Lithium Supply Chain Researcher Livio Filice on the Electrification of Everything, Latest Lithium M&A Activity & What's Next in the Fast-Moving Lithium Sector

Gerardo Del Real: This is Gerardo Del Real with Resource Stock Digest. Joining me today – and man is it timely – is Mr. Livio Filice. Livio, how are you doing? 

The markets are selling off. It's been a tough week. You and I have had several private conversations on everything having to do with the EV revolution, the electrification of everything. That includes mass transit, stationary energy storage, passenger EV. 

I want to get your take on some of the most recent M&A in the lithium sector, but let's keep our eye on the broader trend. I want to talk about the broader trend that is the electrification of everything. It's a space that you are dedicated to. I would love to hear your take amidst this panic sell-off on what the next 6 to 12 months look like in the sector and what you're seeing out there, because obviously it's a bloodbath in the markets today.

Livio Filice: Absolutely, Geraldo. It's great to reconnect with you and you're right, saying that this has been a tough week is an understatement for what everyone's experiencing right now in the market. And that includes the lithium equities. I have Orocobre's stock price open in front of me, it looks like it's down 7% on the day alone.

Gerardo Del Real: And that's rebounding from... it was down 10% earlier, right? So it's definitely been a tough day, a tough week, as you said. But again, I want to focus on the broader trend because the broader trend gives us a lot to look forward to if you're patient, if you're not trading on margin, if you don't have a liquidity squeeze, there's a lot of opportunities there. 

Let's start with the why. If you are looking to initiate positions in the better names here with this sell-off or in the coming months, let's talk about the broader trend. Can you provide some color on what you're seeing out there? What will continue to happen despite this near-term sell-off?

Livio Filice: Sure, absolutely. I don't think that the sell-off that we're currently experiencing was really co-related to the lithium markets at all. When we look at lithium demand and where it's coming from, obviously the vast majority of the growth is coming from lithium batteries. And where are those batteries being used are being used in transportation. So electrification of transportation and that ranges from obviously passenger vehicles to mass transit. We're seeing a lot of ferries and a wide range of other applications adopt electric electrification, electric motors. 

Then the second big growth space is stationary energy storage markets around the world. So taking a look just from a high level, what's happening in the stationary storage markets just in the past, I would say, five years, we've seen growth in probably converting to hundreds of percent. Germany alone, for example, I was looking at some figures a couple of days ago. In 2018, we reached the first 100,000 residential systems installed in Germany. And Wood Mackenzie is expecting the market to grow by 500% by 2024. 

So what does this mean? We're looking at about 6.6 gigawatt hours of residential storage capacity expected to come online in the next 4 years. When you break it down, that equates into about 1 million new residential installations over the next 4 years. That's pretty significant growth considering we've just hit the 100,000-unit mark in 2018.

Then here in Hawaii, I don't know if you've seen the headlines, obviously with everything that's happening in California. California is really shaped up to be the hot space and I've been spending a lot of my time there. So really what's happening is utility is creating power outages in select markets to prevent failure of infrastructure which has led to these wildfires. So Bloomberg New Energy Finance put together a study and they said, “Okay, what's really going to happen here?”

And they have come out with a pretty bold statement two weeks ago where they forecast 50,000 residential battery systems to be installed over the next 12 months. Maybe not on the high side, but nonetheless, that's an indication of where the market is heading.

Gerardo Del Real: A couple of points really quick before you continue, Livio, because you made some good ones that I want to follow up. 

You mentioned Germany and I think that it's important to note that a lot of the transition that's happening is government-mandated. We obviously have economics that are tied to it and capitalism that's tied to it, but we also have the other end of it where there is a big global push on a governmental level to implement a lot of these policies. 

For the second point that you made that I thought was astute, the fact that these systems, the antiquated grid, they are failing. The fact that you're having rolling blackouts around the world tells you that these systems are already failing. They're antiquated. You have to pivot and either you replace those with newer antiquated technology or you pivot to green. I mean that's really the only two choices we have. Would you deem that as accurate?

Livio Filice: Yeah, absolutely. That is accurate. And I would say that the future of energy generation is going to be more distributed compared to one large power plant feeding an entire city. We're going to move more towards distributed energy resources where you're going to have over a million battery systems scattered throughout Germany and those are all going to be coupled probably with a million solar panels that I think already are installed. 

Those collectively are going to be charging and discharging the batteries, and then they're going to be going into the grid, and then there's going to be some new markets and new business models where we can actually take that energy and trade with other homeowners. There's some companies that are already doing that and we'd call that a virtual power plant. So that's the general direction of where we're moving with these assets.

