first analysis lithium update june 2014

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Table of Contents:Lithium conference take-aways 1Lithium project updates 9A lithium primer 12Market structure 12Applications 18Chemical properties 22Sources and production 23History 25Definitions 26

Lithium companiesCovered and monitored Ticker Price Rating

Chemical & Mining Co. of Chile SQM $30.83FMC Corp. FMC $75.00 EGalaxy Resources GXY.AX AUD0.06Orocobre Ltd. ORE.AX AUD2.09Rockwood Holdings ROC $73.43 O

Additional companies

Critical ElementsLi3 EnergyLithium AmericasNemaskaRB EnergyReed ResourcesUmicoreWestern Lithium

Lithium still poised for significant future growth

We recently attended the 6th Lithium Supply and Markets conference, providing an opportunity to hear from market experts, producers, and consumers in the space. This report details our take-aways from that conference and includes a refreshed version of our lithium primer. We continue to view ROC as the best way to play growth in the lithium market, though the to-be-spun FMC Minerals business will derive roughly 25% of sales from lithium. Our favorite speculative play is Oro-cobre, which should be starting up operations very soon.

We believe pricing for lithium carbonate and other commodity products is trending stable to slightly higher thus far in 2014, and we disagree with other market observers who expect significant long-term upward pressure on pricing. Our view is that higher prices lead more projects to appear economically attractive, encouraging new supply and keep-ing lithium carbonate in a relatively stable range somewhat dependent on the high-cost producer, subject to some short-term volatility and highly dependent on HEV/EV uptake.

Batteries remain the most important long-term growth driver, and we anticipate continued strong growth in HEV/EV demand could lead to an inflection point in 2017. We project underlying (excluding HEV/EV applications) lithium demand CAGR of 5%-6% through 2020, with de-mand for vehicle batteries boosting demand by a further 3% annually.

Lithium buyers have long desired an additional supplier, and should have new options in the near future, as both RB Energy and Oroco-bre are nearing commercialization. We see the potential for additional entrants as directly related to uptake of HEV/EV, but in general, startup projects are likely to be disadvantaged vs. existing producers ROC, SQM, FMC, and Talison in terms of cost and/or technical expertise (production and application).

LITHIUM CONFERENCE TAKE-AWAYS

We have attended the LSM conference four of the six times it has been held, allowing us to see how the landscape has changed in some respects and remained largely unchanged in others. Despite all the talk over the past several years about development of new sources of lithium supply, the vast majority of these junior suppliers are still strug-gling to obtain financing and move their projects forward. Several par-ticipants credited Elon Musk and his plan for supplying Tesla Motors’ lithium battery needs with a “gigafactory” – perhaps hundreds of such factories – for reinvigorating investor interest in the lithium sector after a particularly rough ride over the past few years for junior miners.

Update: Lithium Fundamentals and Outlook June 18, 2014

Michael J. Harrison, CFA · [email protected]

(800) 866-3272 2 First Analysis Securities Corporation

Lithium June 18, 2014

While supply and demand dynamics were key issues in the past (would HEV/EV de-mand lead to a shortage, or would new projects lead to a glut?), we believe focus is turning toward extraction and production costs, with several junior suppliers discuss-ing novel low-cost methods to convert lithium raw material into commercial products. We’ll be interested to see how these methods proceed, though we are generally skeptical that new chemical processes will work as efficiently at commercial scale as in the lab, where real-world variables can be tightly controlled.

The conference allowed us to get updates on some startup companies, though as in recent years was lightly attended by existing producers. We summarize the presenta-tions below, with those we believe of greatest interest to lithium investors first, and project updates last.

More motion, less e-motion: Is 2014 the year lithium regains its traction? David Merriman, Roskill

In setting the stage, David showed the following charts, noting the transportation end market currently accounts for 5,000 tons of LCE, or about 3% of global lithium demand in 2013.

EV/HEV accounted for 2% of global 2013 vehicle sales, 23% CAGR since 2007 off a low base, around 1.7M units in 2013. Car sales do not indicate battery demand -- EV and PHEVs were 12% of e-vehicles, but 67% of e-vehicle battery demand. Li-ion has around 70% of EV/HEV market based on battery demand, with Prius the hanger-on in NiMH (nickel-metal hydride, still 75% of e-vehicles sold).

Plug-in sales are gaining more momentum in 2013 into 2014, with Leaf the leader, and tracking ahead of Prius HEV pace at corresponding time since launch. Chevy Volt, Toyota Prius PHEV, Tesla Model S, and Mitsubishi Outlander PHEV round out the top 5 in total vehicle sales. Panasonic is the leading battery supplier at 39% share, helped by Tesla; NEC is 27% (supplying Nissan), and LG Chemical at 9% with Chevy Volt supply. Auto battery supply chain is pretty concentrated, which is typical in the industry.

CHART 1Global Lithium End Markets, 2013

Ceramics and Glass 35%

Rechargeable Battery 29%

Lubricating Greases 9%

Metallurgical Powders 6%

Polymer 5%

Air Treatment 5%

Primary Battery 2%

Aluminum 1%

Other 9%

Source: Roskill.



What to watch in 2014: ■ BMW i3 and Mercedes B-class EV, as well as upcoming i8 PHEV -- BMW has

already increased production 43% and committed to tripling carbon-fiber produc-tion.

■ China incentivizing EVs (US$9,800 subsidy for EVs, targeting 5M on the road by 2020 but currently at ~30K), and other governments may also be subsidizing.

■ HEVs: In U.S., still dominated by Toyota/Lexus with 67% share in 2013; Toyota’s continued use of NiMH batteries reduces HEV impact on lithium demand.

■ Tesla gigafactory: Aim to reduce unit cost of Li-ion battery pack by 30%, allow-ing a $35k vehicle to address broader market. Question marks around financing (Tesla said it would provide $2B of the total $5B cost), technology/chemistry, will there be other partners besides Panasonic, will there be U.S. government sup-port? Gigafactory would have profound impact on global battery industry and raw material needs.

■ See significant growth in 48v (upgrade from 12v) in mild/micro applications for start/stop capability, but these use a relatively small amount of lithium (0.2-0.4kg LCE per unit).

■ 2-wheeled vehicles: Li-ion penetration only 5%-7% vs lead-acid and gas-pow-ered. Asia-Pacific market is mature, but switch to Li-ion would drive demand.

Predicting the inflection point: Inflection is not expected until costs fall, but should see strong growth through 2017, accelerating from there as range increases and costs fall. PHEV and EV expected to be the main drivers.

Roskill’s lithium demand forecast: Low case 200k tons LCE, high case more than 500k for 2020. For 2014, EV impact still pretty limited, expected to get more mean-ingful in 2018 and beyond.

CHART 2End Markets for Rechargeable Lithium Batteries, 2013

Consumer/ Comms/

Computing 79%

Transport 10%

Power & Motive 10%

Heavy Duty 1%

Source: Roskill.



Getting from the brine to the end product Peter Ehren, Process and Environmental Consultancy

Peter is a consultant for Orocobre, has worked with BHP (Salton Sea project) and as a process engineer and R&D manager at SQM.

Every brine deposit is unique based on a number of factors (refer to Table 4 for a comparison of brine sources):

■ Composition: Variables include lithium concentration, Mg/Li ratio (tells how much magnesium has to be removed at high cost), SO4/Li ratio (determines sulfate or chloride deposit), Ca/Li ratio (calcium has to be removed as well), and potassium concentration (potential byproduct). Concentration requirements depend on the conversion process to carbonate. For example, SQM and ROC require high concentrations (6%) in their process, while Orocobre will require much lower (0.7%).

■ Climate: Variables include surface area, altitude, precipitation, evaporation rate (a function of solar energy and wind).

■ Reservoir hydrogeology: Mature vs. immature salars (which have more layers and behave differently). Porosity also a factor, as is the impact of pumping on the dynamics of the salar.

■ Reserves: Determines project life, production rates; reservoir modeling critical to prevent declining grade/concentration by overexploiting the deposit.

■ Fresh water and energy: Try to reduce water consumption given typical scarcity. FMC adsorption process is water-intensive. Energy considerations include solar for evaporation and availability of energy infrastructure (electricity/gas) for plant, brine heating, and drying.

■ Infrastructure: Distance and time to port, for both export and import of reagents (soda ash, lime, sodium sulfate, etc.)

■ Environmental management: Variables include regulatory framework, wildlife, tourism, indigenous communities, protected areas, hydrogeological issues, waste salt management, and end brine management (can you reinject into salar?).

■ Social responsibility: Working with indigenous and local communities, suppli-ers, labor force.

■ Market requirements: Increasing purity specifications, commercial inroads. ■ Cost drivers: Operational costs include reagents (soda ash, lime, sodium sul-

fate), energy, process, byproducts. Brines should have operational costs between $1500 and $2800 per ton vs. minerals between $3000 and $3500 per ton. Invest-ment costs include the resource, brine transportation, ponds, power supply, plant construction, and other infrastructure (buildings, labs, camps, transportation).

