The world produced 540,000 metric tons of lithium in 2021, by 2030 the World Economic Forum is forecasting that global demand will reach over 3 million metric tons. As recently as 2015 only around 30 percent of lithium was used in batteries, that figure is around 75 percent now and it is estimated that by 2030 95 percent of lithium will be used in batteries.
But there are risks that companies seeking to capitalise on the lithium-boom must examine in the earlier stages of the lithium life cycle. How well these risks are managed will ultimately determine which players reap the biggest benefits and those that will be discharged before they have a chance to contribute. The first three risks to consider are:
- Water and environmental risks
- Political risk
- Business continuity
Today around 40% of lithium is produced through evaporation and chemical recovery from salt brines through a process that uses a surprising amount of water as well as hydrated lime and soda ash. The United Nations Conference on Trade and Development (UNCTAD) reports how lithium mining requires huge amounts of groundwater to pump out brines from drilled wells, with estimates suggesting lithium production using this method requires almost two million litres of water to produce one ton of lithium.
As well as impacting water supplies in water-stressed areas, the brine involved in lithium production can also contaminate the supplies of water to human populations and to agriculture, causing potentially significant detriment to local populations and the environment. These water risks could easily impact other risk areas, and should your lithium mine lead to any pollution or environmental damage in the processing phase, the associated biodiversity loss, will inevitably have social and political implications. Under these conditions only the best in the industry will retain their license to operate. Already we are seeing reports of water scarcity in the Atacama salt flat region of Chile and with the expected growth in production to meet demand, these pressures will increase exponentially.
Securing funding for lithium production is likely to depend on specialist insight on water risk, which could also incorporate predictive climate modelling to consider the impact of a warming world on water supplies throughout the life of the mine.
Using frontier technology such as direct lithium extraction (DLE) techniques, could present ways to reduce water use and the expanse of environmental damage as compared with brine evaporation but novel technology requires substantial derisking, and securing financing and risk financing will be more difficult for early adopters before techniques scale up.
Managing political risk in lithium production
When considering locations for lithium production, you should undertake a political risk assessment of your prospective location, seeking to understand the political landscape, in particular around issues such as the incumbent government’s nationalisation agenda. Lithium is an increasingly coveted resource. Many, including Elon Musk have termed it the new oil, so it is unsurprising that it is likely to give rise to heightened political risks for lithium mining companies.
Mexico moved to nationalize lithium in 2022 and, more recently, reportedly cancelled lithium mining concessions held by a Chinese company and introduced other constraints such as limits on the number of foreign workers.
Permitting is still challenging and complex. There have been a spate of recent permits being denied in light of local opposition, including the 2022 withdrawal of the exploration licences of Rio Tinto by the Serbian government following sustained popular protests over plans for a lithium mine.
One way of de-risking lithium production in areas of heightened levels of political risk is working with a local company or government body in a joint venture. Alternatively, you could tie-in a major international body or bank to a project through financing or becoming a shareholder. This could help to protect your investment and educed the chance of nationalization.
Business continuity risks in lithium production
There is no better time than during the design and engineering phase of a project to introduce risk engineering to think about how your investment is protected from fire, impacts of climate change and other traditional perils, such as Machinery/Equipment Breakdown. Thinking about what will happen if a critical piece of infrastructure or equipment is damaged improves the resilience of your operation long term and lowers your risk financing costs in the future. Consideration of contingent risks, for example those that could potentially impact at key suppliers or customers, and integrating strategies to mitigate these, is also fundamental at the planning stage.
On another front and when working in non-OECD countries you may need to consider questions like what happens in the event that your project lead is kidnapped?
Working through these scenarios early and with the support of experts in these areas such as risk engineers and specialist service providers is critical to ensure your investment doesn’t burn to the ground or grind to a halt because your people are impacted.
With rush comes risk. While there is an undoubted global dash for lithium, not rushing the risk management process makes commercial sense and separates you from those who will stumble later. The successful companies will be those that consider each risk in turn and interrogate the interconnectivity of various exposures.
Specialist risk analytics that put numbers against those key trade-offs is a great way to understand the cost-benefits between your options.
For expert perspectives on finding smarter ways to manage mining sector risk, including those associated with lithium production, please get in in touch.