And you're correct, some of it is driven by government incentives. In California for example, there's the self-generation incentive program and the state has just committed another $800 million to the fund over the next 5 years. That's pretty significant. And in some cases where they're running electric well pumps and other critical devices, they're giving them a $1,000-a-kilowatt-hour discount, which is essentially a free battery. So the state's going to be giving away free batteries to some homeowners in select regions. And then in Germany, you have low interest rate loans and some other incentives. But for the most part, if you really look at it, these batteries are going to pay for themselves all within 5 years. And that's really exciting.

Gerardo Del Real: For people that aren't familiar with you, Livio, can you provide a bit of background and then explain to people what you do? Because you have your finger on the pulse specifically in this sector.

Livio Filice: Yeah, absolutely. So my background is in renewable energy. I've been in the space for about 13 years now. I've been entirely focused on residential energy storage for the past 7 years. I've worked with a number of different companies in business roles, including Eguana Technologies, a Canadian company out of Calgary, that's a system integrator. I've worked and developed the North American business for a German systems company called Sonnen Battery. They were actually acquired for around $500 million last year by Shell. That was a big acquisition in the space and I've also spent some time in Silicon Valley with Mercedes Benz Energy, working on TV infrastructure and residential energy storage systems.

Gerardo Del Real: Let's talk everybody's favorite topic this week, stocks, and where there's opportunities. Obviously, we talked a bit off-air and I was sharing with you, I could look at my screen and everything is an opportunity at this point because of the sell-off. 

But let's take a forest perspective. Instead of looking at the trees, let's look at the overall sector. We had some recent M&A. A company that both you and I had visited in Argentina, Advantage Lithium, proposed to be bought out by Orocobre. Obviously, both companies have been hit hard over the past week, as has everything else, but I'd love to hear your public take on the transaction. Then let's talk about opportunities in the sector for those that maybe are lucky enough to just be getting into looking at speculations in the lithium sector. 

Let's start with the Orocobre and Advantage deal. Your thoughts?

Livio Filice: Sure. I think that there's a lot more value to the asset than what's been being paid out to the Advantage Lithium shareholders. Obviously, I've been a shareholder for Orocobre for probably the past, I think,a 6 years at this point. I was a big supporter of Advantage Lithium when they spun out that asset a few years ago. I think we did well on both of them when the market rallied in 2017 and then it's obviously dipped back down now. 

I think if anyone's holding Advantage Lithium shares, it's not a bad idea to convert them over into Orocobre shares, wait for lithium prices to rebound, and realize that appreciation. Both of them, that entire basin, all the companies located there, are incredibly undervalued, I believe, at this point because lithium prices are low. 

So when I look at this, it's a bet on if lithium prices are going to go up. And if you think so, then you want to buy an early-stage producer like Orocobre or Advantage Lithium. Unfortunately, Advantage Lithium is now being taken out, which is unfortunate because I was looking to open a position over the next couple of months here.

Gerardo Del Real: Yeah, it's unfortunate because I have a sizable one that I've had for years and frankly the exploration portfolio that's also included in this transaction was very prospective and a portfolio that I thought once the market turned in a better market, those properties had great infrastructure and great chemistry and great potential in the future. But that all now appears to be under the Orocobre banner, assuming the deal and the transaction closes. 

Let's talk about what's next. Why would Orocobre take out Advantage Lithium in a basin that you and I agree has been begging for consolidation for years?

Livio Filice: Yes. Maybe we are starting to see that. Obviously, we have Ganfeng now at the table with their partners, Lithium Americas, on the other side. Advantage Lithium, their deposit was pretty impressive and I don't think anyone thought it was going to come out to that extent. It's unfortunate that they completed their exploration activities at the tail end of the lithium market. So we as shareholders have never really seen the real benefit of what we put into it.

Orocobre now is picking up that asset at a pretty nice time. Lithium prices are low, we know it's around $5,000, $5,500 dollars a tonne. So now they're coming in at a good point and picking up that asset, but you really have to ask why is Orocobre diluting their existing shareholders to purchase a large lithium deposit when they already have one that they've been working on and they're very familiar with? 

So I think, and maybe you will agree, that maybe Orocobre is positioning itself to be acquired and they want to sure they've tied it up, all the loose ends, ahead of a potential acquisition over the next year or so.

Gerardo Del Real: Yeah, I absolutely agree. Orocobre, in their latest conference call, hinted at towards that. You know, they mentioned the fact that the basin was ripe for consolidation. Obviously, if you're a major and you're looking to come in and consolidate the entire thing, you're not going to have Advantage Lithium and it's healthy and robust deposit, but comparatively small in the bigger scheme of things, lingering and presenting another roadblock or obstacle to that consolidation. 

