Arcadium Lithium's Low-Cost Lithium Should Benefit From Rising EV Sales Despite Volatile Prices

Strategist

Seth Goldstein

Arcadium Lithium is a pure-play lithium producer created in the Livent-Allkem merger in early 2024. The company is a top five lithium producer globally by capacity on a lithium carbonate equivalent basis. Arcadium's two lithium carbonate production resources in Argentina are among the world's lowest-cost lithium sources on an all-in sustaining cost basis.

As electric vehicle adoption increases, we expect high-double-digit annual growth for global lithium demand. Arcadium is looking to expand its Argentine brine-based lithium volumes from around 40,000 metric tons in 2023 to over 130,000 metric tons on a lithium carbonate equivalent basis by 2030. The growth will come from the expansion at its two existing resources, the Salar del Hombre Muerto and Olaroz, and the development of two new brine resources, Sal de Vida and Cauchari.

Lithium carbonate is produced by pumping brine out of the ground (primarily in South America) or via pegmatite mining that produces spodumene, which is later converted to lithium carbonate. Lithium hydroxide can be produced either from the conversion of carbonate or directly from spodumene.

Arcadium's strategy is to produce both hydroxide and carbonate. Hydroxide is a higher-quality and typically higher-priced product. Arcadium is one of the lowest-cost carbonate producers globally but has a higher-cost position in hydroxide due to the additional conversion cost. Fully integrated hydroxide producers that start with high-quality spodumene assets can produce hydroxide at a lower cost than Arcadium, but Arcadium's costs are still on the bottom half of the hydroxide cost curve.

Arcadium also owns lithium hard rock resources. Mount Cattlin produces spodumene, a lithium concentrate that is sold to converters who make the battery chemicals. The company is also developing two hard rock resources in Canada to expand its spodumene volumes over time. Arcadium plans to build spodumene processing capacity to fully integrate some of its spodumene production, while continuing to sell the remaining spodumene to converters.

Business Strategy & Outlook

We award a narrow economic moat rating to Arcadium Lithium due to the company’s strong and durable cost advantage in lithium production.

Globally, lithium carbonate is produced from either lower-cost evaporation of brine or higher-cost mining of spodumene minerals. Arcadium has a cost advantage in lithium carbonate production due to its two lucrative brine assets in Argentina, the Salar del Hombre Muerto and Olaroz, which produce lithium at among the lowest cost of any resources globally. Arcadium is also developing a third brine resource in Argentina, Sal de Vida, that should have slightly higher costs than its two resources in production, but still sit firmly on the lowest quartile of the cost curve.

The company pumps the brine above ground into a network of large evaporation ponds. Water evaporates from the ponds over the course of approximately 18 months, leaving behind concentrated lithium brine, which is then processed into lithium derivatives, including lithium carbonate. The lithium can then be further processed into either carbonate or hydroxide for batteries.

Overall, Arcadium operates on the lowest quartile of the global lithium carbonate cost curve. The company's brine assets have a slightly lower lithium concentration and, therefore, a slightly higher cash cost than the top-tier brine assets in Chile operated by Albemarle and SQM. However, after including the Chilean royalty, which is among the highest globally, Arcadium’s unit production costs are lower on an all-in sustaining cost basis when using our marginal cost of production lithium price forecast of $20,000 per metric ton. For a cost advantage moat source, we also look at an operation’s ability to generate an excess return on invested capital when prices are at the bottom of a cycle. When lithium spot prices fell below $7,000 per metric ton in 2020, the bottom of the cycle, Arcadium’s operations remained profitable, a sign of a durable cost advantage.

Arcadium also owns spodumene resources. Spodumene is a hard rock mineral extracted through traditional mining methods, that is the feedstock converted into a downstream lithium product. Arcadium’s one resource in production, Mt. Cattlin, produces spodumene at a higher cost than other Australian peers. The mine is reaching depletion of its open pit mining process. However, Arcadium is developing two hard rock projects in Canada that should sit on the lower end of spodumene production once they enter production and ramp up later this decade. These projects should generate positive economic profits, helping Arcadium’s cost advantage.

All in all, Arcadium’s cost advantage in lithium carbonate production should prove more than sufficient for the business to outearn its cost of capital over at least the next decade.

Narrow

Economic Moat

Arcadium Lithium PLC

Kinetik Holdings, Inc. provides oil and gas production and distribution services. It also provides comprehensive gathering, transportation, compression, processing and treating services for companies that produce natural gas, natural gas liquids, crude oil and water. The company is headquartered in Houston, TX.

Earnings data Q4 2023

Earnings data Q1 2024

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Arcadium Lithium Plc operates as a lithium chemicals production company. It engages in lithium production process including hard-rock mining, conventional pond based brine extraction, direct lithium brine extraction (DLE) and lithium chemicals manufacturing. The company's products include lithium hydroxide and lithium carbonate. Arcadium Lithium was founded on May 5, 2023 and is headquartered in Shannon, Ireland.

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