Last year, Canada declared lithium a critical element – essential to the economy. But if the country is to become a player during lithium 2.0, it will take a lot more than news releases and politicians uttering bromides.Chris Helgren/Reuters
A global move to zero-emissions electric vehicles is fuelling a once-in-a-generation boom in lithium, a critical component in EV batteries. But Canada is struggling to establish a foothold in one of the world’s most vital minerals as China’s vise grip on global supplies tightens.
Canada has already had one kick at the lithium can, and it wasn’t pretty. About five years ago, lithium prices exploded based on unrealistic anticipated EV demand. Then prices crashed to earth in 2019 and 2020.
Lithium 1.0 ended badly for one high-profile and hugely ambitious Canadian company in particular: Nemaska Lithium Inc., which was financially backed by the Quebec government, but then had to seek creditor protection in late 2019. It was almost a textbook case of what can go wrong when governments race to invest in a hot new sector, only to get slammed when the bubble bursts.
But now the price of the silvery white, super light metal is again on a tear, and trading at record levels. M&A activity is booming, with Canadian development companies in the crosshairs. EV sales are rising exponentially, and with more stringent global commitments to reduce carbon emissions made at last year’s COP26 climate summit in Glasgow, demand for lithium ion batteries is expected to increase over the next decade – and keep growing.
“This time is different,” said Lukasz Bednarski, author of Lithium: The Global Race for Battery Dominance and the New Energy Revolution. “Demand is more robust. This battery economy is really growing faster than it was in the past. We are talking about much, much bigger volumes in terms of sales of EVs, batteries and energy storage.”
Canada talks a big game when it comes to battery metals, with pronouncements from politicians such as Ontario Premier Doug Ford that his province is set to become a global EV supply chain hub. But the reality is very different. In fact, there are no lithium mines, no lithium processing facilities and no lithium ion battery makers in Canada. The country is a minnow compared to the United States, Australia and especially China.
Virtually unique among the world’s biggest lithium players, China mines, processes and feeds the metal directly to domestic battery makers, who then sell to Chinese EV makers. Because the entire supply chain is located in one place, China’s costs are much lower than anywhere else.
China also has a global lock on refining, with about two-thirds of lithium mined in the West shipped there for processing. The dynamic has seen true industry giants emerge. China’s Contemporary Amperex Technology Co. Ltd., a do-it-all lithium company, has a stock market value of US$206-billion. That’s 57 times bigger than Vancouver-based Lithium Americas Corp., which is aiming to bring a mine in Nevada and two in Argentina into production.
China has become so dominant that there are fears that it could one day hold the West for ransom over lithium, which sits at the epicentre of the clean energy revolution.
“Every day China gets more and more powerful,” said Arne Frandsen, co-chief executive of Pallinghurst Group, the London-based private equity firm that now owns a majority of Nemaska and plans to spend $1-billion to begin mining and producing lithium in Quebec. “Having a supply chain that is dependent on China is not without risk.”
Last year, Canada declared lithium a critical element – essential to the economy. But if the country is to become a player during lithium 2.0, it will take a lot more than news releases and politicians uttering bromides. It will take billions of dollars in funding, massive reductions in regulatory red tape and long-term strategic thinking from the highest levels of government.
“When I think of where we’re at, compared to where we need to be, we have work to do,” said Brendan Marshall, vice-president, economic and northern affairs, with the Mining Association of Canada.
To understand how the lithium industry works, the first thing you need to do is chuck your old mining textbooks in the recycling bin. Many traditional rules don’t apply. The copper and gold industries are based on producing as many ounces as possible, as cheaply as possible, and refining metals on site using technology that’s been around for more than 100 years. The end customer is an afterthought because there is a guaranteed market for the metal.
The paradigm in the lithium industry is flipped. Producers have to find the customers first, then design and build a mine and an advanced refining plant around the needs of the consumer.
“Those steps are completely foreign to the culture of the traditional mining industry in Canada,” said Don Bubar, chief executive officer of lithium development company Avalon Advanced Materials Inc. “We are producing basically a specialty product that has to meet the needs of the market.”
Each stage of the supply chain is demanding, often involving new and untested technology, and every lithium producer does things a little differently. Unlike South American lithium deposits, which occur in easy-to-access brine, Canadian lithium tends to be found in much-harder-to-crack hard rock. Consequently, Canadian deposits require an additional round of processing in a “converter,” which adds considerable time and expense, and increases the likelihood of something going wrong.
