advantage Lithium (OTCPK:OTCQX:AVLIF). The journey to the Olaroz-Cauchari basin took much longer than anyone had anticipated but the breath-taking views of the Andean Mountains kept the visitor complaints to a minimum. The winding road through the mountain range of northwestern Argentina led the group through the heart of the world famous lithium triangle. From a climate standpoint, the region remains pretty dry year around, with less than 100mm of annual rainfall while some regions are impacted by seasonal snow fall and ice buildup. Within the mountain range micro-climates exist but lithium companies operating in the Olaroz-Cauchari basin dismiss the climate as a non-issue. Proper pond and inventory management reduces risk from seasonal variabilities within these micro-climates.

Rest stop along the path to the Olaroz-Cauchari basin (Argentina Lithium Tour 2017)

The Puna Plateau is often coined the“Saudi Arabia of Lithium” or the “Lithium Triangle”, as it is home to the high-quality, low-cost lithium salar deposits. The region is located in the Andean Mountains, reaching elevations of 4,000 meters and spans 1,800 kilometers across Argentina, Bolivia and Chile. This group of salt lakes located below the earth’s surface, contain the largest proven deposit of lithium accounting for approximately 70% of estimated global reserves.

Through the Andean Mountains (2017 Argentina Lithium Tour)

Shifting political landscape in Argentina

Despite such a bold name awarded to the region, very little of the worlds lithium supply is actually produced on the Argentine side of the Lithium Triangle. Today, Chile and Australia are top producers of the white metal which is being increasingly used as the power source for a wide array of new technologies from mobile consumer devices to home battery energy storage systems to electric vehicles. One of the primary set-backs for the lithium industry in Argentina had been the political uncertainty. Cristina Fernández de Kirchner, a populist who governed Argentina until December 2015, created challenges for foreign companies to conduct business in Argentina. This was especially true for junior mining and exploration companies seeking to enter the Argentine resources industry (See: Orocobre – The Road to Lithium Production In Argentina). High levels of inflation, currency control and the extreme difficulty to move all forms of capital in and out of the country deterred foreign investment and set-back key industries. Since 2015, a transition in political power in Argentina has taken place. The global business community is now looking to Argentina's new business friendly leader Mauricio Macri, who is working aggressively to attract investment into the Argentine economy which has spurred activity in the lithium exploration and production industries. Political economic actions allowed for more favorable currency controls which devaluated the Peso and started to shift towards scrapping export taxes.

Argentine flag outside of the Olaroz facility (2017 Lithium Tour)

There have also been favorable actions toward maintaining and accessing information on land claims, harmonizing tax regulations, and standard royalty rates. The change in Argentina’s political landscape has assisted to draw foreign capital which will assist to increase the nations lithium output to 145,000 T LCE in 2022. In recent years, FMC (NYSE: FMCincreased its production capacity in Argentina to 23,000T LCE, while Orocobre is expanded to produce 35,000T LCE and Lithium Americas could produce 50,000T LCE over the next years. This indicates that the country is expected to receive additional capital investment from existing producers or expects new lithium producers to enter the market. Richard Seville, CEO of Orocobre shares his view on the topic as he comments,

“some new supply will come from greenfield, but most from project expansion”.

Fundamental increases in lithium demand and the impact on Orocobre

Orocobre is an Australian based chemicals company focused on the lithium markets. The company is best known as the only lithium explorer in recent years to bring high volumes of battery grade lithium carbonate to market from a brine resource. In fact, before the successful ramp-up of Orocobre’s flagship project, Olaroz, no new lithium brine facilities had been commissioned in over 20 years. The past few years have paved the path for the “electrification of things”, which is driving global demand for lithium materials. Beyond batteries the market for lithium is pretty simple, it is driven by demand from a wide array of products such as: industrial applications, glass, and medicine. However, these applications all command a small amount of lithium and even with the widespread adaption of mobile and smart phones, laptops, and hundreds of other handheld consumer devices, the demand for lithium has only started to trend higher (See: Fundamentals Support Strong Lithium Pricing In 2018).

The future of lithium has recently been charged up as automakers announce line-ups of all electric vehicles, which has triggered battery manufacturers to announce significant expansion of global battery manufacturing capacity. These factors have spurred demand for lithium carbonate which has driven price for the white metal. This has partially assisted in propelling shares in Orocobre which have been have lifted from a low of around $1/ share in recent years to the current highs of over $6/ share.

Olaroz - A “Titanic” chemical facility high in the remote mountains

The ride through the Andean Mountains was a direct reflection of how Orocobre shareholders have felt over the past years. A painful, exhausting, and tiring experience at high altitudes which makes it hard to breathe and can lead to fainting. However, long-term investors have always shared the vision that the end result would be well worth the exhausting ride through a remote mountain range.

Approaching Olaroz, a masterpiece in the Andean Mountains (2017 Argentina Lithium Tour)

Down a long, paved road through the mountain range, sight of an industrial complex finally breaks in the far distance. The image of the facility instantly generates smiles across the faces of the visitors, as the bus moves quickly across the paved road leading into the Olaroz property. It is clear to see that the facility is an isolated gem high in the mountains. To have reported on the developments of the Olaroz facility, to then see the operations was a breath taking event. One Australian analyst referred to the facility as “A Titanic”, which I found very fitting.

Build-up of activity in the region

The shift to electric vehicles has created momentum downstream within the lithium industry, spurring a flurry of activities in the lithium exploration space. Recently financed junior exploration companies have flocked to Argentina to seek out land packages in the lithium triangle, which has drawn naïve retail investors who have lifted share prices for junior exploration companies (See:Lithium Investing – Argentina Exploration Companies Attract Investment). Despite most of these newly formed junior exploration companies having no expertise or knowledge on the development of lithium projects, still at least a few projects will find their way to market beyond 2022 due to shortage in supply and high lithium price. The top three characteristics which should be sought when looking into lithium brine projects are as follows: First, the chemistry needs to be good. Second, the size of the resource and land package must be substantial. Third, the proximity of the project to local infrastructure is critical. The distance to infrastructure is critical as it dictates the CAPEX and the ongoing operational cost. The further the project is from infrastructure, the more difficult and costly it will become to explore and develop a potential project. The rise in lithium price has attracted investors but it is equally important that price remain firm at current levels in order to retain the inflow of investment dollars. Seville speaks confidently towards the strength of lithium prices,

“it will absolutely stay above $10,000, and the supply side response is so slow and muted”, he continues on,“I am not getting pushed back these days on pricing, the idea of a tidal wave in oversupply hasn’t happen”.

It is notable that thousands of kilometers in road that lead to the Olaroz-Cauchari basin is well paved with only a few pot holes every so often. Along the journey, there are a number of functioning communities which illustrate the presence of everyday basic life requirements. Seville touts strong regional assets which support lithium exploration and production including: good road systems, gas pipeline infrastructure, water supply, mobile telecommunications and people.

Lime is produced within close proximity to the Olaroz-Cauchari basin. It is used in the purification process

From brine ponds to processing

The visiting group is split into various smaller groups who are dispatched to view various parts of the Olaroz facility including the brine ponds, underground to surface brine pumping station, brine processing and packaging, and finished goods inventory awaiting shipment. It is clear that the visitors, although all heavily involved in the mining or chemical business, are impressed with the operations, especially when factoring in the remoteness of the project and the altitude involved. The workers at Olaroz appear excited to have the guests on site, even if just for a little while and the visitors are equally thrilled to have the opportunity to visit such an incredible facility.

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