During Q&A, Peter noted he sees several constraints to increasing production in the Atacama, including regulatory issues, contract limitations, and environmental con-cerns (note ROC has been working on getting approval for increased brine produc-tion since 2009). Peter believes there are fewer production constraints in Argentina, though we would note we consider political and economic risk higher there.

Lithium-ion batteries from a cathode point of view: Trends and challenges Elewout Depicker, Umicore

Chart 3 shows Umicore’s expectations for growth in cathode materials, which are cur-rently dominated by portable electronics, but expected to see significant growth from EV/HEV through 2020, driving a 13% overall CAGR over that period. Performance and price are critical to this growth.



Portable electronics: Devices are everywhere, still driving growth. Wearables an emerging trend: Google Glass, fitbits, etc. Devices are changing, getting bigger, brighter, better performance, but thinner and lighter – this requires higher energy den-sity, more lithium ions in the same volume. Smartphone, tablets account for ~60% of battery demand now, likely grow to ~75% by 2020 as laptops market stable/declining.

E-mobility is happening: Regulations and incentives, lower prices, rising consumer acceptance and popularity, and producers placing bets on EVs. Relatively small mar-ket now, but Umicore sees it growing from 20k tons of cathode to 120k tons in 2020, a 29% CAGR, driven primarily by EVs and other e-mobility applications.

Challenges: Reduce the cost, but maintain or improve the quality. Cost efforts have led to an imbalance, where certain raw material costs as a percentage of total battery cost are going to increase, which is likely to lead to a shift to lower-cost raw mate-rial input and increased pressure on raw materials. This is already happening with a shift from cobalt toward nickel and manganese, and cathode producers are likely to choose the lithium material with the lowest total cost (carbonate vs. hydroxide). Quality control -- specifications getting tighter and customer screening getting more sophisticated. Stability is important, and impurities can have detrimental effects on performance.

Technology’s double-edged sword: Lithium and the promise/threat of new technology Jon Hykawy, StormCrow

The rise and fall of laptops and tablets is an example of how quickly technology can change markets. These changes can drive changes in raw material demand, but also note availability or lack of raw materials can be a driver of technology.

Clearly transportation is expected to be the main driver of lithium demand over the next several years, but this presentation takes a look at some of the potential technol-ogy-related drivers.

CHART 3Cathode Material by End-Market, 2013 and 2020 (forecast)

2013 2020 forecast

Portable Electronics

65%

EV/HEV 31%

Energy Storage Systems

4%

~35,000 MT LCE cathode material

Portable Electronics

42%

EV/HEV 49%

Energy Storage Systems

9%

~80,000 MT LCE cathode material (13% CAGR)

Source: Umicore.



■ Consumer, communication, and computing (CCC) grows at least as fast as electronics overall, but wrinkles include differences in laptops (40Wh battery) vs. tablet (14.4Wh Samsung or 32.4Wh iPad). PCs down 11% to 178M units, tablets up 51% to 217M units, and laptops should level off while tablets keep growing thru 2018 at least (depends on whose projections you look at). Assuming laptops keep shrinking and tablets grow, total power demand grows 12.1 GWh in 2013 to 14.2 GWh in 2018, or only 17% in 5 years (3.3% CAGR), not including other electronics not adjusting for changes in battery requirements.

■ On the other hand, consumers are requiring more from batteries, leading to changes in cathode and anode chemistry. In anode, shift from graphite to lithium titanate leads to faster charge, but lower energy density -- this would sug-gest additional 100,000 tons per year LCE of demand if all graphite in the cur-rent battery market were converted (60% increase from current demand levels). But clearly not happening overnight… this is one piece of a complex evolution in lithium battery chemistry.

■ Concentrated solar thermal working fluids: Crescent Dunes, NV project uses 32,000 tons of salt, which would include ~4,300 tons of LCE in the form of lithium nitrate for its 110 MW system, which uses a different salt. Europe is looking at 630 GW of solar thermal by 2040, which would be 24.6 MILLION tons of LCE if all used lithium nitrate in the salt mix. Again, not happening overnight, but even a single large project could have a dramatic impact on overall lithium demand.

■ There are alternatives to Li-ion batteries for electric vehicles, including metal-air batteries, layered super capacitors, and molten salt ZEBRA batteries. Similarly, in grid storage there are solutions that don't use batteries, molten salt batteries, lead-acid, flow batteries, Ambri batteries, etc. Ultimately, grid storage is probably a hodgepodge of technologies, as size matters in some cases and not in oth-ers, but in particular when the battery is close to the end user and needs to be smaller.

In conclusion, technologies could swing lithium demand dramatically -- we could see alternatives to Li-ion batteries lead to lower demand, or lithium could find applications in anodes or solar thermal and drive huge growth. Expect lithium to remain battery of choice for CCC and EV applications, maybe not for grid storage or heavy-duty, so upside seen as better than downside.

Junior lithium mining: The harsh reality Luis Santillana, Li3 Energy

In many ways, this is the presentation we have been waiting to hear for several years, as it discussed the challenges facing startups in the space. Li3 noted its inter-nal index of junior lithium miners (both brine and hard rock) is down around 75% from 2011 to present, though much of this is related to weakness in global mining over that time, particularly junior miners. (This is to be expected as junior miners more sensitive to the weaker commodity demand outlook out of China and other emerging markets.)

Overview: Of a total of 16 companies Li3 is watching, only Orocobre and RB Energy are under construction, 8 more are in some feasibility stage, Li3 in advanced explora-tion, and 5 more are in early exploration. Some market analysts point to as many as 68 total projects, and very difficult to say how many end up producing (First Analysis editorial comment: probably not many). Lack of funds is hurting the sector. Prog-ress on projects is not reflected in market value, perhaps suggesting some room for improvement if/when that happens. Asian investors had been rushing to invest in the sector, but have turned more cautious. Juniors need to look for strategic partners for money, support, knowledge, and potential offtake agreements.



Challenges: Include the macro environment and investor risk appetite, lithium still a relatively unknown sector, reliance on EV/HEV for demand growth, high hard rock operating expenses, country risk in Argentina and Bolivia, lithium-specific regulatory risk in Chile, and environmental concerns.

Is consolidation on the way? Galaxy/Lithium One, Tianqi/ROC and Talison, and investments by big industrial groups like Samsung, Toyota, etc. are recent examples. Consolidation of junior suppliers probably will continue as consumers look for an ad-ditional supplier vs. incumbents. Consolidation could help lead to viable source, and size/scale is important, maybe the only way for juniors to survive.

Juniors in the next couple of years: Likely to see 2-3 emerging mid-tier produc-ers, backed by strategic partners, not a threat to existing producers. Other juniors will need to get creative to raise funds, maybe drive consolidation. Tesla “gigafactory” a big driver in bringing attention to the sector, but will it happen?

New technologies could improve economics and reduce environmental impact, as Posco, which owns 23% of Li3, is attempting to do with its process technology. Posco’s process uses reverse osmosis to reduce lithium recovery time to 8 hours vs. 12-24 months with evaporation processes. Though the process has been tested at Li3’s Salar de Maricunga, we would note we have question marks around how much pre-processing the brine would need, and how susceptible the process would be to variations. We note Li3 had run out of money, but raised $8M from BBL (private backer) in early 2014 that funds the Maricunga project through construction.

Cost structures for lithium carbonate production: A world view Tim Johnston, Hatch

Hatch is a large engineering, procurement, and construction management firm with significant experience in lithium plants worldwide.

In looking at differences in cost structure across geographies and geologies, Hatch benchmarks with a standardized plant: 20,000 tpa lithium carbonate, assume 1.6% hard rock grade or 550 ppm brine concentration. Other factors normalized (variations by geography and geology).

Capital Costs: For a hard rock facility, the mine and concentrator account for 27% of cost, the carbonate plant is 45%, utilities 11%, infrastructure 9%, and sodium sulfate production 8%. For brine, evaporation ponds are about 51% of the cost, carbonate plant is only 22%, plant utilities 10%, infrastructure 13%, and brine extraction wells 4%. Brine production typically requires higher capital cost in any geography.

Operating Costs: Reagents are 43% of the cost for hard rock, by far the largest operating cost. These include sodium carbonate, sulfuric acid, natural gas, steam, calcium carbonate, and other reagents. Mining accounts for 10% of the cost, concen-trator 11%, labor 14%, and energy 7%. On the brine side, reagents account for 53% of the cost, including sodium carbonate, calcium oxide, sodium hydroxide, carbon dioxide, hydrochloric acid, and others. Salt harvesting accounts for 16% of costs, labor 10%, and energy (natural gas) 8%. Hard rock operating costs are higher, but there is not as big a difference in operating costs as might be thought between hard rock and brine.

How engineering can unlock value from projects: Improve product quality using bicarbonation to remove impurities, reduce pond construction costs and optimize, use cheaper and simpler materials in construction, use pre-assemblies, etc. Preparing for location-specific risks is also important and plays into cost structure.



