EP67: The Lithium Gold Rush: Can the American Smackdown Formation Transform the U.S. from Lithium Dependence to Lithium Independence?

Summary:

In this episode, we explore the potential of the Smackdown Formation in Arkansas as a source of lithium, particularly for battery production. The discovery of significant lithium deposits within the formation has sparked interest in Direct Lithium Extraction (DLE) technology, a faster and more efficient process compared to traditional methods. While Standard/Equinor's project utilizing repurposed bromide wells shows potential cost savings, we highlight the volatility of the lithium market, including historical price drops and uncertain demand as a concern. This market instability presents substantial risk for investors, potentially impacting the financial viability of the project despite its promising technological advancements.

Questions to consider as you read/listen:

1. What are the potential benefits and risks of the Smackdown Formation's lithium extraction project?
2. How does Direct Lithium Extraction (DLE) technology compare to traditional lithium extraction methods, and what are its implications for the lithium market?
3. What are the key factors that will influence the economic viability of lithium extraction in the Smackdown Formation, and how might these factors change in the future?

Long format:

 The Lithium Gold Rush: Can the American Smackdown Formation Transform the U.S. from Lithium Dependence to Lithium Independence?

SMACKDOWN FORMATION

Smackover Formation is an extensive, porous, and permeable limestone aquifer that hosts vast volumes of mineral rich brine. According to reports that broke on October 24, 2024 machine learning (AI) was used to examine data to discover that within that brine is believed to be a large volume of lithium. Samples from Arkansas were analyzed by the USGS Brine Research Instrumentation and Experimental lab in Reston, VA, and then compared with data from historic samples within the USGS Produced Waters Database of water from hydrocarbon production. The machine learning model was then used to combine lithium concentrations in brines with geological data to create maps that predict total lithium concentrations across the region, even in areas lacking lithium samples. Lithium is used in batteries. The U.S. relies on imports for more than 25% of its lithium. The USGS estimates there is enough lithium brought to the surface in the oil and brine waste streams in southern Arkansas to cover current estimated U.S.  lithium consumption.  The low-end estimate of 5 million tons of lithium present in Smackover brines is also equivalent to more than nine times the International Energy Agency’s projection of global lithium demand for electric vehicles in 2030.

THE TECHNOLOGY BEING USED AND MEANS OF PRODUCTION

Standard/Equinor and ExxonMobile are the two main outfits that will be exploring and producing lithium at this field. They both use the same exact technology. They are both using Direct Lithium Extraction (DLE) technology. It is a process that very loosely is like fracking which is my somewhat area of expertise.

Direct lithium extraction (DLE) often involves drilling wells into lithium-rich saltwater reservoirs, which can range in depth but are typically between 300 and 2,000 meters underground. This depth is crucial to reach the brine layers that contain sufficient lithium concentrations. The extraction wells are usually drilled vertically, although some advanced methods may include horizontal or directional drilling to increase contact with brine-rich areas and improve lithium recovery rates.

Once the brine is brought to the surface, it goes through a series of steps to selectively pull out lithium using specialized materials or filters, often relying on ion-exchange or adsorption technology.

No additional water is typically introduced into the well in direct lithium extraction (DLE). Fracking chemicals are generally not used in DLE. DLE doesn’t rely on fracturing the rock to release lithium, unlike hydraulic fracturing (fracking) used in oil and gas extraction. Instead, it simply involves pumping the naturally occurring lithium-rich brine up to the surface through wells, where lithium is then extracted through chemical processes.

While the specifics can vary depending on the company or technology, the general process includes the following steps:

Brine Pumping and Pre-Treatment: The lithium-rich brine is pumped from the underground reservoir to the surface. Sometimes, it undergoes initial filtration to remove larger particles and impurities, such as sand or debris.

Lithium Adsorption/Absorption: The brine is then passed through a series of filters, membranes, or specialized materials designed to attract and hold lithium ions. Common materials used in this step include lithium-specific adsorbents, which can selectively trap lithium while letting other minerals and salts pass through. These adsorbents are often lithium-selective resins or materials like manganese oxide or aluminum-based composites.

Elution (Lithium Release): Once the lithium is captured on the adsorbent, a chemical wash (usually a mild acid or a proprietary solution) is applied to release the lithium from the adsorbent material. This wash produces a concentrated lithium solution, sometimes called a "lithium eluate."

Purification: The lithium-rich solution is then further purified to remove any remaining impurities or unwanted ions, such as calcium, magnesium, or potassium, which may be present in the brine. This is typically done through additional filtration or precipitation steps.

Conversion to Lithium Compounds: The purified lithium solution can then be processed into a commercially usable lithium compound, often lithium carbonate or lithium hydroxide, which are commonly used in batteries. This final step typically involves precipitation reactions or crystallization to produce the desired lithium product.

