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Chile is NOT nationalizing the lithium industry and presents a massive buying opportunity - This is why we like Lithium in Chile
Editor's Note: We have a message below from one of our external partners, Monumental Minerals Corporation. Their message may not reflect our views, but we believe you'll appreciate the information...
— Gerardo
Monumental Minerals Corp. (TSX-V: MNRL; FSE: BE5; OTCQB: MNMRF) is advancing lithium brine exploration at two highly prospective salars in Chile (Salar de Laguna Blanca and Salar de Turi) with a total area exceeding 21,000 Ha (approx. 52,000 acres). These high-quality assets lie in the heart of the most prolific lithium area on the planet, known as the “Lithium Triangle.” We believe that misguided fears that the Government of Chile will “nationalize” lithium has created an incredible value-buying opportunity of MNRL. Chile is an excellent jurisdiction in which to do business with a long history of mining, including lithium production. Monumental has a healthy balance sheet with which to advance both projects and add considerable value for shareholders.
Lithium historically had applications limited to the medical field, as a water-proof lubricant, and in nuclear weapons. Its use in batteries was limited to small consumer electronic devices, until Elon Musk and Tesla brought EVs to the mass market about 10 years ago. The parabolic increase in EVs has seen massive investment in R&D to improve lithium-ion battery life, increase energy storage density, and heighten safety. Lithium is now coined by many as the new “white petroleum."
Although there is significant R&D focused on alternate battery materials including sodium, lithium is still considered the best material for EV batteries. In short, chemistry and physics dictate that lithium is the optimal element to power EVs of today and well into the future. My 10 year-old son asked what was so special about lithium - I bought him a Li-ion battery for his hobby RC Truck, and it became immediately evident. Compared to the standard NiMH, the truck was lighter with the Li-ion battery, traveled faster, and lasted nearly twice as long before recharge.
Monumental’s Chilean projects are brine-hosted, where the lithium is found naturally in salty water. Brine lithium has the benefit of:
- the shortest time to define a resource (it only requires about 3-4 drill holes to define an inferred resource).
- simplest progression to production - exploration and production are more similar to oil rather than mining.
- the smallest carbon footprint of any type of lithium extraction.
In brine projects, mother nature has done half the work as natural groundwater has already extracted lithium from the rocks, and concentrated it in salars or salt lakes via natural cycles of evaporation. The geological, hydrological, and climatic conditions needed for brine lithium deposits to form are rather uncommon on Earth, found most commonly in the Lithium Triangle of Chile, Argentina, and Bolivia.
Governments globally are taking notice of the opportunity to benefit from and support the energy transition. The huge increase in demand for lithium has triggered a massive flow of capital into the sector, as investors try to participate in the financial benefits of what might be a once-in-a-lifetime opportunity for “white petroleum." The government of Chile has certainly taken notice of the value of lithium. In 2022, SQM and Albemarle contributed USD $5.5 billion to the public treasury. Comparatively, copper miner Codelco contributed USD $2.7 billion.
Monumental Minerals is investing in lithium in Chile because it ticks all the right boxes for both discovery and development. Chile has the world’s largest known reserves, all of which are brines, a well managed capitalist economy, and a stable democracy that protects domestic and international companies. Despite these positives, recent announcements by the Chilean government regarding lithium (the “National Lithium Strategy”) have confused some media alongside the mining and investment communities.
Many news articles announced that Chile is “nationalizing” lithium. The articles led to a broad misinterpretation that the government will expropriate projects, taking control of assets from companies. This incorrect interpretation, in part prompted by the convoluted and unclear communication regarding the National Lithium Strategy (NLS) by the government (including President Boric) has led to a challenging period for lithium explorers and investors. The NLS does not actually change laws, the current legal framework of lithium, or nationalize anything. Rather, it is an attempt to explain how the country of Chile plans to go about advancing their lithium mining industry.
For clarity, the NLS is comprised of two aspects. Firstly, in the Salar de Atacama, which is considered “strategic” to the country, the government has indicated that they will be majority partners going forward. The State of Chile is the primary owner of concessions in Salar de Atacama, through Corporación de Fomento (CORFO). CORFO currently leases claims to SQM and Albemarle, where rights will expire in 2030 and 2043 respectively. The government stated that current lease agreements shall be respected, however CORFO has the option to renegotiate them at the end of the lease term. The Chilean government indicated that it will require a majority stake in any new lease deal regarding CORFO-owned areas on Salar de Atacama once they are renewed or reissued.