LiSX process: Maximize lithium recovery, minimize costs Jonathan Lipp, Tenova Bateman Technologies

Bateman Technologies, part of Techint, has developed a number of solvent extraction (SX) processes to address market needs, of which lithium is the most recent.

LiSX process involves a clean brine (no calcium or magnesium) that is run through electrolysis to get a pregnant leach solution that is feedstock for the main process, where the solvent is loaded, gets scrubbed of impurities, and is stripped of lithium chloride using hydrochloric or other acid. Proprietary equipment is involved. The finished stream can be lithium chloride, reacted with soda ash to get lithium carbon-ate, converted with hydrolysis to lithium hydroxide, or different acids can be used to produce lithium nitrate or other products.

Advantages: Economics are independent of byproducts, high recovery, high purity, lower capex and opex, low factory footprint, and weather-independent. Works even in dilute solutions less than 100 ppm. Product ready in hours, and multiple lithium prod-ucts can be produced. Waste stream can be reinjected into the salar. Process can be used in main production, residual recovery with ROI of about 3 years, and waste treatment. Assuming a brine concentration of 700 ppm, Tenova says a 20k tpa LCE plant would cost $130M-$150M (vs. $230M-$250M using traditional extraction by evaporation), have operating costs of $1.33/kg vs. $1.50/kg for traditional processes, would be faster to market, and allow higher recovery.

Though this is interesting technology, we believe achieving consistent feedstock free of calcium and magnesium impurities is a key challenge and could add expense.

Lithium in Quebec: Where to next? Denis Raymond, Ministère de l’Énergie et des Ressources Naturelles, Québec

Since 2011, there have been several developments in Quebec, including a new hard rock mine, a new carbonate plant, other projects moving forward, exploration of new metallurgical processes, some regulatory changes, and progress on the EV front.

Current activities include exploration in James Bay, RB Energy’s mine and plant in final commissioning in Abitibi, and battery and processing activities in southern Quebec.

Projects in the pipeline: Nemaska’s mine in Whabouchi, Critical Elements’ Rose lithium/tantalum project, and Gleneagle Resources’ Authier project (very close to RB Energy’s resource), with Galaxy’s James Bay and Perilya’s Moblan West projects both on hold. By 2017-18, Quebec could be host to potential production of 48,000 tpa LCE (~20%-25% of global total) as well as battery production and other R&D facili-ties.

Quebec supports green and sustainable energy, including $516M Transportation Electrification Strategy 2013-2017, set to increase EV uptake through incentives and infrastructure.

Quebec advantages: Good financing resources for miners, tax incentives, good in-frastructure, preferential electricity rates, proximity to R&D and commercial markets, clear permitting process.

Matching exploration techniques to best practices for reporting resources and reserves Don Hains, Hains Engineering Company

Resource estimates allow for comparisons across projects, particularly important in brine projects. Resource is the in-situ volume, reserve is what is economically



recoverable. Best practice guidelines help identify critical issues to examine, allow for comparability between projects, and ensure relevant factors are disclosed.

Best practices can depend on the particular characteristics of the salar. Data quality and confidence is more important than grade or flow rate in estimating the resource -- lower confidence = smaller resource. Exploration methods need to match salar characteristics in order to have confidence in the data.

There are a variety of techniques for surveying, understanding the hydrogeology of the salar, drilling, estimating specific yield, sampling, and modeling the salar hydro-stratigraphically.

Reserve estimates require a dynamic model that reflects changes in the reservoir over time.

LITHIUM PROJECT UPDATES:

Whabouchi mine through feasibility, what’s next? Guy Bourassa, Nemaska Lithium

Nemaska claims the richest hard rock deposit in North America (1.53% grade), and the 2nd largest in the world (27.3M tons of reserves). The recently completed feasibil-ity study shows an even more attractive resource than assumed in the preliminary economic assessment, suggesting a longer mine life and higher NPV ($924M).

The project has moved along to the mine permitting stage, and is now exploring construction of a Phase 1 plant (500 tpa of hydroxide and carbonate) for marketing purposes. The plant is expected to use a patented conversion process to produce lithium hydroxide and carbonate using electrolysis, drawing on the advantage af-forded by low power costs. The process is relatively simple and flexible, produces lithium hydroxide in solution, which can then be converted to carbonate or finished as hydroxide.

Expected production 28,000 tpa hydroxide and 3,250 tpa of carbonate for $448M capex, most of which is the conversion plant. Cost of $3,105/ton for hydroxide and $3,771/ton for 99.99% carbonate, and we note these costs have come down since the preliminary economic assessment.

Nemaska expects to receive some government funding, but is in the process of find-ing a strategic partner and investor.

Lithium Americas: Rebooting for significant positive change Tom Hodgson, Lithium Americas

Lithium Americas (LAC) is developing a resource in northern Argentina, the Cauchari-Olaroz salar, in close proximity to Orocobre.

Based on previous conference attendance, Tom noted every project seems to claim a large resource, great chemistry and byproducts, great infrastructure, low capex and opex, IRR over 20%, NPV around $1B. LAC is no different: Cash operating costs $1332/ton for lithium carbonate, $269M capex for lithium, $45M capex for potash, expected to begin generating revenue in 2015. And for good measure, IRR of 23% and NPV of $738M.

New management team, focused on creating long-term shareholder value, develop-ing a world-class lithium company partnered with Posco. The relationship with Posco provides innovative extraction technology, a partner to build and operate the pilot plant at Cauchari-Olaroz for which LAC provides the brine, expected to be opera-tional 4Q14. LAC hopes to expand this to a commercial relationship. Posco’s process



is said to be faster than evaporation (8 hours vs 18 months), lower capex and smaller footprint, 80% recovery rate vs. typical 50%, minimizes weather risk, and is scalable.

LAC just raised $18.6m through an equity rights issue, paid off debt, and now has $8.5m in net cash on the balance sheet, assuring funding through 2015. The com-pany believes it should be able to raise more capital.

A diversified industrial minerals company Richard Clark, RB Energy

Formerly Canada Lithium, RB Energy is now commercial producing 99.95% lithium carbonate, first shipment imminent.

New management team and board. Recently raised $22.5M in equity to see busi-ness through to cash-flow positive. Canada Lithium issues related to kiln that could not meet Canadian standards, had to wait 6 months to get permitted. Weather also led to some delays this past winter because equipment had not been winterized. Also discovered the importance of using plastic piping vs. steel, as RB was getting iron contamination in the product.

Val d'Or project in Quebec is integrated with ore production, concentration, and car-bonate processing. Nameplate 20,000 tpa, cost of $3200-$3900/ton, sodium sulfate byproduct. Also have Aguas Blancas iodine project in Chile, more of a mining process than brine, a cash generator.

Cheap power and gas is key to hard rock projects. 17.1M tons of reserves at 0.94% grade. Expect $50M-$75M EBITDA in 2015/2016 assuming $5500-5800/ton lithium carbonate price; first shipment selling at $5700/ton. Pricing seen stable to slightly higher.

Orocobre Olaroz project update

We note Orocobre did not present at the conference, but felt it would be worthwhile to include some of our commentary published in late November 2013 following investor meetings with Chairman James Calaway.

We believe construction is more than 80% complete and the company remains on schedule to begin lithium carbonate production in mid-2014. Initial volume should be around half the 17,500 tons/year nameplate capacity, and ramp to full capacity could take 9-12 months.

Orocobre's flagship lithium brine source is the Salar de Olaroz, located in northern Argentina about 100 miles from FMC's resource at Salar del Hombre Muerto. While the lithium concentration in the brine is lower than that of SQM and ROC (770 mg/liter vs. 1800 mg/liter), the brine is relatively free of contaminants including magne-sium, which are costly and time-consuming to remove. As such, Orocobre claims its evaporation process will take only eight months and reach a lithium concentration of 0.8%, as opposed to ROC's process that takes roughly twice as long and takes lithium to a concentration closer to 6%.

Olaroz has options to produce byproduct potash and boron, which could further re-duce Orocobre's estimated lithium carbonate production cost of $2,000/ton to $2,200/ton. We believe variable costs are roughly $1,400/ton.

We point to Orocobre's relationship with Toyota as well as with a large Korean elec-tronics manufacturer as suggesting the company has good baseload customers that provide a head-start on commercial inroads.



The Rose lithium-tantalum project Jean Sebastian Lavallee, Critical Elements

Tantalum byproduct makes the project unique. Located in Quebec, close to Nemaska project. Still in feasibility stage, $268M capex, with focus on keeping capital costs low. Preliminary economic assessment shows IRR of 25%, NPV of C$488M.

Expect to produce 26,600 tpa of lithium carbonate at cost of $2900/ton including tan-talum byproduct credit, which would be toward the low end of hard rock producers. 0.89% lithium oxide grade, with low iron content.

