Patriot Battery Metals Corp did promise a maiden resource estimate in July and Monday July 31 is the last opportunity to deliver, with the ASX getting it on our Sunday night. Given that Night Market Research challenged PMET's credibility about its MRE timing, which I discussed in KW Episode July 14, 2023, I would be shocked if CEO Blair Way and Chairman Ken Brinsden fail to deliver. The real question is how will the market react to whatever is published? The tonnage reported will be meaningless because PMET will likely publish a set of inferrred resources at different cutoff grades so that they can isolate the higher grade Nova portion. They do have to pick a base case resource and that will probably be one that allows a resource just over 100 million tonnes to prove Night Market Research wrong.
The real one, however, which potential bidders for PMET will be looking at, will be the one which allows an optimal scale for that region. What do I mean by optimal? A key factor will be the combination of mine life and open pit mining scale. Pegmatites tend to be elongated bodies and CV5 is no exception, but when they outcrop or are close to surface they deserve to be open pit mined. But because of their elongated nature the waste to ore stripping ratio will be very high, so giant 100,000 tpd open pit operations such as you see with copper porphyry systems or what FPX Nickel contemplates for the Decar nickel project just isn't feasible for LCT type pegmatites. And since the dip is sub-vertical, chasing the dip to a vertical 300 m pit limit does constrain the tonnage available.
There is also the additional consideration of the ideal mine life. Normally one likes to aim for a 20 year mine life, but, given that we would be lucky to see a James Bay lithium mine producing by 2030, would it be wise to plan such a long mine life? Lithium is not like copper or nickel whose fundamental uses as an electricity conductor and stainless steel input are unlikely to change in the long run. But lithium use is linked to a specific technology which may be on its way out by 2040, possibly eclipsed by hydrogen fuel cells. The mission critical problem for energy transition goals is meeting the demand surge between now and 2035, which suggests choosing a mine life of 10-15 years.
For these reasons selecting a higher cutoff grade and a smaller operating scale may be more optimal than shooting for maxium size and economy of scale. In the case of Corvette, the 50 km trend may have multiple similar deposits. It might be prudent to develop multiple open pits at lower mining rates but higher grades feeding a larger capacity central processing facility that could also include a refinery so that you do not need to ship concentrates long distances. Anybody looking at PMET as a buyout target will be thinking in these big picture terms.
My prediction is that the maiden resource will be presented in a manner that allows bulls and bears alike to all claim victory, but what counts is what the Albemarles and Rio Tintos of the world see as their preferred development scenario. I wouldn't be surprised to see a range of resource estimates at different cutoff grades which includes NMR's 76 million tonne estimate all the way to 150 million tonnes. The key will be the open-pittable cutoff grade. What becomes the true "base case" will depend on the desired mine life in the eyes of a future developer. Generally when a discovery shifts from resource estimate delivery to feasibility demonstration, in essence "cost discovery", the eventual proven and probable resource ends up smaller and higher grade than the base case maiden resource estimate.
We should also keep in mind that the cut-off grade is half determined by OpEx considerations, but the other half is the revenue side. What lithium carbonate price is it reasonable to assume for the mine life? With established metals like copper and nickel the cost curves of existing mines and potential mines provide a guide to the future, linked to macroeconomic predictions about overall demand growth. Electric vehicles represent a policy driven disruptive technology that entrains lithium demand. The world has never seen anything on this scale, except perhaps in the post WW2 period when uranium as the fuel for nuclear energy caught the market's imagination. Seven decades later uranium supply limps along with an annual value below $5 billion while lithium supply, worth $200 million in 2005, is heading towards a $100-$200 billion annual market if EV deployment goals for 2030 are to be met.
Every lithium bear out there, just as during the rare earth boom of 2009-2012, will moan that lithium is everywhere, and that the world will never be caught screaming, "my kingdom for a pallet of lithium". Along with the astonishing demand trajectory there is also the reality that extraordinary lithium resources are sitting under everybody's noses, Bolivia's salars among the most staggering. But what does it take to mobilize these resources? What the Lithium Mania 2.0 detractors do not understand is that time is of the essence. How long will it take out for Chile, Mexico and Bolivia to sort out a fair split for the lithium windfall? In the case of direct lithium extraction (DLE), or claystone flow-sheets, how much CapEx and time needs to be invested in order to "know" this supply is truly part of the cost curve? Never before has so much uncertainty existed about the future price of a metal.
The reason the James Bay lithium deposits are on the radar of downstream lithium users is that their cost structure is reasonably well understood, with caveats regarding the risks that Canada's tolerance for the anti-mining lobby or First Nations extortion is absolute. But this structural opposition can vanish overnight, especially once politicians start to connect a destiny of "burn baby burn" with opposition to resource development. When PMET publishes its cutoff-grade defined range of CV5 resources, what actually matters will be in the eye of the beholders, and those beholders may include parties like Toyota who think they have secured the holy grail of a solid state lithium ion battery, and are plotting to seize the EV mass market in 2030 and beyond. The lithium input cost, even though the future commodity price may range widely, will still be a fraction of the future overall cost of an EV.