This has little to nothing to do with Monumental Minerals rights, or other companies exploring for lithium in Chile outside of Salar de Atacama.
The second aspect of the NLS applies to projects not considered “strategic” (i.e., outside of Salar de Atacama). Under this circumstance, the government has indicated that the Strategy represents a roadmap to explore and produce lithium through public-private partnerships with the State of Chile throughout the production cycle.
Based on information provided to date, Monumental would apply for a Special Lithium Operational Contract (CEOL). The Chilean government has indicated that CEOLs for exploration and production will be granted to private companies and, in case of positive results, these companies will have a preferential right to reach an agreement to produce lithium. Furthermore, the government has indicated that they will start issuing CEOLs in early 2024. The contract could take the form of an agreement with ENAMI, a state-owned copper company, or a royalty / tax structure if ENAMI does not have an intention of being a partner.
It is reasonable to expect that a lithium effective tax rate (ETR*) or public / private ownership percentage (outside Salar de Atacama) will be similar to the ETR* for lithium in other jurisdictions to remain competitive and to attract investment dollars. For example, Western Australia and Argentina have rates around 35%. However, it is possible that the ETR* could be up to 46.5%, as that is the 2024 effective tax rate for big copper producers (up from 37.5% in 2023). The increase was recently ratified by the right-leaning Chilean Congress, a rare win for the left-leaning Boric Government. It still positions Chile as competitive globally, as it is well below the copper ETR* threshold for mine development in Chile (MinEx 2022). A chart from MinEx Consulting (Figure 1) demonstrates where Chile is positioned globally.
The Chilean government has made it clear that they are not lithium brine experts, and do not have the resources to move projects forward without private companies. They have also indicated that partnerships would be in lieu of royalties. Therefore, we do not believe that the final cost to a private company would be greater with the NLS compared to standard royalty / tax structures.
The mode announcement of the NLS by the government of Chile is imperfect. We realize that there have been several delays in providing specifics to the public, which has fed wide-spread uncertainty about it. However, we believe that the government of Chile understands the value of foreign investment into the commodities sector, which has helped to position Chile as the number 1 copper producer, and number 2 lithium producer globally. We are also encouraged by a recent bill proposed by the majority party in the Chilean Constitutional Council, which aims to make it easier to explore and produce lithium by declaring the mineral a “grantable mineral substance." This could potentially allow broader exploitation beyond the State’s current parameters, and thus the laws around lithium would be more similar to that of copper.
*Effective Tax Rate (ETR) is defined as the following by MinEx 2022:
- A financial model was built to determine the revenues, costs and associated free-cash flows generated from a given mining project.
- The model was then run using the various levies and incentives applicable for a given country. The key output was the Net Present Value (NPV) of the income captured by the Government.
- The model was then re-run using a default set of investment rules (where all levies were set to zero) The Corporate Income Tax rate was then adjusted to generate the same NPV to the Government as before. This adjusted rate is called the “Effective Tax Rate” (ETR) for the Country.
What does the NLS mean for Monumental Minerals? Firstly, we believe that partnerships with the government will assist Monumental Minerals to move our Laguna Blanca and Turi projects forward more quickly and achieve permitting and regulatory milestones. It will give Monumental guidance on what portion of the future lithium extracted will be reserved for government revenue (or royalties), and it will provide a roadmap on how to progress and de-risk projects, and gives a firm understanding on the value of each asset.
Monumental Minerals is engaging with government, rights holders (Indigenous Peoples), and other potential partners to demonstrate to the Chilean government that our high value projects have been de-risked, have a high likelihood of success, and are worthy of a CEOL. The government is interested in facilitating early-stage exploration projects like ours and is keen to progress on them quickly. Chile understands that a strong lithium mining industry starts with explorers and the development of new projects.
We are excited to progress our Laguna Blanca and Turi lithium brine projects in Chile and we believe that the framework that the government has announced for lithium is tenable. We believe the NLS represents an opportunity to de-risk and advance our high value lithium assets in one of the most prolific lithium jurisdictions in the world.