Summary

After a multi-year increase in lithium prices, they continue to remain strong in Q1 2018; an overview of what has transpired and driving firm prices.

Despite the sell-off in shares of high-quality lithium investments due to a fear of market oversupply, chemical prices do not echo these concerns.

I believe that strong lithium prices will continue to attract investment into the lithium supply chain.

As lithium chemical prices outside of China continue to play catch-up with Chinese domestic pricing, various opportunities are arising. One significant opportunity produced by this situation is the need for large battery and material companies to identify and secure meaningful volumes of lithium supply. Many Chinese companies throughout the value chain, from battery material players to automotive groups, are highly dependent on the supply of low cost, high volume and of battery-grade quality. A lack of supply of the white material could hold up the production schedule of an entire industry. This issue has especially serious ramifications for the automotive industry, which is required to meet Chinese government implemented targets starting in 2019. Beyond the short-term ramp up in battery production, the new energy vehicle market in China and around the world is poised to grow over the next years, ensuring that battery and related materials acquisition remains a top priority for industries that are highly dependent on secure supplies. Based on this overall macroeconomic trend, lithium prices will remain strong over the coming years, leading to good equity investment opportunities in lithium mining and exploration businesses. It is my opinion that energy metals and technologies focused investors should have good exposure to advanced stage lithium explorers and early stage production companies, as these will greatly benefit from increasing lithium prices.

Another significant and growing trend in the lithium chemical business is the movement of Asian capital into lithium exploration and production companies. I view this as a clear signal that we are ahead of a significant long-term bull trend in demand for lithium chemicals. It is my opinion that as the lithium price continues to remain strong over the next 12-24 months, additional investments will be made into lithium exploration and mining companies who are looking to increase their production or moving towards production. As lithium prices remain high for a longer duration of time, this will become expensive for battery and material manufacturers unless they have a direct relationship with high-volume producers. Toyota Motors (TM), through Toyota Tsusho, is the only Tier 1 automotive company that has so far made a significant investment in the exploration, development, and operation of a lithium mining and chemical production asset. In the event that other automakers decide to make similar moves to secure lithium supply, either directly or indirectly, the valuation of both juniors and producers will significantly increase. It is also important to note that most lithium is produced by subsidiaries of very large, diversified chemical producers such as SQM (SQM), FMC (FMC), and Albemarle (ALB). Off-take agreements, such as the agreement reached between Ganfeng and Lithium Americas (LAC) will ensure that meaningful new supply lands directly in the hands of large users such as Chinese material and battery manufacturers. The impact of this situation is that despite new production coming gradually to market over the next few years, limited amounts of this supply will be distributed to many new and existing users of the chemical, leading to a period of prolonged high prices. Price relief will only occur when all major new and existing lithium users are supplied with an abundant amount of material.

In the near term, as lithium prices continue to remain strong, it is my expectation that there will be an increasing amount of capital being placed into junior lithium exploration companies. A speculative investment thesis is that advanced junior lithium exploration companies who are actively developing both high-grade and volume, low-cost lithium assets such as Advantage Lithium (OTCQX:AVLIF) and Millennial Lithium (OTCQX:MLNLF) will benefit for several reasons. First, their untapped resource asset simply rises in value due to a rising price for finished goods. Second, as prices remain high for an extended period of time, battery and material manufactures will be put under additional pressure to secure direct supplies, leading to an increase in resource asset acquisitions. Third, strategic relationships will become increasingly important for these manufacturers, leading to more Asian capital becoming available to develop lithium projects. Fourth, large users of lithium chemicals will want to secure supply by entering into long-term off-take agreements. It is my opinion that all of these factors will play a meaningful role in increasing the valuation of late-stage lithium exploration and early-stage production companies.

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