While China is sprinting toward the finish line in the global lithium race, Canada is stuck in the starting blocks. Canada is home mainly to early-stage lithium exploration companies, many of which have assets abroad. A handful of those companies have projects that could start production in a few years, but many are a decade or more out from that milestone – if they ever make it.
Nemaska, the company closest to production in Canada, has learned the hard way how treacherous the road to success can be.
Three years ago, then publicly traded Nemaska was the in-vogue Canadian lithium investment. Its charismatic CEO, Guy Bourassa, promoted the company’s novel electrolysis processing technology for converting lithium as a game changer.
In 2018, Quebec-based Nemaska raised $1.1-billion to build a lithium mine east of James Bay and a processing plant. The investment included $80-million from the provincial government. The company also attracted a large contingent of retail shareholders, many of whom went all in.
Nemaska rode a wave of excitement and the company eventually reached a stock market value of $1-billion. Then, seemingly out of nowhere, Nemaska shocked the market, saying its costs had spiked dramatically higher than predicted. A few months later, Nemaska collapsed and sought creditor protection, wiping out the value of its shares.
“There’s thousands of shareholders in Canada that lost their life savings in this,” said Frank Pschonder, a retail investor, whose own holdings were wiped out.
Pallinghurst paid $100-million to acquire the carcass of Nemaska during creditor protection in 2020. Even though Pierre Fitzgibbon, Quebec’s Economy Minister, admitted Nemaska 1.0 was “a financial disaster,” the province doubled down on its investment, putting another $95-million into Nemaska 2.0.
Pallinghurst’s Mr. Frandsen says the first iteration of Nemaska made many rookie mistakes. It inflamed community tensions by choosing Shawinigan, a large residential area, to locate its chemical plant. Nemaska signed agreements with potential lithium purchasers that gave away huge amounts of margin up front. It plowed ahead on mine construction with a team that had no experience in building mines. The construction timeline was far too aggressive and debt levels were alarming. “It was toxic,” he said of the company then.
The new iteration of Nemaska plans to do almost everything differently. The chemical plant will be in Bécancour, across the St. Lawrence River from Trois-Rivières and the site of a former nuclear plant. Bécancour is also close to rail lines.
Gone are the punitive offtake agreements with suppliers. Instead, Nemasaka will focus on selling its lithium at market prices, thus retaining a lot more profit. Pallinghurst is also an experienced mine builder, having overseen the construction of nine mines in the past.
Mr. Frandsen, however, has no illusions about how tough the road ahead is. Pallinghurst has already spent $200-million, and has about another $800-million to go. First production isn’t expected for at least four years. While he thinks the electrolysis technology Mr. Bourassa touted has promise, the company will likely use a conventional conversion process, at least in the beginning, a step that will further reduce risk.
But Mr. Frandsen says Canada holds one huge trump card compared to the rest of the Western world when it comes to the lithium supply chain: an abundance of clean hydro. Canadian lithium producers such as Nemaska should have a much cleaner extraction footprint than many others, especially Chinese producers, which don’t have a sterling environmental reputation. In an era in which there is huge pressure on the mining industry to cut its carbon footprint, zero-emissions power could be a big draw for new investment.
“If you want to produce electric vehicles that are going to help in the decarbonization of transportation, and if you want big lithium-based batteries that are going to store renewable energy, it’s counterintuitive to use dirty lithium,” Mr. Frandsen said. “You need to use as much renewable energy as possible, and you need to set the goal to be carbon-neutral. Because why on earth would you make batteries, if in the production process you are polluting nearly as much as the car that you are replacing?”
But as the Nemaska experience shows, establishing a new lithium supply chain takes a long time, and requires big financial bets over the long term. Success is far from a sure thing, and who will pay for much-needed infrastructure such as processing plants is unclear. Government funding for lithium has come mainly from Quebec so far. Ottawa has shown little interest in committing the billions that may be necessary.
Yves Tiberghien, professor of political science at the University of British Columbia (UBC), believes Canada needs to think in terms of decades, not years, when it comes to critical minerals. Canada also needs to learn a hard lesson from the past when it let critical technology slip out of its hands. In 2009, Nortel Networks Corp., a Canadian pioneer in 5G telecommunications technology, collapsed.
During Nortel’s liquidation, China’s Huawei, then an upstart in 5G, recruited dozens of Nortel scientists. Twelve years later, Canada is nowhere in 5G, while Huawei is a world leader. Canada, in fact, now is fearful of the Chinese monster it helped create. Prof. Tiberghien believes the federal government should have rescued Nortel and kept it afloat financially. Had it done so, Canada, not China, might be the world leader.