Recently slowed the project to be sure the process would be optimized ahead of environmental impact assessment.

Financing is an issue right now, and Critical Elements is talking to tantalum end users about getting advance payments and exploring government-backed debt. Expect to be producing by the end of 2016; focused on financing, off-take agreements, and feasibility study during 2014.

New low-cost lithium supply in Nevada Jay Chmelauskas, Western Lithium

Western Lithium (WLC) is still three years away from permits, now looking at produc-tion perhaps by 2018. Recently completed a C$8M equity raise, and currently has $15M in net cash on the balance sheet.

WLC has a static, shallow hectorite clay resource in northern Nevada, extends for 25km, has similarities to brine for processing purposes, with low impurities, pre-dictable chemistry. Phase I 13,000 tpa LCE, Phase II would double 4 years later. Planned process involves calcination followed by water leaching to produce a brine, and a demonstration plant is planned to be up and running late 2014 in Germany, where partners have good expertise, facilities already in place. WLC envisions cash operating costs of $968/ton for lithium carbonate, adjusted for potassium sulfate and sodium sulfate byproduct credits. Pre-feasibility study points to an after-tax IRR of 20% and NPV of $373M, at Phase I capital cost of $248M.

Jay points out that additional lithium demand in the high-growth EV forecast would require 10 new projects vs. the two that are coming on stream, so there is room for WLC and others. Also points out that Rockwood, the biggest and best brine producer, has turned to hard rock for lithium molecules with its recent investment in Talison. Incremental production is coming from Chinese mineral conversion.

Organoclay mine is permitted, and plant construction is nearing completion, with pro-duction expected by late 2014, serving oilfield drilling mud market. This will provide some cash flow to help fund further development of the lithium project.

Electrolytic lithium hydroxide: The final frontier? Chris Reed, Reed Resources

Reed Resources is 70% owner of the Mount Marion hard rock project in Australia. Corporate strategy involves de-risking with strong partners, on the mining side (Min-eral Resources), and the downstream processing side (to come after feasibility and quality proven). Pre-feasibility study found pretax IRR of 94% and NPV of $321M.

Proof of concept on electrolysis process to get lithium hydroxide at a cost of $3900/ton vs competitors at $5700/ton. The integrated hydroxide process is about 1/3 the capital cost of a carbonate plant plus hydroxide processing plant. Still at pilot stage, will have some funding needs on the order of $100M for capex.



A LITHIUM PRIMER

We continue to believe lithium represents a growth market with strong secular driv-ers, and believe existing players are well-positioned in a market with relatively high barriers to entry. Topics discussed below include lithium's market structure (includ-ing cost structure and pricing), applications (including HEV/EV batteries), chemical properties, sources and production, and history. A list of useful definitions appears at the end.

MARKET STRUCTURE:

Players: SQM, Rockwood, and FMC are the main producers of lithium carbonate and lithium compounds (estimated combined 48% share of global production, the vast majority being in South America, and an estimated 72% share of global sales), with ROC and FMC having significant downstream production capability for higher-value-added lithium compounds. Australia's Talison (now owned by a 51/49 JV between Sichuan Tianqi and Rockwood) is by far the most prolific hard rock producer with its Greenbushes deposit, and its ore is converted into lithium carbonate by a number of Chinese processors, the largest of which is Tianqi. Chart 4 shows the breakout of production by volume.

RB Energy (formerly Canada Lithium) expects to begin commercial sales in 2Q14 from its hard rock project in Quebec, and Orocobre is in the final stages of construc-tion of its brine project in Argentina. Numerous other startup projects (we estimate more than 60) are in various stages of exploration or development; though some of these sources may prove attractive, we believe startups face an uphill battle against incumbent suppliers with significant expansion capability.

Production/capacity: Though production fell in 2009 as a result of the global economic downturn, we estimate production recovered at a 14% CAGR between to reach 168,000 MT of LCE (lithium carbonate equivalent) in 2013. We believe capac-

CHART 4Global Lithium Supply, 2013

SQM25%

Rockwood14%

FMC9%

Sichuan Tianqi (Talison)

39%

Other Chinese7%

Other Non-Chinese

6%

Total: 168,000 MT LCESource: Roskill.



ity utilization was around 75% in 2013, which likely falls to around 70% by year-end 2014 with the gradual ramp-up of production at RB Energy and Orocobre.

Commodity vs. downstream capabilities: We note SQM has by far the largest lithium carbonate production capability (25% of global supply), and is focused on commodity products (lithium carbonate, lithium chloride, and lithium hydroxide), with very little downstream production capabilities. However, we estimate Rockwood is

CHART 5Estimated Global Lithium Market Share by Sales, 2013

SQM16%

Rockwood37%

FMC19%

Tianqi (Talison)13%

Others15%

Source: Company reports, First Analysis estimates.

CHART 6Global Lithium Demand by Product, 2013 (LCE Volume Basis)

Carbonate - BG 25%

Carbonate - TG 22%

Hydroxide -BG 4%

Hydroxide - TG 8%

Butyllithium 5%

Bromide 4%

Metal 2%

Mineral Direct Use 20%

Other 10%

BG = Battery-Grade TG = Technical-Grade

Source: Roskill.



the global market leader when measured by total value of lithium compounds sold, followed by FMC (only about 30% of ROC's lithium sales are commodity carbonate/chloride/hydroxide; we estimate just under 50% of FMC's lithium sales are carbonate/chloride/hydroxide). Chart 5 shows the global breakout of the lithium market in sales dollars.

This speaks to the increased value-add of downstream products: For example, lithi-um carbonate may sell for $2 to $3 per pound, while downstream products like lithium metal and butyllithium can be more than 20x that price per pound. Chart 5 illustrates this point: Compare our estimates of market share based on dollars sold with market share based on production volume (in LCE - Chart 4). We believe gross margins are highest for the commodity products (60% to 80%), but downstream products gener-ate higher gross profit dollars per pound of lithium contained. Table 1 provides an illustration of the wide array of lithium derivatives, and Chart 6 shows a breakout of lithium volumes by product.

While we formerly thought of only ROC and FMC as having downstream capabilities, we believe a handful of Chinese mineral converters have capability to produce lithium metal and some other downstream products. We anticipate these converters will continue to become more sophisticated in producing a wider range of products, and higher-purity commodities.

TABLE 1Lithium (Li) Production Tree

Direct-chloride process

(alumina adsorption)

Reaction with calcium hydroxide

Raw materials from salars / brines (impure LiCl)

~60% of global production from brines

Li hydroxide (LiOH: used in greases, Li-ion battery

electrolytes, polymerization catalysts)

Li carbonate (Li2CO3: main RM, also apps in battery, pharma, glass,

ceramics, construction)

Li chloride (LiCl: big raw material, used in welding fluxes and for

humidity control)

Li iodide (LiI: used in organic synthesis, iodination, other

reactions),Li perchlorate,

Li bis(oxalato)borate, and other electrolyte salts for batteries

Li acetate (LiCH3COO: polymerization catalyst,

pharma RM), Li benzoate(LiC6H5OO:

polypropylene catalyst, pharma RM),

Li citrate, Li salicylate (agent for

pharma synthesis)

Li peroxide(Li2O2: plastics hardener, air regenerator),Other CO2absorption products

Li borohydride (LiBH4: used for selective reduction in reactions), Li zeolites (for oxygen production

through adsorptive air separation)

Li foils and anodes(key battery products)

Li sulfate (Li2SO4: used in pharma, special glasses), Li nitrate (LiNO3, used in cement curing and rubber vulcanization),

Li phosphate (Li3PO4: additive for special glasses and enamels, polyurethane stabilizer),

Li silicate, Li tetraborate (Li2B4O7: fluxing agent for RFA sample prep; used in

special glasses and greases), Li chromate (Li2CrO4: corrosion inhibitor),

Sabalith

Butyl-lithium (BuLi)(LiC4H9: catalyst for reactions in

pharmaceuticals and elastomers)

Potash and Bischofite(sold as byproducts)

Li bromide (LiBr, used in pharma, Li-ion battery electrolytes, air

conditioning)

Li nitride (Li3N, a “superbase” – fast ion conductor and potential hydrogen

storage medium)

Reaction with soda ash

Reaction with HCl

(thicker box = key material)

Electrolysis with molten KCl

Melted down, filtered, cast into ingots, and extruded

Reaction of butyl bromide or

butyl chloride with Li metal

Li hydride(LiH: reducing

agent and high-density hydrogen

source)

Li amide(LiNH2: used for condensation and

alkylation reactions)

Reaction with ammonia

Reaction with hydrogen

Li aluminum hydride (LAH)(LiAlH4: a strong reducing agent that

generates a controlled release of hydrogen )

Li tri(t-butoxy) Al Hydride (LTTBA)(selective reducing agent for organic synthesis )

Li Diisopropylamide (LDA), Li Hexamethyldisilazide (LHS), and Li Bis(trimethylsilyl)amide (LHMDS)

(strong low nucleophilic bases)

Methyl-lithium(LiCH3: alkylating and

metalating agent)

Phenyl-lithium(LiC6H5: reagent for introducing phenyl

group)

Li acetylide(synthesizer)

Li methoxideLi tert-butoxide

(auxiliary products for organic synthesis)

Li fluoride (LiF, fluxing agent, used in aluminum electrolysis, RM for

optical lenses and prisms)

Lithium metal(reduction and deoxidizing agent; RM for organic Li

compounds; apps in primary batteries and

alloys)

Source: Rockwood, SQM, First Analysis research.