So, if I had a confidentiality agreement with Orocobre, I would absolutely insist that they tidy up the Advantage Lithium portion of that real estate package before I made an offer. And of course now if, those Advantage shares do convert to Orocobre shares, the hope is that Orocobre garners a big premium. Right? Because, if not, a lot of people, including myself, are going to be underwater on it.

Livio Filice: Yes, absolutely. It would have to be at a premium from where it is right now. Lithium prices now range around $5,000 to $6,000 a tonne. And that's what Orocobre based its economics on. Lithium prices escalated pretty dramatically over the next couple of years, up to well over $15,000 a tonne and now they're back down. 

So really, it's a matter of where do we think lithium prices are going to go in the next 12, 24, 36 months from here. The way that I look at this is lithium is the input into these lithium batteries. At a very simple level, lithium chemical is the input into these lithium batteries and what's happened and where is demand going with lithium batteries.

You can look at every indicator in the market, whether it's stationary storage, whether it's Tesla building these very large factories around the world, LG, Panasonic, Samsung, and then a whole group of Chinese companies have recently capitalized over the past 12 to 24 months to build new factories. And those factories are currently under construction. So, do I think there's going to be a shortage of lithium? Maybe not. But definitely we're at the bottom of the price and that's only going to increase. 

So an investment in Orocobre at this point or some other high-quality producer, is going to appreciate. It's going to give you exposure to the battery, to the growth in the battery market.

Gerardo Del Real: If you were making a list for speculators and investors to do due diligence on, not recommendations, but just companies that you would recommend doing some research on, where would you start? Give me three or four names. You mentioned Orocobre, obviously they're taking out Advantage Lithium. 

Who else would you look at that you feel has a dominant moat, if we could call it that, in the space and that's going to be around to benefit from what we view as a trend that the trajectory is clear, right?

Livio Filice: Absolutely. And I think one thing that's important to notice is what we experienced in 2016 and '17, when dozens upon dozens of companies were listing and all these type of offerings and jumping in a wagon and heading down to South America, and their stock prices were $100 million and they had absolutely nothing behind this. I personally stay away from those type of investments, which is why I've always focused on Orocobre and Advantage Lithium and a few others.

So right now, I would follow the same philosophy. I think it's going to be hard to finance new assets. I would stick once again with Lithium Americas. I would've said Advantage Lithium, but now they're being acquired in Orocobre. So right now my short list is down to those two. 

It's still a very sensitive space. Look what happened with Nemaska. A lot of people got burnt on that play. So I don't think it's an industry where you want to go in and just buy blind or speculate. You're going to get hurt. So stick with the big companies, stick with the assets that are financed, and the deposits are proven and things are ready to move.

Gerardo Del Real: Well said. Livio, is there anything else that you want to chat about or that you'd like to add? It's been an insightful conversation. It always is with you. Will you be attending any conferences anytime soon?

Livio Filice: Yeah, I'm going to be all over the place.

Gerardo Del Real: As always.

Livio Filice: It's going to be a busy year trying to keep my head straight. This has been a very exhausting week, but it's presented a lot of opportunities and, as I said before, I think we're going to see an uptick in the lithium space going into 2021 once the battery plants start and construction is completed and there's more insight into electric vehicle sales. Obviously, everyone's seen what happened with Tesla stock price. It went from what $300 to $900? 

Another thing, Gerardo, I wanted to mention was the mass transit space. What's happening there is pretty interesting. In 2017-2018, we've seen a lot of transit authorities and transit associations start testing and trialing one to five buses for their local communities. And over the past few months here, we have seen Los Angeles, a great city like Los Angeles, come out and say they're going to buy several hundred electric buses. Paris said that they're going to do 800 electric buses over the next few years. Tallinn, Estonia is going to do 600. Vancouver, out on the west coast of Canada, is going to do 600 electric buses.

So clearly what's happening is we're seeing a transition from trials to full fleet electrification. That's all going to happen within the next five years. There's another interesting point is the C40 Fossil Fuel Free Streets Declaration, which has been signed by a number of mayors across the globe, saying that they're only going to buy zero emission vehicles, buses, by 2025. 

So when you look at everything that's happening in the stationary storage market and mass transit and other niche products, along with the passenger vehicle market, I think now is a good time to be buying into distressed lithium assets.

Gerardo Del Real: There's a lot to look at, Livio. It's a fast-moving sector. I want to have you back on a regular basis. Hopefully you can make time and hopefully we bump into each other here soon. I know that you're going to be on the conference circuit. I'm getting ready to ramp up here soon as well. Thank you so much for your time today. Thank you for the insights and we'll chat again soon.

Livio Filice: It's always a pleasure, Gerardo. Good luck up there.

Gerardo Del Real: All right. Thank you. Safe travels.

Livio Filice: Talk soon.

Gerardo Del Real: Bye now.