“It was a lack of strategic thinking and a lack of anticipation of how important 5G would become,” Prof. Tiberghien said. “For Canada, it was a critical loss.”
Canada must not make the same mistake in lithium, he says. Japan, South Korea and France intervene in their economies all the time, with targeted investment in critical industries. Even the U.S., the most market-based global economy, is moving in this direction. President Joe Biden’s recently passed US$1.2-trillion infrastructure package includes more than US$6-billion for the battery sector, and another US$50-billion for the broader EV supply chain.
Also on the table in the U.S. are thousands of dollars in new “Buy American” EV tax credits that consumers can claim only if the cars and batteries are made within its borders.
The contrast with spending in Canada is shockingly stark. Ontario recently unveiled plans for establishing an electric battery infrastructure that contained no new funding whatsoever. Despite that, Mr. Ford expressed confidence Ontario can attract as many as three battery plants by 2030.
The Mining Association of Canada’s Mr. Marshall thinks that goal is pie in the sky. U.S. auto makers, he points out, are choosing their home country for battery plants, in large part because of huge government financial incentives.
“This is an extremely fierce investment environment and while Canada and Ontario have features that are attractive, the level of investment and tools that are being put in place by other jurisdictions [is far higher],” he said.
Instead of trying and failing to attract battery makers, Mr. Marshall believes Canada should concentrate on building more lithium mines, and establishing manufacturing prowess in the less glamorous segments of the supply chain, such as battery parts, including anodes and cathodes. Canada has followed this template in the auto sector to great success; homegrown parts makers Magna International Inc. and Linamar Corp. are world beaters.
Canada could also help the lithium industry simply by doing away with outdated rules and regulations – which would not cost a penny. Because of a severe shortage of facilities in Canada that can process lithium bulk samples, the metal often needs to be shipped to Europe.
But in Ontario, that entails getting an exemption to a regulation that dates back to the First World War. The rule was put in place to prevent the shipment of metallic elements to Germany for armaments. Despite Canada and Germany being staunch allies for decades, the rule hasn’t been rescinded.
Avalon’s Mr. Bubar said that a few years ago, his company wanted to ship lithium concentrate to a European company for processing. But there were so many hoops to jump through, the deal fell apart.
“It took so long,” Mr. Bubar said. “By the time we were ready to do it, they said ‘Forget it.’ Canada does not have a good reputation in the international investment community, unfortunately, for getting anything done in this whole new emerging sector.”
Mr. Bubar also believes that lithium companies shouldn’t be regulated under the Mining Act, but rather as advanced manufacturing companies. Doing so would drastically speed things up early in the lithium supply chain process, when product testing is paramount.
While Canada hopes to stimulate investment in battery metal infrastructure, it also has responsibility for protecting the small contingent of homegrown lithium companies that already exist. The federal government already vets any takeover deal of a Canadian company by a foreign buyer on national security grounds. If Ottawa suspects the transaction is a threat to national security, a deal undergoes a formal review under Section 25.3 of the Investment Canada Act (ICA).
Last year, Ottawa sent a strong signal of intent when it nixed Chinese state-controlled Shandong Gold Mining Co. Ltd.’s attempted takeover of Canadian gold miner TMAC Resources Inc. That transaction was kiboshed because the gold mine in question is on strategically sensitive land in the Arctic.
While military security has historically taken centre stage in driving Ottawa’s decisions on foreign takeovers, increasingly economic security around critical minerals such as lithium has come to the forefront. In fact, Prime Minister Justin Trudeau recently asked for a federal review of existing investment legislation, with the goal of further protecting Canadian industry from hostile foreign concerns. Innovation Minister François-Philippe Champagne was given instructions to modernize the Investment Canada Act and enact stronger measures to mitigate economic security threats.
Still, despite ostensibly taking a tougher stance against foreign takeovers, the federal government is not practising what it preaches. The Globe and Mail reported this week that Ottawa recently gave the go-ahead for state-owned Zijin Mining Group Co. Ltd. of China to acquire Canadian lithium development company Neo Lithium Corp. without conducting a formal security review.
The decision surprised some security experts who had predicted the deal would be closely scrutinized against the backdrop of fears about supply of the critical mineral in Canada, and concerns over the potential loss of intellectual property to China. Toronto-based Neo Lithium is developing a project in Argentina. In an era when Canada’s weakness in lithium has become glaringly obvious, scrutiny over Ottawa’s future vetting of foreign acquisitions is only expected to intensify.
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