Reinjection of Brine: After lithium extraction, the remaining brine, now with much lower lithium content, is reinjected back into the reservoir. This helps to reduce environmental impact by maintaining local groundwater levels and minimizing waste.

Each of these steps is designed to maximize lithium recovery while using less water and space than traditional methods. The specific materials and chemical processes in each step are often proprietary and can vary depending on the technology provider.

DLE does not require drying for months. DLE is a faster and more efficient alternative to traditional lithium extraction methods (Chile), which can take months to years. DLE can extract lithium from brine in hours or days.

I really didn’t get that deep into whether or not the pre-existing extraction wells could be repurposed without significant cost other than taking Standard’s say so. I would have gone there next or eventually I suppose. But in all truth I got gun shy with the 80% and also thoughts of possible softening of demand and what if both ExxonMobile and Standard pump out this much on top of Australia and Argentina and Chile. It’s not a mature enough or stable enough market for my liking. Your mileage may, of course, vary.

Whether it is a pre existing hole that can be repurposed doesn’t impact the means or technology between the two projects.

THE ECONOMICS OF THE STANDARD/EQUINOR PROJECT

I chose to examine the Standard/Equinor proposed exploration and production as they have made public their investment prospectus. Like all prospectus, they need to be read with some suspicion as it is definitely an advertisement to invest. In my past experience, such things need to be not only read critically but also with notions of increasing costs, adding time to time tables for delays and finally reducing yield projections.

Standard/Equinor have a potential advantage over ExxonMobile as their project calls for repurposing existing well infrastructure used in bromide extraction now for lithium extraction. This is potentially a large start p cost savings to the tune of between $2.5 to $7 million in well drilling and initial production costs. In theory, former bromide wells could potentially be repurposed for direct lithium extraction (DLE), depending on the specific geological and chemical characteristics of the brine in those wells. Bromide and lithium are often found in similar types of brine reservoirs at similar depths, so existing bromide wells might have infrastructure and access to brine sources that could contain lithium, making them candidates for DLE with some adjustments.

Bromide wells already have the necessary infrastructure, such as pumps, pipes, and well casings, which could be adapted for lithium extraction. However, the equipment might require upgrades to accommodate the specific needs of DLE technology, such as specialized filtration and extraction systems. Any repurposing of wells would need to meet environmental regulations for DLE, which differ from bromide extraction. Regulations may cover reinjection practices, groundwater management, and waste disposal.

Nevertheless with all things being equal, the initial costs of extraction will be less for Standard/Equinor than ExxonMobil.

THE SPECIFICS OF THE STANDARD/EQUINOR PROSPECTUS

The South West Arkansas Project Pre-Feasibility Study (PFS) by Standard Lithium and Equinor presents an investment overview and analysis for Standard Lithium Ltd.'s and Equinor’s project provides the relevant information.

The following key investment aspects and assumptions have been outlined:

Project Scope and Ownership:

Standard Lithium holds the rights to extract lithium from brine under an option agreement with TETRA Technologies Inc., with a 10-year exploratory period.

The project targets lithium-rich brine within the Smackover Formation, covering an area of approximately 36,839 acres.

The study expands upon a 2021 Preliminary Economic Assessment, offering updated methods and extraction plans to produce lithium hydroxide, primarily for battery applications.

Production Capacity and Methodology:

Target production is 30,000 tonnes per annum (tpa) of battery-grade lithium hydroxide, with potential to increase to 35,000 tpa.

The resource extraction involves a network of brine supply and injection wells, leveraging a refined flowsheet based on Direct Lithium Extraction (DLE) technology. Brine from wells will be processed and reinjected to maintain aquifer pressure.

Economic Viability and Cost Estimates:

Capital Expenditure (CAPEX): Estimated at $1.3 billion, including contingency, primarily for the well field, pipelines, DLE units, and processing facilities.

Operating Expenditure (OPEX): Estimated at $5,229 per tonne of lithium hydroxide, with electricity and reagent costs as major components.

Revenue and Profitability: The study assumes a lithium hydroxide price of $30,000/tonne, yielding strong financial projections:

Net Present Value (NPV): $3.09 billion after-tax, based on an 8% discount rate.

Internal Rate of Return (IRR): 32.8% after-tax.

Assumptions and Risks:

Market Price Stability: A flat rate of $30,000 per tonne for lithium hydroxide over the project life.

Regulatory Compliance: The assumption of future royalty rates aligned with Arkansas regulations.

Technical Feasibility: Continuous operation and optimization of the DLE process, with ongoing development to minimize reagent costs and manage waste.

Resource Sustainability: Long-term viability of lithium concentration and production rates based on well data and geological modeling.

Sensitivity to CAPEX/OPEX Fluctuations: Economic sensitivity analysis indicates the project remains viable even under adverse CAPEX, OPEX, and pricing scenarios.

