ARENA MINERALS: Positioned to Transform the

Argentine Lithium Industry

Lowering the cost of the batteries will be a continuing objective and the material supply chain will have to adjust. As such, we believe the future of the lithium industry resides in brines, naturally occurring bodies of salt water carrying high concentrations of lithium in solution, where lower costs of production are possible. The evolution of battery technologies, with the possible growing use high-nickel cathodes, points to an increasing demand of high purity lithium products, which can be made from hard rock (spodumene) or brines. The battery industry uses both lithium hydroxide (LiOH) and lithium carbonate (Li2CO3). Lithium carbonate, which is made from brines, is expected to retain the largest part of the market. Benchmark Minerals Intelligence forecasts that lithium carbonate will still represent 56% of the market in 2028.  An important fact to take into account: lithium hydroxide can be produced from lithium carbonate and it is cheaper to produce this way than producing lithium hydroxide directly from spodumene. It is not possible to produce lithium carbonate from lithium hydroxide. Therefore, we fully expect that lithium production from brine resources will continue to increase significantly.

When it comes to lithium brines, the uncontested leading supplier has been Chile. Both SQM and Albemarle, 2 of the world’s 3 major lithium producers, are active in Chile where higher grade brines combined with optimized processing technology has made the country the world’s lowest cost producer. But Chile now faces challenges due to increasingly stringent environmental and legal frameworks; it is now very difficult to obtain social licenses to operate or even expand. As Reuters reported in 2018, Chile’s water regulator is imposing restrictions on new water rights in the Salar de Atacama because of uncertainty over how much water and brine extraction the ecosystem can support, which we expect will lead to lower production levels than expected. SQM has also been experiencing delays in expansion and an effective decline in production due to decreasing lithium grades. Albemarle, that operates the Atacama brine facilities as a result of their acquisition of Rockwood Lithium in 2014, may not be able to proceed with their planned expansion. It has been widely reported that it will be challenging for Albemarle to get this approval. A meaningful amount of incremental brine being pumped would indeed affect the natural state of the salar. Even outside of the lithium industry, Chile is a country where it is becoming much more difficult to get mining projects permitted. Having been involved in Chile for many years in base metals exploration via joint ventures with reputable companies, Arena can testify to the difficulty of this regulatory environment.

The famous Lithium Triangle, a large, dominantly high altitude and arid region of the Andes, spans parts of northern Chile and Argentina but also covers part of Bolivia. Due to the political environment and general business framework, Bolivia has yet to experience any meaningful influx of capital or even the presence of international companies. Furthermore, the processing technology required to address the high impurities present in the Uyuni brines found in Bolivia does not appear to have been successfully developed with no industrial production having been demonstrated. As a result, the lithium resources in Bolivia have seen almost no development and are not expected to come online within the next decade.

Therefore, the world is now turning to Argentina for lithium brine supply and production levels from the country will need to increase significantly. The good news is, via exploration, over the last decade, Argentina has undergone a very significant and globally meaningful resource expansion. After Chile and China, Argentina now has the largest reserves of recoverable lithium.

Argentina saw over 10 mines put into production in recent years and over 500,000 workers are employed by the mining industry. HSBC estimates that Argentina will increase its global lithium supply contribution from 16% in 2018 to 23% by 2025. Not only does the country host some of the world’s foremost lithium deposits, but it also benefits from technical advantages such as high evaporation rates, which is impacted by sunlight, humidity, winds and temperature. Argentina has been the source of all of the new brine production since the 1990’s as it saw an influx of large multinationals, including the Big Three lithium producers: Livent (formerly FMC Lithium), SQM (which subsequently sold its participation in Minera Exar S.A. to fast growing leader and China based Gangfeng Lithium) and Albemarle.  President Macri has gone on record supporting the mining sector with an emphasis on lithium.

But while reserves have increased dramatically in Argentina, new production has yet to experience the same level of growth. The costs of production, both actual and forecasted, are not as low as they are in Chile and the new operations in the country are not performing as well as expected making it challenging for new projects to get funded.

The Brines in Argentina are different and do present some obstacles to overcome.

