While governments, industry and financial institutions are collaborating across Europe and North America to establish frameworks for battery metals investment and supply chains, Australia has seen a reluctance among mainstream banks to provide development capital for pre-production lithium projects.
This is despite both the Federal and Western Australian State governments’ backing of a battery chemical production hub in Perth and the broader international movement towards electric vehicles and lower emissions.
"Uncertainty over future cash flows"
Speaking with Cannings Purple’s Investor Insight, Gilbert & Tobin energy and resources group partner Justin Little said the investment barrier comes from project revenue risks and long payback periods for the scale of debt being sought, which can run up to several hundred million dollars.
He said: “Uncertainty over future cash flows in the absence of published index prices for spodumene concentrate has led banks to hold back from major lithium project investments.
“With up to 30 different reporting agencies offering lithium price bulletins, according to lithium content, chemical state, the location of the buyer and whether the lithium is sold on long-term contracts or the spot market, it is easy to understand why uncertainty exists in the market.
“The best current measure for a bank to rely on when assessing project finance is published offtake arrangements, including the credit quality of the off-taker, the agreed price mechanism and the supply-demand balance.”
Proposed lithium price index
The London Metals Exchange (LME) has recently asked companies that currently asses battery-grade lithium prices to submit proposals for the supply of a lithium price index.
It also announced its new lithium cash-settled futures contracts would be released in the fourth quarter of financial year 2019, with aim of providing greater price certainty through transparency of LME contract trading.
Little told Investor Insight that difficulties he had seen in recent offtake deals related to identifying an appropriate spodumene concentrate price, with some using either Chinese import or export prices.
As Chinese purchase prices tend to be understated and sale prices overstated, Little believes having a spodumene concentrate contract price on the LME would allow mainstream debt providers to hedge pricing risk.
Financing dynamics to shift in the long-term
Based on his experience with lithium clients, Little said the existing uncertainty results in Australian banks opting to provide short-term credit provisions rather than major project investments.
This pushes companies towards more expensive offshore bond markets, large private equity groups or to pursue funding options directly with customers.
Little added: “The current gap in the debt finance market has been treated as an opportunity by specialist lenders such as Swiss private equity firm Pala Investments and Australia’s Tribeca Global Natural Resources Credit Fund, who have emerged to assist the small end of the resources sector.
“We don’t expect this trend to continue in the longer term, and anticipate the debt finance dynamics around lithium and other battery chemical projects will shift quite quickly once one or more of the big four lenders in Australia commits to a major project or two in this emerging sector, which we think is likely to happen.
“Foreign and local banks are currently nibbling at the hook with smaller amounts, with BNP Paribas providing small working capital facilities for both Pilbara Minerals and Galaxy Resources, while Westpac is also active in the sector.”
Pricing mechanism will help address concerns
Along with concerns around medium-term oversupply and the growing diversification of the sector, speculation in the market has caused the banks to respond with caution.
Little said: “Lithium is all the rage now, but the loan periods are seven to eight years and who knows what the lithium market will look like then.
“If [banks] can’t hedge their risk on price, they just won’t lend.
Another element of reluctance from banks, according to Little, is not understanding the marketing of lithium, together with the potential lithium rush to end up being a bubble.
He adds: “A better understanding around the marketing of lithium and having an LME pricing mechanism will help address these concerns.”