Lithium Power International (ASX:LPI) CEO interview

Lithium Power International (ASX:LPI)

We spoke with Lithium Power International‘s CEO Cristobal Garcia Huidobro about the recent resource upgrade at the company’s flagship Maricunga Lithium Brine Project in Chile and work on a refreshed Definitive Feasibility Study for that project.

 

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Transcription

 

Stuart: Hello, and welcome to Stocks Down Under. My name is Stuart Roberts, and I’m one of the editors of our publication. And with me in Santiago, Chile is Mr. Cristobal Garcia-Huidobro. Garcia, it’s Tuesday evening, the 29th. It’s the morning of the 30th of September here. Good to have you.

Cristobal: How are you, Stuart? It’s Wednesday afternoon here.

Stuart: Wednesday afternoon, the 29th. So, Cristobal, you’re the CEO of Lithium Power International, ASX LPI. And LPI had some great news yesterday. You’ve just doubled your reserves at the Maricunga brine lithium project.

Cristobal: Yes, we did. Yeah. We have had a kind of a very busy, you know, year after we decided to start or to move forward with this stack strategy by the end of last year and we came up with this stage one for our Maricunga project. Basically, we speeded up all the processes. And the first thing we did was to start working on an updated DFS for the stage one. Even though it’s exactly the same project, exactly the same design, and same production process, you know, stage one is slightly smaller than what it was, the original project. So, you have to work a little bit around your engineering. And as part of those activities, we decided to also go deeper within our concessions, the ones that are going to be used for this stage one, which are only half of our 19 concessions, basically, which are the old code concessions.

Stuart: Right.

Cristobal: So, we went down to 400 meters, which were more than 2,000 additional meters within our concessions and, you know, results were very, very, very positive. We were able to, like you said, to almost double our resources, measured and indicated resources on our old code concessions for the stage one. So, basically, now, you know, we feel very comfortable that our reserves will be more than enough to cover the 20 years [inaudible 00:02:37] producing now the 15,000 tonnes that we have planned for the stage one of Maricunga. But that’s not, you know, the only news. Like you said, these are very, very exciting news. But also, you know, our DFS update is moving forward. We’re expecting to have that ready during November this year. We’re really working at full speed on that update. And also we have GA medicine, Germany, which already finished, the basic engineering. So, you know, on the production process side, you know, the engineering it’s much more advanced. And look, this resource update is the base for updating the hydrogeological model, and then updating our reserves for the stage one that will be included on the DFS update by November.

Stuart: Right. Now, for those unfamiliar with the resources sector in modern Chile, they might be a little confused by the terms old code and new code. Now, let me summarize what I think is the situation in Chile. In 1979, the mining code in Chile was revised as I understand it.

Cristobal: Yes.

Stuart: The previous mining code was from the 1930s. And the 1979 code set aside lithium projects in a special category because potentially of the relationship between lithium and nuclear power. Old code you don’t have those constraints. They’re yours in perpetuity. Do I understand it correctly?

Cristobal: Yes. That’s right.

Stuart: Right. So, this resource that you’ve just upgraded, that’s completely within your old code tenements where there’s no regulatory issues related to the Chilean nuclear authorities.

Cristobal: Yeah, it is. Let me complement that a little bit. Yes, we do have two mining codes. The one from the ’30s is the old code. So, all the mining concessions that were registered under that code, so before 1979, you know, are what we call the old code concessions. For those, you don’t need any special permit to exploit lithium. For every other concession, you know, registered after 1979, you need this special lithium operation contract in order for you as a private company to exploit lithium in Chile. Okay? Now, having that, it has nothing to do with the ownership of your mining concessions. So, all your mining concessions here in Chile are, you know, in perpetuity, you know, while you pay your annual payments, which are very, you know, really not significant, you know, that’s an asset of the company. Okay? This is not a lease. You don’t have to, you know, take those or return those mining concessions back to anyone. Okay?

Now, what we need is a… So, in other… And also adding to that, we already have, you know, our environmental permit. We already have the water secured, energy secured. So, now, basically, what we did by the end of last year was, you know, within this whole process with the new code concessions that we wanted to include since, you know, the beginning of the project, it was taking too long, so we decided to divide the project into stages. And the first stage is now completely based on our old code concessions, which accounted for half of our mining concessions more or less, and for which the project is fully permitted. And the only, you know, activity that we have ahead of us is to close the financing structuring for the project and start the construction. Basically, that’s all it means.