Grades are generally slightly lower in Argentina than Chile, but more importantly, the chemical composition of the brine is different, and the industry has been slow to adapt to this fact. Newcomers in Argentina were quick to adopt what is known as the “liming” or “Silver Peak” process. The basic principle of this process is to treat the brine with lime to remove the magnesium and then allow the brine to concentrate until it reaches levels suitable as a feed for the carbonate plant. This process has been employed in Silver Peak for several decades producing “technical grade” lithium carbonate, which is generally not suitable for the battery market and therefore a lower priced product. The brines of most of the deposits in Argentina carry higher levels of other impurities (aside from Mg) for this process to work adequately. These higher levels of impurities do not allow for the treated brine to concentrate to sufficiently high levels of lithium in solution to act as a feed to battery grade lithium carbonate production. The concentrate produced by the liming process and subsequently fed to the carbonate plant carries high levels of sulfate, calcium and boron, and modifies the natural pH of the brines such that, over time, it lowers the purity of the produced lithium carbonate. During pre-production studies, where work is typically bench-scale testing of battery grade production, this process will indeed result in a >99.5% lithium carbonate product. But at commercial production levels, requiring a continuous cycle, some of the impurities fed to the plant remain in the system and, over a relative short period of time, will show up in the lithium carbonate, resulting in a decrease in purity below 99.5%, a product that would be typically categorized as technical grade lithium carbonate. This small difference in purity has an impact on selling prices of approximatively -40% to -60% per tonne. A redissolution and recrystallization process, known as the “bicarbonate process”, has been applied downstream to improve the lithium carbonate product quality. Unfortunately, this “purification” method increases production costs significantly, has a lot of operating issues and has yet to be implemented successfully at commercial scales.

There is an alternative to the liming process. An alternative which delivers much greater lithium purity and a product much better suited for battery grade lithium carbonate. But before discussing it, it is important to review the experience of Mr. Eduardo Morales, Arena Minerals’ Chairman.

Mr. Morales has been involved in the lithium industry for almost 40 years, taking the Salar de Atacama in Chile from resource development through to the world class lithium producer it is today. The facilities Eduardo designed and built were the principal assets of Rockwood Lithium, of which Eduardo was the President at the time of its sale to Albemarle Corporation for US$6.2 billion in 2014. Most recently, Eduardo served as the COO of Lithium-X Energy Corporation, driving the development of the Sal de los Angeles lithium brine project in Argentina alongside William Randall, CEO of Arena, and the rest of the Lithium-X team. Lithium-X was sold in March 2018 to Tibet Summit Resources for a total cash consideration of C$265 million.

The alternative to the liming process is a process that will lower the targeted impurities of the brine by using a calcium rich reagent. This process not only allows the production of a concentrate of up to 6% lithium (compared to a typical maximum of 1-2% in the Silver Peak process) but it is much better suited for the production of battery grade lithium carbonate as it ensures a continuous feed with certain levels of impurities that can be handled in the carbonate plant. Furthermore, since the original level of concentration is significantly higher, there is no need for a purification circuit and therefore the capex of the operation tends to be lower. However, the calcium reagents required can be expensive and need to be imported adding supply security concerns, making this process economically challenging when compared to the liming process. Yet, it was the demonstration of this process at Lithium-X Energy that led to the Company being acquired.

In the 1970s, Eduardo Morales was part of a team which implemented this process in Atacama (Chile) and had a dramatic impact on the industry.  By using a sourced brine with chemical characteristics allowing it to be used as a calcium reagent, not only were lower operating costs achieved but the reagent itself also contributed lithium to the concentration process to further improve the economics. Mr. Morales was also the person responsible for implementing this Brine-Mixing-Process (“BMP”) in Chile in the 1980s, which led to the Chilean Industry becoming the leading supplier it is today with a high quality and low-cost product.

As mentioned above, this process results in products that are much more suitable for battery grade lithium carbonate since it ensures a consistent, high purity feed. In fact, the first battery grade lithium carbonate was achieved under Mr. Morales’ leadership and to our knowledge, the liming process has yet to demonstrate its suitability to consistently and economically produce battery grade lithium carbonate.

Having been involved in Argentina over the last few years, Mr. Morales and our team were able to learn a lot about the brines of Argentina.