The PFS confirms the South West Arkansas Project’s investment potential, supporting its transition to further feasibility assessments and regulatory steps for future production if conditions precedent are met.

WHY I WAS AND AM A PASS…

The breakeven price for lithium hydroxide extraction in the South West Arkansas Project can be derived from the operating cost estimates. The all-in operating cost is approximately $5,229 per tonne of lithium hydroxide for the base case production scenario of 30,000 tonnes per year. This cost represents the minimum price at which the project would break even, excluding additional financial considerations like CAPEX recovery, taxes, and any unforeseen royalties not included in this analysis. Thus, the breakeven price is approximately $5,229 per tonne of lithium hydroxide for operational sustainability. As of September 4, 2024, the spot price for lithium hydroxide was $10,550 per metric ton. So it seems to make sense in the current market.

The estimated cost to produce lithium hydroxide per tonne for the South West Arkansas Project, based on the provided figures, is broken down as follows:

All-in Operating Cost: $5,229 per tonne of lithium hydroxide, which includes:

Workforce Costs: $371 per tonne

Electrical Power: $1,291 per tonne

Reagents and Consumables: $1,158 per tonne

Natural Gas: $15 per tonne

Maintenance, Waste Disposal, Miscellaneous Costs: $1,073 per tonne

Indirect Operational Costs: $168 per tonne

Royalties: $741 per tonne

Sustaining Capital: $415 per tonne

This cost structure covers all essential operational expenditures needed to produce one tonne of battery-quality lithium hydroxide.

Looking outside of the US to see the competition. Australia can and does produce lithium hydroxide at approximately $6,600 per ton of LCE (assuming integration with lithium mining), compared with $10,400 per ton of LCE for China. Indeed, South Korea and Canada, the closest countries to Australia from a cost perspective, still have costs approximately 24 to 51 percent higher than Australia’s.

But one has to examine history of the market as a whole and its strength…

In 2023, lithium hydroxide and lithium carbonate prices fell by more than 80% after reaching record highs in 2022. Yikes. That right there scared me off. If all of the sudden China rolls back its overproduction of NEVs and the American market softens on them, then might that be a problem? Will simply producing as much as they outline above crater the price too?

Too risky for my blood. I wish Exxon and the others well. They can take a loss leader every day of the week. I prefer not to.

CONCLUSION

In conclusion, the economic viability of the Smackdown Formation's lithium extraction project, while promising on paper, presents substantial risks that temper its attractiveness as an investment. The formation holds vast lithium resources that, if fully utilized, could supply a significant portion of U.S. lithium demand, with advanced DLE technology offering an efficient and environmentally conscious extraction method. Standard/Equinor's project shows potential advantages in cost savings by repurposing bromide wells, which could reduce initial infrastructure expenditures and further enhance feasibility.

However, the project remains vulnerable to significant market volatility. Historical trends in lithium pricing, including the sharp price drops in recent years, raise concerns about future profitability. If global lithium supply increases due to production from Arkansas alongside other leading regions such as Australia, Argentina, and Chile, a price decline could undermine revenue forecasts. Additionally, while current projections estimate competitive production costs, unforeseen CAPEX or OPEX increases, regulatory changes, or shifts in market demand could also impact profitability.

While major players like ExxonMobil may have the resources to absorb potential market fluctuations, the risks associated with lithium's price instability and uncertain demand growth render this project too speculative for some investors. For those seeking a stable return, the Smackdown Formation’s project may be best approached with caution, given the current state of the lithium market and its sensitivity to global supply-demand dynamics.

My Sources:

https://www.newsweek.com/enormous-reserve-hidden-treasure-found-under-arkansas-1972840

https://www.usgs.gov/news/national-news-release/unlocking-arkansas-hidden-treasure-usgs-uses-machine-learning-show-large#:~:text=The%20USGS%20predictive%20model%20provides,a%20type%20of%20artificial%20intelligence

https://corporate.exxonmobil.com/what-we-do/delivering-industrial-solutions/lithium#Whyitmatters

https://d1io3yog0oux5.cloudfront.net/_eb6382573a303ca3bd820e96a6747e7d/standardlithium/files/pages/standardlithium/db/369/description/South_West_Arkansas_Project_-_Pre-Feasibility_Study_2023.09.18.pdf

https://lithiumharvest.com/knowledge/lithium-extraction/what-is-direct-lithium-extraction/#:~:text=Direct%20Lithium%20Extraction%20(DLE)%20is,environmental%20footprint%20of%20lithium%20extraction

https://news.pontemanalytics.com/p/lay-the-smack-down

https://www.mckinsey.com/industries/metals-and-mining/our-insights/australias-potential-in-the-lithium-market#

https://www.reuters.com/markets/commodities/china-lithium-boom-slows-sagging-prices-batter-high-cost-miners-2024-03-13/