And of course, the second stage or a subsequent stage will be the one that will be developed on the new code concessions or the other half of our mining concessions in the future. And we don’t know yet if we will use, you know, traditional technology or maybe if we move forward with this agreement with Chile, which we think we will. We will be able to use direct lithium extraction also or evaluate the use of direct lithium extraction technology on those concessions.

Stuart: If you go ahead with direct lithium extraction, that’s likely to score you some points with the people who are evaluating your project from an ESG perspective. It’s much less carbon involved than other more conventional extraction techniques.

Cristobal: I think that’s a big mistake.

Stuart: Okay.

Cristobal: That’s not really true.

Stuart: Okay.

Cristobal: It depends on the kind of DLE. It depends on the use of energy, basically. Remember, you will have to use much more energy. You are not going to use the sun. And you still have, you know, the trucks, you still have people. You still have… So, from an ESG perspective, which is something which we are working as we announced by June, July this year. By the way, we’ll have some announcements during the next days on that regard. We already engage with a big name on the review of our, you know, ESG process and all the project from that perspective, but you have to separate things. One is, you know, the source of your energy, you know, basically your carbon footprint. And the other things are, you know, what are you doing in terms of your social, you know, relationships with either indigenous communities or basically all your stakeholders on the influence area of the project? And, of course, your, you know, corporate government, which is, you know, a small part of it. But from a social point of view, I don’t think any project, any other project have been able to match what we have been doing with Maricunga.

Stuart: Right.

Cristobal: We have, you know, three indigenous communities within our influence area. All of them have been participating on the design of this project since day one. We have an amazing relationship with them. And in fact, they will participate on the benefits that this project will generate in the future, meaning, they will receive part of, you know, the revenues this project will generate. It’s a small part, but in present value will account for more than 15 million USD. So, that’s a lot of money. It’s pretty much the same, you know, structure, and the same experience that the first nation had in Canada many years ago with the energy industry. We are replicating something very similar to that. And it has been a very, you know, honest and a very transparent relationship with these communities. And, you know, today they are part of this project also.

So, from that point of view, this project has a very, very unique position and also a relationship with the civilian communities, the Chilean communities, and the locals, you know, the regional governments, etc. It’s very, very good. The project will participate on a lot of initiatives, you know, on the area and on the third region in [inaudible 00:11:12] in Chile. So, we’re very happy with that. And on the carbon footprint side, we will only use renewable solar energy in this project. Remember, we have a transmission line there that was built.

Stuart: Yes. And in recent years Chile has radically upgraded its transmission system, more reliable power right up and down the entire country.

Cristobal: Not only our transmission infrastructure, but also, you know, the matrix, the power generation matrix. We passed 20 years ago from…or 20 years ago, we had a very, you know…a heavily concentrated matrix on the thermal side with coal and natural gas. After Argentina cut the natural gas supply years ago, the authorities had to take some decisions. Basically, renewable energies, you know, started appearing. And now we have more than 25% of our, you know, generation capacity it’s coming from renewable sources, meaning, solar…non-conventional renewable sources, meaning, solar and wind, you know, because we have always had a lot of, you know, hydroelectric power plants here in Chile. But the idea for the project, of course, many of those solar plants, power plants are located at the north of Chile where the project is. And what we have been doing since during the last month is talking with a lot of those projects. And the idea is to supply…for all the supply of the energy, supply of the project to come from those non-conventional and renewable sources.

So, that’s on one side. Also, you know, our use of freshwater have been reduced to, you know, the minimum. We’re consuming kind of 80% to 90% less freshwater than the traditional producers here in Chile. And part of that water is produced by ourselves through recovery during our production process, compensations, and other things. So, from an environmental point of view, I think it’s fair to say that this is one of the most strict projects that have been approved here in Chile and that will certainly set very high standards for the industry and for, you know, the future projects in the country. Also, we’re using, you know, operation points, so, basically, no energy other than the sun over there. But that’s basically the idea. Our objective is to, you know, transform ourselves on the first carbon-neutral brine producer here in Chile.

Stuart: Yeah. Not only does it pass every single metric from an ESG perspective, the economics are great. And I’m just referring now to a DFS you’re revising, but the original DFS from early 2019. We were able to put a $1.8 billion net present value on that at an 8% discount rate with a 30% IRR. And that was with pretty modest pricing. The only issue that possibly had people a little concerned was the capital cost of the original DFS for about 20,000 tonnes a year was about a little north of $500 million which it’s fair to say the capital costs in this current DFS will come down. But the lithium price environments improved markedly in the last few years.

