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Rio Tinto’s recent production of lithium in California could mark a step change in the mining industry

On some scenarios, Macquarie thinks the lithium price could double over the next four years

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Until now, the major mining companies haven’t played much of a role in the lithium space. The reasons are largely historical. Go back fifteen years and lithium mining was a just an obscure niche in a sector that offered plenty of easier profits elsewhere. The bulk of the production was in South America, and it was undertaken by specialists who knew their commodity, and knew their way around what was then a very opaque market.

The advent of electric vehicles changed all that.

Lithium companies are now mainstream at the junior and mid-tier level, and the major South American producer SQM (NYSE:SQM) has come out from the shadows and is now capitalised at US$14bn on the New York Stock Exchange.

It was only a matter of time before the attractions of this value creation trickled upwards, and Rio Tinto (LON:RIO)(ASX:RIO), one of the world’s big four miners, has now taken its first tentative steps towards serious nickel production.

Earlier this month, Rio announced that it had produced battery-grade lithium at its Boron project in California, where an investigation of old tailings from borate production showed economical levels of lithium.

Initially the company had been looking for gold in the tailings, but was delighted to find lithium instead. It wasn’t always the case that companies preferred lithium to gold, but times change.

Rio is now contemplating a US$50mln investment at Boron to allow it to scale up lithium production there to 5,000 tonnes year. Recent forecasts from Maquarie Bank show the lithium price increasing by between 30% and 100% over the next four years, so it may be that Rio’s decision is largely made for it.

Even so, at this stage the revenue line from the lithium will be just a drop in the ocean when compared to Rio’s huge earnings from iron ore, copper and coal.

Nevertheless, a major move into lithium would work in more ways than one for Rio, as a company that has been dogged in recent years by public relations disasters. For one thing, lithium is generally touted as a key commodity in a green future, something Rio Tinto is keen to get on board with.

“We produce materials essential to human progress,” runs the strapline on the homepage of the company’s website. A growing profile in lithium production would underline that point, and if the lithium price just happened to be on the rise, then so much the better.

The company does have the potential to produce more lithium already. In Serbia it is developing another borate project, and this is also likely to throw off lithium as a significant by-product.

Whether Rio Tinto, or any of its other peer group at the major end of the mining sector, is likely to get into the mining of lithium as a primary product is a more intriguing question.

Although South America continues to play a major role in lithium production, the world’s largest producer is now Australia, a country where both Rio Tinto and BHP already have significant interests, and with which they are very familiar.

Iron ore is key, but both companies also have significant coal operations there. Yet, with ESG pressures growing, the question is: how much longer are these going to be sustainable from a public relations point of view? We’ve already seen Anglo American (LON:AAL) recently move to divest itself of a major coal asset in South Africa by spinning it out into a separate entity on the London Stock Exchange.

Could it be that the majors in Australia will end up making similar moves? And if so, why not replace the outgoing coal capacity with incoming lithium capacity. There would be a certain symmetry to such an approach, and no shortage of companies with existing projects to choose from, if brownfields was to be preferred to greenfields.

SQM has already dipped a toe in the water, with its involvement with Wesfarmers in the Mt Holland project in Western Australia. But there are plenty of other Aussie companies with promising-looking projects, like Lithium Australia (ASX:LIT), Jindalee, (ASX:JRL),

Further afield, it’d also be interesting to see if companies like AVZ Minerals (ASX:AVZ), Piedmont Lithium (ASX:PLL) or Savannah Resources (LON:SAV) start to show up the large company radars – Savannah, after all, is already in business with Rio Tinto in Mozambique.

After all, the age of the electric vehicle is just beginning. The majors are well positioned in copper and nickel already, and Glencore also holds a commanding position in cobalt. But if lithium turns out to be the standout winner, the top companies are going to want a seat at that table too. It’ll be interesting to watch.

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