Over-charged

Lithium: prices down 70%

Lithium was once better known as a mood stabiliser, particularly for people suffering from bipolar disorder. It’s only in the last decade that it has established more of a reputation as a key material for the batteries that power electric vehicles (EVs).

Jiang Weiping, the founder of Tianqi Lithium, may be in need of some of its medicinal properties, after the highs and lows of his firm’s expansion strategy. After starting out strongly, his growth plan was punctured by a supply glut that pushed lithium prices down 70%. Now they’re suppressed by the impact of Covid-19 too.

The long-term prospects for lithium producers are better. But that’s little comfort to the Shenzhen-listed company, which is struggling to repay its debt after acquiring a quarter of Chilean producer, Sociedad Quimica y Minera (SQM), for $4.1 billion at the height of the most recent bull market for the commodity in mid-2017.

That purchase was largely financed by a $3.15 billion loan, which fell due last November. Tianqi had hoped to repay some of the borrowing in 2018 by raising $1 billion through a Hong Kong listing, but was pipped to the post by rival producer Ganfeng Lithium. This was the beginning of its misfortunes. Ganfeng traded badly in the secondary market as lithium prices started to crash, extinguishing Tianqi’s hopes of a blockbuster debut on the Hong Kong bourse. Citic Securities later afforded Tianqi a one-year extension on the loan.

Yet that did little to solve the company’s cashflow crunch. In December, Tianqi raised Rmb2.93 billion ($424 million) through a rights issue, although Jiang’s wife and son-in-law subscribed to 40% of the amount.

This May Jiang announced plans to sell a 6% stake. This would raise Rmb1.44 billion – based on the current price of Tianqi’s A-shares – and still allow him to retain a controlling stake.

Together, the two equity deals will buy the company more time, but not much. This Thursday, a $5.6 million interest payment came due on a $300 million dollar bond maturing in 2022.

According to S&P Global Market Intelligence, Tianqi had total debts of $4.45 billion at the end of the first quarter, of which $1.9 billion were short-term. On the other side of the balance sheet, assets were $6.06 billion, with cash and equivalents amounting to just $174 million.

Rating agency Moody’s had already downgraded the company’s credit from Baa3 investment grade to Caa1, just two notches from the bottom, since last summer. In late April, Tianqi said it expected to report a net loss of up to Rmb932 million for the first half of the year.

Tianqi’s future now depends on a sale of some of its prized acquisitions or the introduction of strategic investors to its share register.

One thing in its favour is that the Chinese government will want to ensure adequate lithium supplies for its EV industry. It’s possible that a vehicle manufacturer with a battery business like BYD, or a pure battery producer like CATL, might be tempted to become a strategic investor or buy one of the resources.

The main asset reportedly up for sale is Tianqi’s 51% stake in Australia’s Greenbushes, the world’s largest operating lithium mine, which it purchased in 2018. Its joint venture partner is Albermarle, another of the world’s largest lithium producers, to which it owes $100 million for overdue sales.

Albermarle’s boss Kent Masters says the New York-listed company is “interested” in buying Tianqi out of the JV. “But we’re also mindful of the current market environment,” he added. “We know the Chinese government will probably have influence on where that asset ends up.”

Conversely, Albermarle has first right of refusal over other buyers and there’s the Australian government to consider too. And that bilateral relationship isn’t great, with Chinese state media going mixed metaphor this week in describing Canberra as “a giant kangaroo that serves as a dog of the US” (see WiC496 for more background on the fraying ties). Its foreign investment board recently blocked CATL affiliate Yibin Tianji from buying a stake in ASX-listed AVZ, which has a lithium project in the Congo.

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