Cristobal: That’s a fair comment. And let me clarify a couple of things. Yeah. The original DFS that we issued by the beginning of 2018 had an NPV of almost $1 billion for the original project. The original project was a 20,000 annual tonnes production of battery-grade lithium carbonate for 20 years. Okay? Now that we’ve stacked…we’ve moved forward with this stack strategy, we have two stages, the first stage is slightly smaller. We will produce around… It has a nameplate of 15,000. We’ll produce probably a little bit more than that, around 16,000. And we will have, in the future, another stage that probably will be of the same size. Now, in terms of the CapEx that was shown on that DFS was almost $570 million.

Stuart: Right.

Cristobal: Remember, this is a project that probably is one of the most advanced projects in South America. We went through our international bidding process for the EPC contract. And those prices, we received proposals from different engineering companies. We finally selected two companies to submit, you know, revised proposals, which were Bechtel and Worley. And that happened just before the COVID started. And the COVID didn’t create a problem with the liquidity in the world. The problem was the uncertainty that it was generating on the different aspects of the project.

Stuart: Right.

Cristobal: And let me give you an example. For example, during the construction, we had a camp at 4,000 meters high for 1,500 people. Now the problem is that during 2018, you were able to have three or four people sleeping in one room at the camp. Now you can have half of that.

Stuart: Right.

Cristobal: So, it’s either you increase the size of your camp or you work around your shifts. Now, you can’t increase the size of your camp because, one, it’s very expensive and, second, you don’t have the environmental permit to do that. So, you have to work around your shifts. This is just one example of the things and the uncertainties that this COVID situation generated. And all those, you know, uncertainties at the end of the day, you know, just have, not negative, but an impact on the CapEx numbers. We were unable to close the CapEx and with, you know, numbers that makes us feel comfortable. And we didn’t want to make a mistake on the financing structuring because once you have your debt, you know, defined, the risks have to be equity.

Stuart: Right, right.

Cristobal: So, if you make a mistake on the definition of your CapEx, you will have to go out to the market again in the middle of your construction and raise more equity and that…everyone knows it can be, you know, very, very difficult. And the best story or the best example there is what happened to Nemaska Lithium some years ago.

Stuart: Right.

Cristobal: They made a big mistake. They tried to be very aggressive, very unrealistic, really, with the numbers they showed on their CapEx. They closed their financing and look what happened after. But our CapEx is probably one of the most real ones that you will find in the market. We don’t want to sell any, you know, dream or a story about numbers that are not going to be achievable. And now the CapEx for the stage one, it will be a little bit lower, of course. The economics still are very, very positive. Now, everyone saw what happened with the lithium prices, you know, after 2018 started to go down and we touched the bottom like 12 months ago. And now the prices are back. The recovering of the prices have been amazing. And that has a direct impact on, you know, the leverage capacity of the project.

We want to finance the Maricunga stage one through a project financing structure. So, probably aiming to a 1:1 debt-to-equity ratio. So, on the side of debt, you know, we want for this to be on a project financing, like I said, basis. So, for that, you know, we need an offtake as secure, you know, to decrease the uncertainties on selling your production, which is basically what we agreed or one of the things we agreed with [inaudible 00:20:49] which we’re working with them. But also, you know, at the end of the day, the amount of debt that the project can support depends entirely on the lithium prices.

Stuart: Right.

Cristobal: And one of the most or important things or impacts that the recovery in the prices have been having is it’s, basically, you know, the amount of debt that the projects can support. So, we’re back again, you know, on our objective of having a 50% leverage at least. And, you know, we have been receiving a lot of, you know, interest from financial institutions for the financing process. So, we’re very happy with that. And now, you know, all the effort is done and we’re really focused on finalizing our DFS update that we expect to have ready by November this year. And in [inaudible 00:21:57], we’re moving forward with all the other activities, basically, you know, being the priority, the main priority is the financing today. So, we expect to have that ready and closed by the end of the second quarter probably next year, as to be able to take immediately, you know, the construction decision and to start the Maricunga project.

Stuart: Cristobal Garcia-Huidobro, for a long time, Maricunga has been mañana, but pretty soon it’s going to be ahora. So, well done.

Cristobal: Yeah.

Stuart: Thank you for speaking to Stocks Down Under.

Cristobal: Thank you, Stuart.