Market size and growth outlook: We estimate the global market for lithium and lithium derivatives at roughly $1.2B in 2013, up from around $900M in 2009, a ~7.5% 4-year CAGR, which is lower than the 14% volume growth CAGR in LCE terms due to mix (faster growth in lower-priced commodity lithium products). Future growth rates are uncertain given significant components of lithium demand are driven by industrial production as well as the question mark surrounding uptake of HEV/EV and its influ-ence on the battery market. We assume underlying (non-HEV/EV) demand growth around 6% (similar to historical levels), and assume annual production of HEV/EV will grow to 8M vehicles by 2020 from ~1.7M in 2013 (25% CAGR). Our estimates assume this is roughly evenly split among Li-ion HEV at 1.5 pounds LCE per vehicle, PHEV at 15 pounds LCE per vehicle, and EV at 30 pounds LCE per vehicle, yielding additional 2020 LCE demand of ~57,000 MT (see Chart 7). Assuming prices similar to current levels, we would estimate global lithium sales of more than $2.5B in 2020, roughly double 2013 levels.

Cost Structure: Brine-based production is significantly lower-cost than ore-based production, though we believe the gap has narrowed over the past few years. Based on our prior conversations, we believe ROC is the low-cost producer (followed closely by SQM), with production costs in the Salar de Atacama falling in the $1,400 to $1,800 range per ton of lithium carbonate. FMC's costs are believed to be slightly higher, in the $2,300 to $2,600 range per ton. ROC's costs at its operation in Silver Peak, Nevada, are higher still, but below the lowest-cost production from ore, which we believe is around $4,000 per ton but lower than in the past as mineral converters have improved their processes. In general, we believe ore-based producers focus on industrial markets (primarily glass and ceramics), leaving mostly brine-based produc-ers to compete in the battery and other specialty downstream markets, though we acknowledge this is changing as mineral converters improve product quality. Chart 8 provides some detail on relative costs, based on companies’ public commen-tary, which may or may not be based in reality (note these differ from our estimates above).

Cost drivers for brine-based production include brine quality (lithium concentration and impurities, particularly magnesium), evaporation rates, technical expertise in

CHART 7Estimated Global Lithium Demand, 2000-2020e

0

50,000

100,000

150,000

200,000

250,000

300,000

Lith

ium

Car

bona

te E

quiv

alen

t (to

ns)

HEV/EV BatteryUnderlying

2010-2020 CAGR:6.4% Underlying8.8% Including HEV/EV

Source: Company reports, First Analysis estimates.



the production process, costs for inputs like soda ash (roughly 2 tons required for every ton of lithium carbonate produced) and energy, and the market price of potash and other byproducts. We believe the main cost drivers for ore-based production include ore quality and accessibility, and the cost of capital equipment. (Please see our above notes from the presentations entitled “Getting from the brine to the end product” and “Cost structures for lithium carbonate production: A world view” from the Lithium Supply and Markets conference for more thoughts on cost drivers.)

Pricing: Pricing information for lithium carbonate, a key lithium compound and raw material for the metal and other downstream products (accounting for more than 45% of demand) is relatively difficult to obtain. Lithium metal pricing data is even more difficult to find and of dubious utility, given most end uses of lithium are in compound or mineral form. As noted above, pricing for lithium carbonate, lithium chloride, and lithium hydroxide can be well below $10/pound, while lithium metal and downstream products are multiples of those prices. Chart 9 is based on semi-annual updates from supplier SQM on sales and tonnage in the company's lithium and derivatives seg-ment; the pricing thus represents a shifting basket of primarily lithium carbonate and other lithium compounds that provides some insight into recent trends.

SQM began producing lithium compounds from brine in 1997 (at relatively low cost), and dramatically reduced market prices in order to gain market share on commer-cialization in the early 2000s (from roughly $4,000/ton down to $1,400/ton). In light of

CHART 8Estimated Lithium Carbonate Production Cost by Producer

Est

imat

edC

ost p

er T

on o

f Lith

ium

Car

bona

te (U

SD

)

Estimated Capacity (Tons per Year Lithium Carbonate Equivalent)

Source: Orocobre, Roskill.



falling demand and growing capacity, SQM in October 2009 announced a 20% price cut on lithium carbonate and lithium hydroxide, though we believe pricing has shown a gradual recovery over the past few years. Chart 10 shows U.S. Geological Survey data based on U.S. imports and exports that give another window into the histori-cal price trend of lithium derivatives (and captures the collapse in pricing as SQM entered the market).

Pricing for downstream products tends to be more stable than pricing for the com-modity products, in part because sales tend to occur under longer-term contracts (typically one year). Because of these contracts, we do not believe downstream pric-ing fluctuates in step with commodity fluctuations, but is instead based on value-add-

CHART 9SQM Average Price for Lithium Carbonate and Derivatives (2001-2013)

$5,366/MT (~$2.44/lb)

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

1H01

2H01

1H02

2H02

1H03

2H03

1H04

2H04

1H05

2H05

1H06

2H06

1H07

2H07

1H08

2H08

1H09

2H09

1H10

2H10

1H11

2H11

1H12

2H12

1H13

2H13

Pric

e pe

r met

ric to

n

Methodology: Revenue / tonnage = price per ton

Source: SQM semi-annual reports..

CHART 10Annual Average Price for U.S. Lithium Imports and Exports (2000-2012)

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

Pric

e pe

r met

ric to

n

Source: U.S. Geological Survey.



ed, and suppliers like ROC and FMC work to move prices gradually higher regardless of commodity fluctuations.

To some extent, we view the long-run price framework for lithium as behaving like any other commodity, in that the average price is set by the cost of the incremental producer. What makes the lithium market different (somewhat more tiered in nature) is the presence of low-cost brine production vs. higher-cost ore production, and the wide variety of applications (some requiring more purified or higher-quality product vs. some needing industrial grades or simple mineral concentrates).

Long-term, we think lithium carbonate pricing is likely to range between roughly $4,000 and $6,000 per ton. Below $4,000, we would expect marginal ore-based producers to begin to curtail supply, while above $6,000 we would expect increased ore-based supply from large producers like Talison (which we believe is currently operating around 50% capacity) and potentially from new projects. Short-term spikes are likely, as even ore-based producers take a few months to ramp production; brine-based producers take much longer.

New entrants have their challenges: Existing suppliers have the best resources, with the lowest-cost production technology, downstream capabilities and existing customer partnerships, and expansion capabilities that require less capital than a startup. We believe brine production is equal parts science and art (similar to wine-making), and existing producers have an advantage over new entrants because they have had years to improve the quality and efficiency of their operations.

Many customers have demanding specifications for even commodity-type products, and existing suppliers have the capability to produce to these specifications; new en-trants will have to develop this capability with cooperation from customers. Nonethe-less, we note lithium users would clearly prefer to see more geographic diversification in supply, as most existing and potential brine production sources are concentrated within a 200-mile radius of each other in South America, where earthquakes, political unrest, or even a severe rainstorm could knock out production for an extended period of time.

APPLICATIONS:

Please refer back to Chart 1 for an illustration of global lithium end markets.

Batteries: ■ Currently use ~52,000 tons of LCE/year, primarily for consumer, communica-

tions, and computing. Growth in the battery end market for lithium since 2000 has been significant (we estimate a 19% CAGR through 2013), driven by growth in smartphones, laptops, tablets, power tools, portable devices like digital cameras and MP3 players, and more recently by growing demand for electric vehicles. As recently as 2000, the rechargeable battery end market accounted for less than 10% of lithium demand (now 29%).

■ Lithium-ion batteries (LiB) account for roughly 75% of the rechargeable battery market (and growing), and we believe ROC and FMC account for the majority of lithium carbonate and hydroxide used in the production of battery cathode materi-als (primarily lithium-cobalt-oxide (LCO)). Newer-generation rechargeable bat-teries will likely move away from the LCO cathode chemistry, substituting other materials for cobalt (such as nickel, manganese, aluminum, and iron), but lithium will likely remain a key component.

■ Primary (non-rechargeable) batteries using lithium are best for long-life applica-tions (pacemaker batteries using lithium can last 8 to 10 years, compared to 1 year for a conventional battery).