The main line of attack by NMR was that under the Lassonde Curve logic the market will lose interest as PMET shifts into the cost discovery portion of the project. This becomes a game theory problem for the potential bidders. If they all stay quiet the price will sink. But I don't think the producers have the discipline to stare down PMET as it moves into tedious feasibility demonstration. The competition in the wings are giants like Toyota who are grappling with an existential crisis. In addition there are the big oil companies. The stupid idealist view is that tomorrow we all stop combusting fossil fuels and the evil oil and coal companies can promptly descend into hell where they can burn. But the idea of an "energy transition" is not that of a cold turkey break with addiction; it is a gradual weaning of dependency.
Big oil is waking up to the fact that the period of denial and suppression is over, and is developing strategies to adapt to a future reality at odds with its historical business model. And this shift need not be because they finally cave to the climate change lobby. It could very much be because they are watching developments in fusion energy and smelling a tipping point that could deliver commercialization by 2040. Fusion energy, because it does not include the hopelessly high radiation mitigation costs that doomed the post WW2 nuclear energy dream, will blow away not just fossil fuels like coal and natural gas, but also the solar and wind renewable energy sector. What will persist is an electricity grid and the capacity to use electricity to create alternative fuels like green hydrogen whose distribution can repurpose natural gas pipelines. It isn't just companies like Toyota sensing an existential threat and potentially making moves that shatter prevailing norms; big oil faces its own existential crisis but does have an intrinsic platform it can adapt to ensure its survival. Night Market Research is assuming that the only players to buy and develop major new lithium projects like PMET's Corvette are traditional mineral or metal producers. Once PMET has its Corvette resource on the map, assuming it meets expectations, a much broader range of interested buyers stands ready to pounce.
But that is me extrapolating about big picture forces that may not be ready to deploy themselves. The Night Market Research critique I most respect is one I made earlier this year, namely the structural instability that comes from PMET's origin as a horribly flaky Canadian junior. PMET has the problem that 24 million in the money warrants sit in the hands of parties who are likely not institutional shareholders. For whatever reason they have chosen not to exercise and collect their profits over the past couple years. If the potential future owners of PMET are truly disciplined, PMET will suffer from the market question "what now?" after the maiden resource is issued. NMR correctly puts its finger on opportunity cost. The market will not care if PMET trumpets that it will go on a drilling rampage along its 50 km land package to show that there are as many as a half dozen CV5 deposits present. With a $2 billion implied value already in place, what is left, another double after you spend another 2 years duplicating CV5? That is not how retail investors think. James Bay is not like the Ekati project within the Slave Craton during the 1990s where Chuck Fipke didn't quite get it all, but did get most of it. Replication of PMET's success within the James Bay region has a much greater probability than during the diamond hunt of the 1990s.
If the James Bay fire access restrictions ease and other juniors start finding LCT pegmatites, we will see PMET warrant holders exercise and exit PMET in order to redeploy the gains into new upside potential. This will create a tax hit in 2024 for them, which will create psychological incentive to engage in gambling on other much cheaper juniors, with potential horrific consequences in December when they dump the duds in order to collect the losses to offset the crystallized PMET gains. While that worry should deter, on the contrary, precisely because this negative outcome can be contemplated, profit soaked ex-PMET shareholders will be unable to resist rolling the dice again, this time without wondering about the legitimacy of Lithium Mania 2.0 or the strange ambitions of management such as merging with some private rare earth company. This time the story has solid legs.
But what will be the driver that explodes the James Bay lithium junior space? This week Brunswick Exploration Inc announced that it has boots on the ground on the Mirage project where the goal is to find the bedrock source of a 1,700 m by 200 m field of spodumene bearing boulders. Should Brunswick report success in the next week or so, this junior with a tenth of the implied value of PMET will start to attract recycled PMET dollars. Within a few weeks Dios Exploration Inc which has a hundredth of the implied value of PMET will have boots on the ground checking out its second order precision targets. I have been following this junior's methodology closely, and I dare to say, its profound discovery potential value is not obvious from their news releases, their web site content, or their invisible corporate presentation. But Dios has significant individual shareholders whose holdings in PMET have a value bigger than the entire market capitalization of Dios. What happens if circumstances create a liquidity event that enables or forces them to exit the mother ship?
At the moment the James Bay lithium junior prices are tracking sideways. While the Canadian media is oblivious to Lithium Mania 2.0, along with both retail and institutional investors, the Australian equivalents, having experienced Lithium Mania 1.0, are completely plugged in. If PMET delivers a multi-grade cutoff set of resource estimates which allows everybody to claim to be a winner, be they bulls or bears, Australian capital could step up to absorb the paper from warrant exercise and sales by the earlier stage motley crew. This could jump start Lithium Mania 2.0 in the James Bay region in August after the juniors spent two months in the penalty box thanks to forest access bans created by Canada's pitiful firefighting capacity. I can't promise execution, but I can confidently point out the setup. |