Shortly after Mr. Morales jointed Lithium X, this alternative processing was implemented and able to produce >5% lithium concentrates in conventional evaporation ponds, using the more expensive imported reagents. To our knowledge, Lithium X was the first operation to achieve this product in Argentina, which is in itself a saleable product as a suitable feed for battery grade lithium carbonate production in China.  Lithium-X was acquired because it was able to demonstrate a process that worked. But Lithium-X had yet to address the cost of the process.

Which bring us to today.

After the sale of Lithium-X, Mr. Morales and his team have worked to adapt the BMP to the brines of Argentina, with a focus on maintaining the high purity (>5%) lithium feed while lowering the reagent costs by using locally sourced brines to produce the required reagent characteristics. Recently, this process was fully adapted, and our team was able to establish the required brine chemistry that would be suitable to be used as a reagent. After an extensive search that looked at most salars in Argentina, a single source of such brine was identified which led to the acquisition of the Salar de Antofalla Project.

The impact of this proprietary process on the Lithium Industry in Argentina could be pivotal where reagents can easily represent half of the production costs. Arena will be suppling a lithium-rich concentrate able to substitute these reagents while simultaneously contribute to lithium concentrations, and effectively lowering the costs of production by up to 65%. In addition to being cheaper to produce, this feed will consistently produce battery grade lithium carbonate which will fetch a substantially higher price in the market. To date, the liming based process has not been able to achieve either the lower operating costs or consistent battery grade production. Moreover, this new design, just like the facilities in Chile, does not require the use of a purification circuit, which results in lower capex as well.

Arena is now in a position to deliver its proprietary process along with the adequate brine-based reagents in order to improve other lithium operations or projects in the country. The reagents produced at the Antofalla Project will be concentrated at site to be shipped to potential partnering projects, which are all located in a radius of approximately 200 km. The Silver Peak process primarily uses lime that need to be trucked from the San Juan province, Argentina which is approximately 800 km further south.

Hence, Arena is advancing discussions to form strategic alliances with other companies advancing lithium brine projects in the area. Under such agreements, Arena intends to adapt its BMP to the other company’s particular brine characteristics, and deliver the required reagents to be mixed. We believe the timing for seeking such business partnerships is ideal as most projects in the country have advanced past the resource building stage and are now building pilot ponds, are in the first stages of process design and are expected to seek process optimization or alternative processing technologies. Some have already made those intentions public1. Once a strategic alliance is in place, it is expected that, within a few months only, Arena will have been able to demonstrate the process to the partner.

No other producer or company is in a position to deliver such an integrated solution to the Argentine brine industry. Arena is evaluating the availability of protection for its intellectual property and related know-how but, regardless whether it is available, Arena benefits from first mover advantage and in depth expertise that is very challenging to find within the lithium industry. In fact, to our knowledge, no one else has demonstrated a similar technology at industrial scale.

Arena is also looking to acquire a more typical source of brine in the region in order to also apply the BMP to its own brines and produce lithium carbonate.

Lastly, the lithium industry, having grown in recent years, has resulted in qualified personal and key expertise having become extremely scarce. Over and above Eduardo’s team, Arena Minerals has been able to reassemble the technical team that was instrumental in the success of Lithium-X Energy Corp. This team is another clear competitive advantage of Arena.

In conclusion, we believe this is the very beginning of an exciting time for the lithium industry.

The lithium-ion battery was invented in the 1970’s by a group working within what today is ExxonMobil. It took the technology a full generation to become part of our daily lives and it is now set to reshape the transportation industry. The technology took time to develop efficiencies, become safe and most importantly develop a supply chain. Ultimately, it is economies of scale, triggered by the demand from cell phones and laptops, that led to falling prices. A few years ago, it became clear that the cost of the battery cells was falling fast enough to compete with the cost of internal combustion engine (“ICE”) vehicles. Both battery makers and car manufacturers began committing significant amounts of capital to meet the upcoming demand for battery powered vehicles. Mega and giga-factories are now being built and the unprecedented growth expected for years is finally becoming a reality and is about to have a significant impact on demand for battery materials. The Li-ion technology is also evolving and new generations of batteries, including the solid-state battery, all require more and more lithium. As such, an important structural change is unfolding for lithium. Even the most bearish forecasts will require a lithium supply that simply doesn’t exist today.

 

1: See Section “Product Development” on page 5: https://www.asx.com.au/asxpdf/20190124/pdf/4421rf0xd8tn8z.pdf