■ Hybrid electric vehicles (HEVs) and electric vehicles (EVs) offer a significant growth opportunity for LiB, as the Toyota Prius (the best-selling HEV in the world) still uses a nickel-metal hydride (NiMH) battery, which has lower performance, but is less expensive and safer than earlier LiB technology. LiB has emerged as the leading technology for PHEV and EV vehicles, and we note transportation applications accounted for ~3% of global lithium demand in 2013. We believe many of the trade-offs between safety, performance, durability, and cost have been addressed, and manufacturers are now focused on increasing scale to reduce the cost of battery systems (a la Elon Musk’s Tesla gigafactory). As Chart 11 shows, the amount of LCE in a HEV/EV battery (we assume 1 Kg/kWh) is several orders of magnitude higher than that in a smartphone; one Tesla Model S requires roughly the same amount of lithium as 2,000 iPads.

■ Given the uncertainty around how many HEVs and EVs using LiB will be pro-duced in the coming years (though estimates for 2020 have crept higher over the past few years, now in the 5M to 10M vehicles/year range), estimates for future growth of the battery end market are all over the map. For example, indepen-dent analysts Roskill project around 50,000-60,000 tons but perhaps as much as 250,000 tons of LCE demand for HEV/EV by 2020. Variables include HEV/EV penetration rates, mix of HEV vs. PHEV vs. EV, assumptions around LCE used per battery, and annual vehicle production.

■ A small but essential component: We note the cathode is the main use of lithium in LiB, and accounts for around 20% of the total battery cell cost; lithium is less than 10% of the cathode cost, meaning it is only ~2% of the cost of the cell, and less than 1% of the cost of the final battery system.

CHART 11Estimated Lithium Carbonate Equivalent Used in Common Battery Applications

5

42 48 54

5921,400

4,400

16,500 24,000

85,000

1

10

100

1,000

10,000

100,000

Smartphone(5.45 Wh)

iPad 3(42.5 Wh)

Laptopcomputer(48 Wh)

Power tool(54 Wh)

Wispere-Bike

(592 Wh)

Ford FusionHybrid

(1.4 kWh)

ToyotaPrius Plug-in Hybrid(4.4 kWh)

Chevy Volt(16.5 kWh)

Nissan Leaf(24 kWh)

TeslaModel S(85 kWh)

Lith

ium

Car

bona

te E

quiv

alen

t (gr

ams,

log

scal

e)

Source: Manufacturer data, First Analysis estimates.



Ceramics and glass: ■ A major end market for lithium minerals derived from spodumene and other ores,

as well as for lithium carbonate; in many applications lithium need not be purified, and is used as a mineral concentrate.

■ Lithium improves durability and performance of ceramic and glass products (including viscosity, thermal expansion, chemical durability, density, and workabil-ity), and also reduces the melting point of glass, improving plant efficiency. Also allows production of lighter-weight, thinner-walled glass containers.

■ In ceramics applications, lithium is valued for its ability to reduce thermal expan-sion, which is critical for applications such as heat-shock-resistant cookware. As in glass applications, lithium can improve plant efficiency by reducing firing time.

■ Other applications include photochromatic glass (for eyeglass lenses that darken when exposed to light), vitreous enamels (for corrosion resistance or decoration), high-performance optical glasses (for use in telescopes, for example), and high-temperature refractory materials.

■ We consider this a GDP-growth end market, with construction being one of the main drivers.

Lubricating greases: ■ Lithium greases can be used over a wide range of temperatures, have good

water resistance, high shear stability, and last longer than many other types of lubricants. Lithium compounds are used in an estimated 60% of lubricating greases worldwide, particularly in machines operating at high speeds and under heavily loaded conditions (i.e. high shear and high temperature). Multi-purpose properties of lithium grease lend to use of a single grease across a wide range of applications rather than multiple specialty non-lithium greases in the same machine.

■ Should grow slightly faster than global industrial production, driven by increasing substitution and use in high-performance machines.

Pharmaceuticals and polymers: ■ Pharmaceuticals remain a key end market for ROC, which is the market leader

in high-value-added organic lithium compounds. These compounds are used as reagents in the production of active ingredients used in a wide range of products, including anti-cholesterol drugs, contraceptives, and even agricultural fungicides.

■ Polymers are the key industrial application for organic lithium compounds, which are typically used to initiate polymerization in the production of polyisoprene, polybutadiene, and copolymers. Lithium initiators allow polymerization at higher temperatures, improving efficiency, and also improve the ability to control the reaction, allowing manufacture of custom products to tighter specifications and with superior properties. Key applications for these polymers include footwear, packaging and consumer goods, adhesives and coatings, tires, and construction.

■ Looking specifically at butyllithium, we believe polymerization accounts for the largest portion of sales for ROC and FMC, followed by agrochemicals and pharmaceuticals. While polymerization has seen some weakness due to slower growth rates in China and is generally a more cyclical/GDP-driven market, we believe pharma shows steady, secular growth, driven by active R&D partnerships and a strong pipeline of potential projects. On the agrochemical side, we note key customer Bayer recently began using a new process that does not use lithium, which has had a negative impact on butyllithium volumes for both ROC and FMC.

Air conditioning: Lithium bromide and chloride solutions are used in dehumidifica-tion of air and other gases, which also has a cooling effect. These lithium compounds are used in large building air conditioning systems, as well as refrigeration systems,



heat pumps, and in dehumidification/desiccant applications. We believe industrial and commercial construction growth is the main driver of this application.

Aluminum: ■ Lithium carbonate is introduced in the aluminum production process to lower the

electrolytic cell's temperature and improve conductivity. Lithium also reduces fluorine emissions.

■ Most applications are in older plants, where introducing lithium can reduce en-ergy costs by 5% to 10%. In newer plants, efficiency gains are smaller, making lithium less cost-effective.

■ Though aluminum production fell during the global economic downturn, we note the industry is experiencing something of a resurgence driven by increasing use in automotive applications, driven by fuel efficiency standards.

■ Lithium can also be alloyed with aluminum to reduce density, improve elasticity, resist corrosion, improve tensile strength, and improve performance at high tem-peratures. However, these alloys are 3x to 6x more expensive than conventional aluminum, which limits their use to critical applications (primarily aerospace).

Continuous casting: Lithium provides thermal insulation and lubrication in the con-tinuous casting of steel and iron. It also reduces the number of defective casts. Main drivers are automotive and steel markets, and industrial production.

Other applications: ■ Bleaches, sanitizers, and swimming pool conditioners: Lithium hypochlorite once

held one of the largest markets for lithium compounds, for use in commercial laundries and as a bacteria and algae reducer in swimming pools. The market today is smaller due to the high cost of lithium relative to competing products.

■ Pharmaceutical: Completely separate from the use of organic lithium compounds in pharmaceutical production is the direct use of lithium carbonate or other lithium compounds as the active pharmaceutical ingredient in the treatment of psychiat-ric disorders.

■ Metallurgy: Lithium metal acts as an oxygen scavenger for aluminum, copper, bronze, germanium, lead, and other metals, improving purity and conductivity. Lithium chloride can be used as an additive or flux for dip brazing, open hearth soldering, and welding rods.

■ Construction: Lithium compounds are used as additives in cement, adhesives, and quick-curing mortars.

■ Dyes and pigments: Lithium compounds increase solubility and brilliance. ■ Carbon dioxide adsorption: Lithium hydroxide canisters remove carbon dioxide

from the atmosphere in submarines, mines, and space vehicles. ■ Future applications: Lithium isotopes for nuclear fusion, molten lithium as heat

transfer medium for solar thermal applications.

Key lithium compounds and their applications:

Please refer back to Chart 6 for a breakdown of global lithium demand by compound or product type.

Lithium carbonate:• Primary raw material for lithium compounds• Glass and ceramics (reduces melting point, viscosity, and thermal expansion)• Aluminum (reduces melting point and air pollution in electrolysis process)• Cement (improves stiffness and reduces drying time)



• Batteries (used to manufacture rechargeable lithium-ion battery cathodes)

Lithium hydroxide:• High-performance greases• Carbon dioxide absorption• Catalyst for organic reactions• Batteries (used to manufacture rechargeable lithium-ion battery cathodes and in

electrolytes)

Lithium chloride:• Key raw material for lithium metal• Humidity control and air conditioning• Welding fluxes

Lithium metal:• Raw material for pharmaceutical production and other organic compounds• Primary lithium batteries• Aluminum and other metal alloys

Butyllithium:• Pharmaceuticals (used as a reagent in the production process)• Elastomers (for polymerization initiation)• Agrochemicals (a newer application, used as a fungicide)

Lithium bromide:• Air conditioning (industrial absorption-based systems)• Pharmaceuticals (dehydrobromation reactions)• Lithium-ion battery electrolytes

CHEMICAL PROPERTIES:

Lithium is an alkali metal, and under standard conditions the lightest and least dense of all solid elements. Like other alkali metals (including sodium and potassium), it does not appear in nature as a pure element due to its high chemical reactivity. Be-cause metallic lithium is soft, it is not used as a structural material, though it is used in alloys to improve properties. Most applications make use of the unique properties of lithium ions and compounds.

TABLE 2Advantages and Disadvantages of Lithium-Ion Batteries

Advantages:• High power storage per unit volume and weight• Higher open circuit / cell voltage• Lower self-discharge rate (power lost when not in use)• Rapid recharge• Operation in relatively wide temperature range (low better than high)• Low memory effect (no need to fully discharge before recharging)

Disadvantages:• High cost• Need for overcharge/overdischarge protection system• Safety concerns and thermal runaway• Limited life span; capacity declines with time, temperature, charge

Source: American Chemical Society, Argonne National Laboratory, Woodbank



Lithium is highly reactive (with water, oxygen, and a host of other elements and compounds) and requires special handling, as do many compounds such as lithium hydride and butyllithium; other lithium compounds, including lithium carbonate, are more stable.

Lithium's natural properties make it an attractive battery material: Lithium's atomic structure includes a nucleus of three protons and either three or four neutrons, and three electrons orbiting in two shells; the outer shell contains only one electron. Lithi-um tends to donate this electron, leaving the resulting lithium cation with a +1 positive charge. As a result of its electron structure, lithium is a good conductor of heat and electricity, and possesses a high specific heat capacity. Lithium-based batteries have a high energy density, which is a key battery property (see Table 2).

SOURCES AND PRODUCTION:

Lithium appears in nature as a compound mineral or as a component cation in brines. It is consumed as compounds, metal, or mineral concentrates, depending on the application. Due to production economics, we estimate 60% of global lithium supply comes from brines, and 40% from minerals (~20% mineral concentrates used directly in applications such as ceramics and glass, and ~20% minerals converted into other lithium compounds).

TABLE 3

Satellite View of ROC's Lithium Production Ponds in the Salar de Atacama

Source: Google Earth, Rockwood, First Analysis estimates.



To produce lithium metal, mineral concentrates or brines are converted to lithium carbonate, then lithium chloride, then to lithium metal through electrolysis with molten salt. (Please refer back to Table 1 for a more detailed look at the numerous lithium compounds, their applications, and the processes by which they are produced.)

Mineral (also known as hard rock or ore) production is primarily from spodumene ores (LiAl(Si2O6)), which typically contain 1.5% to 7.0% lithium oxide (0.7% to 3.3% lithium). Ore is mined, crushed, ground, and put through floatation to concentrate the lithium oxide. While there are multiple processes to get lithium carbonate from mineral conversion, they generally involve taking concentrated ore through a kiln/calciner, reacting with sulfuric acid, dissolving in a leach tank, and reacting with soda ash. Most lithium production was from minerals until 1997, when SQM entered the market with additional brine production; since then, brine production has accounted for the majority of global production.

Brine production requires a unique geological and climatological circumstance that yields a concentrated deposit (a salar) where water containing salts including lithium chloride forms an underground pool of brine. In order for lithium to be recovered economically, the brine in the salar must contain lithium in high enough concentration and with minimal contamination from magnesium and other salts, and the geography must have a relatively high evaporation rate -- high altitudes with little or no precipita-tion, low humidity, low barometric pressure, high winds, and high temperatures.

To purify and concentrate lithium, the brine is pumped to the surface and water is evaporated in a series of ponds with a residence time of 12 to 18 months, where other salts are precipitated out and the concentration of lithium increases from (in the case of ROC's operation in the Salar de Atacama) 0.2% lithium to 6.0% lithium. Table 3 shows an example of a brine-based lithium operation.

Recycling is also a potential source of lithium, particularly as battery size increases (for vehicle and grid storage applications, for example). We believe ROC continues to pursue lithium-ion battery recycling partly funded by a grant from the German govern-ment, and cathode producer Umicore currently has some Li-ion recycling capability. Battery recycling would provide additional lithium carbonate supply that could be rein-troduced as feedstock into battery or other applications, and we believe ROC's costs for recycled lithium carbonate would be competitive with its brine-based production.

TABLE 4Comparison of Brine Sources

Producers Est. ann capacity (tons LCE)

Avg. Li conc (ppm)

Mg:Li ratio

Evaporation Rate (mm/yr)

Avg. Rainfall (mm/yr)

Salar de Atacama (Chile) SQM, ROC 48000 + 27000 1800 6.4 ~3200 ~10Salar del Hombre Muerto (Argentina) FMC ~20000 740 1.4 ~2700 ~100Silver Peak (Nevada) ROC ~6000 240 1.4 ~1300 ~130Salar del Olaroz (Argentina) Orocobre 17500 (planned) 770 2.8 ~2000 ~50Salar del Rincón (Argentina) Rincon Li 10000 (planned) 330 8.6 ~2600 ~100Salar de Cauchari (Argentina) Li Americas 20000 (planned) 620 2.9 ~2000 ~50Salar de Maricunga (Chile) Li3 1040 8.0 ~2400 ~125Salar de Uyuni (Bolivia) 320 20.0 ~1800 ~170Qinghai Lake (China) QSLI ~5000 320 0.5 ~900 ~350Taijanier Lake (China) CITIC ~3000 260 61.5 ~2800 ~30Zhabuye Lake (Tibet) Tibet Zhabuye ~3000 680 0.03 ~2300 ~150Seawater 0.17 7588Source: Rockwood, Meridian International Research, Donald E. Garrett, Process and Environmental Consultancy, company

reports.



Notes on selected brine locations:

Table 4 provides a list of selected brine sources, with key statistics:

Salar de Atacama: Highest lithium concentration, highest evaporation rate. Second-largest brine deposit in the world (behind Salar de Uyuni in Bolivia), but largest in terms of economically recoverable lithium. Annual production capacity is 48,000 tons of LCE at SQM's facilities and around 27,000 tons at ROC, though we note a new lithium carbonate processing plant should increase capacity by another 20,000 tons. ROC began operating in the Atacama in 1984 (13,000 tons/year LCE), and SQM be-gan in 1997 (18,000 tons/year). Lithium concentration in some areas of the salar can be as high as 7000 ppm (vs. average of ~1800 ppm).

Salar del Hombre Muerto: Exceptionally clean (Mg:Li ratio is 1.4:1), but still higher-cost (due in part to lower lithium concentration) and a smaller reserve. FMC began operations in 1997-98, using direct extraction system (alumina adsorption) rather than relying solely on solar evaporation. Salar is relatively small in surface area, but deeper than the Salar de Atacama (brine can be extracted from lower depths). Lithium concentration where FMC works is ~700 ppm. FMC’s capacity is around 20,000 tons of LCE following a recent expansion.

Salar de Uyuni: No production yet. High Mg:Li ratio (roughly 3x that of the Salar de Atacama) makes it more expensive to produce lithium, because lithium chloride doesn't form in ponds unless magnesium is removed. The brine must be pre-treated with calcium hydroxide (to remove magnesium), then with sodium sulfate (to remove calcium). In addition, the evaporation rate is less than half that at Salar de Atacama. Lithium concentrations in the most attractive portions of the salar range from 500 ppm to 4700 ppm.

Salar del Rincón: We believe development plans are on hold. As in the Salar de Uyuni (and Salar de Atacama to a lesser extent), brine would have to be pre-treated to remove magnesium.

Salar del Olaroz: Orocobre aiming to start production here mid-2014. Relatively small resource, but Li concentration around 800 ppm with relatively low Mg:Li ratio. Potential production of 17,500 tons/year, and Toyota Tsusho holds a 25% stake in Orocobre's project.

Silver Peak/Clayton Valley: Li concentration was 360 ppm when production began in 1966, now down to 200 ppm (corresponds to a decline of about 1.4% per year, as-suming the rate is linear). Evaporation rate is ~40% that of Salar de Atacama.

HISTORY:

1817 - Lithium is discovered.

1855 - Lithium is first prepared as a free metal (in meaningful quantities).

1879 - Lithium compounds first used in specialty glass.

1886 - Lithium salts used as additives in aluminum electrolysis.

1923 - Industrial production of lithium carbonate, lithium chloride, and lithium metal begins.

1940s & 1950s - Lithium's properties are investigated and exploited for wartime use, including use of lithium hydride as a source of hydrogen for emergency sig-naling balloons, grease using lithium stearate for high- and low-temperature applications, and lithium-containing ceramic (pyroceram) used later in rockets and spacecraft.



1953 - Lithium hydroxide used to make lithium-6 isotope for the hydrogen bomb; government is largest consumer of lithium until roughly 1958.

Late 1950s - Significant overcapacity and new technology (read: cheap lithium) leads to increasing civilian applications for lithium, including ceramics, lubricants, aluminum reduction, and pharmaceuticals. FMC and Chemetall (was Foote, now owned by ROC) are key U.S. producers of lithium carbonate and other derivatives, using purchased lithium minerals and spodumene mines in North Carolina.

1966 - Chemetall begins Silver Peak brine operation.

1984 - Chemetall begins brine operation in Salar de Atacama.

1995 - FMC purchases Salar de Hombre Muerto.

1996 - Lithium-ion battery sales exceed $1B and account for 1/3 of the global re-chargeable battery market (up from less than $500M and 1/10 of the market the prior year).

1997 - SQM begins operations in Salar de Atacama, eventually supplying the market with 9,000 tons of lithium carbonate at sharply reduced prices, as incremental production is now brine-based rather than ore-based.

1998 - FMC and Chemetall close North Carolina spodumene facilities.

2004 - Lithium carbonate prices (and quality requirements) begin to increase in re-sponse to demand for lithium-ion batteries.

2007 - Lithium-ion battery sales exceed $5B, now accounting for 75% of the global rechargeable battery market.

2014 - Tesla announces long-term plans to build a $5B “gigafactory” with partner Panasonic capable of producing 50 GWh of batteries to supply 500,000 Tesla vehicles by 2020. The company expects to deliver 35,000 Model S EVs in 2014.

Definitions:

EV: Electric Vehicle. These vehicles have no internal combustion engine, and must be recharged via external electricity. Typical battery capacity is 20+ kWh.

HEV: Hybrid Electric Vehicle. These vehicles use internal combustion engines and also have an electric motor drivetrain, usually for low-power situations. Typically these vehicles can recharge the batteries with regenerative braking, and can shut down the engine while idling to reduce emissions and conserve fuel. Typical battery capacity is 1 to 2 kWh.

kWh: Kilowatt Hour = 1000 watts for 1 hour. 1 kWh is enough power to light a 100-watt light bulb for 10 hours (or 10 such bulbs for 1 hour).

LCE: Lithium Carbonate Equivalent. 1 pound of lithium carbonate equals 0.19 pounds of lithium (i.e. lithium carbonate is 19% lithium).

LiB: Lithium-ion Battery.

Mg:Li ratio: Ratio of magnesium to lithium in a brine source. The higher the ratio, the more difficult (and therefore costly) the brine is to process into purified lithium prod-ucts.



PHEV: Plug-in Hybrid Electric Vehicle. These vehicles have an internal combustion engine solely for charging the battery pack during longer trips. The battery is also charged by plugging into a charging station. Typical battery capacity is 10 to 20 kWh. We consider the term HEV/EV inclusive of PHEVs.

ppm: Parts Per Million. 10,000 ppm = 1%.

Primary battery: A non-rechargeable battery, manufactured in a charged state and discharged, then discarded.

Secondary battery: A rechargeable battery, in which charge can be restored after discharging.



IMPORTANT DISCLOSURES AND CERTIFICATIONSIMPORTANT DISCLOSURES AND CERTIFICATIONS

PRICE, RATING, AND TARGET PRICE HISTORY*

FMC Corp.Key Date Close Target Rating1 3/30/2012 $52.93 E

Rockwood HoldingsKey Date Close Target Rating1 8/2/2012 $43.84 $60.00 O2 10/25/2012 $47.35 E3 2/25/2013 $58.85 $75.00 O4 8/6/2013 $66.34 $78.00 O5 11/13/2013 $70.94 $82.00 O6 3/4/2014 $81.65 $93.00 O

*12-month price targets, if any, are effective with respect to the dates on which they are issued. First AnalysisSecurities Corp. does not provide 12-month price targets for stocks rated equal-weight or underweight. It usuallyprovides 12-month price targets for stocks rated overweight. The data in this chart are current as of the lasttrading date prior to the date of this report.





IMPORTANT DISCLOSURES AND CERTIFICATIONSANALYST CERTIFICATION:

I, Michael J. Harrison, attest the views expressed in this document accurately reflect my personal views aboutthe subject securities and issuers. I further attest no part of my compensation was, is, or will be, directly orindirectly, related to the specific recommendations or views expressed by me herein.

SPECIFIC DISCLOSURES:

Chemical & Mining Co. of Chile: None.FMC Corp.: FASC expects to receive or intends to seek compensation for investment banking services fromthis company within the three months following the publication date of this document.Galaxy Resources: None.Orocobre Ltd.: FASC expects to receive or intends to seek compensation for investment banking services fromthis company within the three months following the publication date of this document.Rockwood Holdings: None.

OTHER DISCLOSURES:

The compensation of the research analyst(s) principally responsible for the preparation of this document isindirectly based on (among other factors) the general investment banking revenue of FASC. FASC considers allthe companies covered in its research reports to be potential clients.

RATINGS DEFINITIONS*:

Overweight (O): Purchase shares to establish an overweighted position: Stock price expected to perform betterthan the S&P 500 over the next 12 months.Equal-weight (E): Hold shares to maintain an equal-weighted position: Stock price expected to perform in linewith the S&P 500 over the next 12 months.Underweight (U): Sell shares to establish an underweighted position: Stock price expected to perform worsethan the S&P 500 over the next 12 months.

*Stock target prices may at times be inconsistent with these definitions due to short-term stock price volatilitythat may not reflect large-holder/buyer valuations of the security.

DISTRIBUTION OF RATINGS:

The following was the distribution of ratings for companies rated by FASC as of 3/31/2014: 38% had buy(overweight) ratings, 61% had hold/neutral (equal-weight) ratings, and 2% had sell (underweight) ratings. Alsoas of 3/31/2014, FASC had provided, within the prior 12 months, investment banking services to 13% of thecompanies rated that had buy (overweight) ratings, 0% of the companies rated that had hold (equal-weight)ratings, and 0% of the companies rated that had sell (underweight) ratings. For purposes of the FINRA ratingsdistribution disclosure requirements, our stock ratings of overweight, equal-weight, and underweight mostclosely correspond to buy, hold, and sell, respectively. Please refer to "RATINGS DEFINITIONS" above for anexplanation of the FASC rating system.

USE OF THIS DOCUMENT:

Investors should consider this document as only a single factor in making their investment decision. Pastperformance and any projections herein should not be taken as an indication or guarantee of futureperformance. With the exception of information about FASC, the information contained herein was obtainedfrom sources we believe reliable, but we do not guarantee its accuracy. As a subscriber or prospectivesubscriber, you have agreed not to provide this document in any form to any person other than employees ofyour immediate organization. FASC is a broker-dealer registered with FINRA and member SIPC. It providesresearch to its institutional clients as a service in connection with its other business activities. This document isprovided for informational purposes only. Neither the information nor any opinion expressed constitutes asolicitation by us of the purchase or sale of any securities. More information is available on request from FASC800-866-3272. Copyright 2014 First Analysis Securities Corp.

To residents of Canada: The contents hereof are intended solely for the use of, and may be only be issued orpassed on to, persons to whom FASC is entitled to distribute this document under applicable Canadiansecurities laws.





IMPORTANT DISCLOSURES AND CERTIFICATIONS

To residents of the United Kingdom: This document, which does not constitute an offer of, or an invitation by oron behalf of any person to subscribe for or purchase, any shares or other securities in any of the companiesmentioned in this document, is for distribution in the UK only to persons who fall within any one or more of thecategories of persons referred to in Article 8 of the Financial Services Act 1986 (Investment Advertisements)(Exemptions) (No. 2) Order 1995 (SI 1995/1536) or in Article 11 of the Financial Services Act 1986 (InvestmentAdvertisements) (Exemptions) Order 1996 (SI 1996/1586).

ABBREVIATIONS AND ACRONYMS: The meaning of the following abbreviations and acronyms has beenidentified as not common knowledge, and we therefore provide these explanations. DCF: Discounted cash flow(model). DSOs: Days sales outstanding. EBITDA: Earnings before interest, taxes, depreciation, andamortization. EV: Enterprise value. G&A: General and administrative (expense). OEM: Original equipmentmanufacturer. R&D: Research and development (expense). SG&A: Selling, general, and administrative(expense).

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Health Care ProductivityBroadband Enabled Businesses - IT Applications

Broadband Enabled Businesses - Outsourced Services Clean-Tech / Chemicals

Health care ITFrank [email protected]

Life science technologyTracy [email protected] [email protected]

Clinical research organizationsTodd Van [email protected]

Animal healthJames [email protected]

Transaction processingLawrence [email protected]

Network securityCraig [email protected]

CRM optimizationCraig [email protected]

Business intelligenceFrank [email protected]

Education / HR technologyCorey [email protected]

Wireless / infrastructureHoward [email protected] [email protected]

Internet of things / M2MHoward [email protected]

Education / knowledge servicesCorey [email protected]

HR & accounting servicesJames [email protected]

Accounts receivable managementLawrence [email protected]

Contact center servicesHoward Smith [email protected]

Digital media, marketing servicesTodd Van [email protected]

Workforce planning and optimizationCorey [email protected]

Resource managementCorey [email protected]

Energy relatedMichael [email protected] [email protected]

WaterMichael [email protected] [email protected]

Specialty chemicalsMichael [email protected] [email protected] [email protected]

Renewable chemicalsTracy [email protected] [email protected]

first analysis lithium update june 2014

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