Energy & Resources, Talking Point

The ‘Lithium OPEC’

As Tianqi lists in Hong Kong, the story behind it and lithium rival Ganfeng


A SQM lithium mine on the Atacama salt flat in northern Chile: Tianqi owns a major stake in SQM

Lithium – known as the ‘white petroleum’ – is a metal commonly used in the making of batteries for electric vehicles (EVs). A dozen years ago in August 2010, Tianqi and Ganfeng, China’s leading producers of the metal, both went public in Shenzhen as part of efforts to create a handful of national champions. Both grew quickly thanks to sales to smartphone and laptop makers but more recently the electric vehicle industry has been driving surging demand (batteries for EVs typically require 10kg of lithium).

Ganfeng completed a secondary listing in Hong Kong in 2018 and in the same year Tianqi invested $4 billion for a 24% stake in the giant Chilean lithium miner SQM.

Ganfeng appeared to have outgrown its archrival in December 2020 when its market value surged above Rmb100 billion ($16 billion) and it was announced that it would be replacing Tianqi as a constituent stock of the popularly traded Shenzhen 100 Index.

Less than a month earlier, Tianqi had shocked investors by warning that it would default on a $1.9 billion loan used to finance the SQM investment. Since then Tianqi has managed to turn around its debt woes and its rivalry with Ganfeng entered a new phase this week after it listed in Hong Kong.

The duo is not only vying for the title of China’s leading lithium producer, however. Together, they control much of the refining and processing of the metal (Chinese firms account for at least two-thirds of the world’s lithium processing capacity). Even if international miners discover new sources of supply in Africa they will probably have to send the rock to China to be processed, for instance. Indeed, the rapid rise of the two Chinese giants is raising concerns that a ‘lithium OPEC’ backed by Chinese firms could be in the making.

How has Tianqi performed in Hong Kong since its debut?

Tianqi’s shares fell as much as 11% at one point on their debut on Wednesday, although they rebounded to close at HK$82, equal to where they were initially priced in an offering that raised about HK$13.5 billion ($1.7 billion) in the biggest listing in Hong Kong so far this year.

The offering pulled in reasonable interest from investors amid a lacklustre market. Its institutional tranche was oversubscribed more than four times. Defying speculation, Tesla didn’t buy shares in the offering. That said, South Korea’s LG Chemical, one of the world’s biggest EV battery makers, was one of the so-called “cornerstone investors” that bought a substantial stake in the equity offering.

Demand for its shares had allowed Tianqi to price its H-shares at the top end of the marketing range. Its shares trade much more strongly across the border in mainland China, however. At market close on Wednesday, its A-shares in Shenzhen carried a market capitalisation of about Rmb190 billion or Rmb128.6 apiece. That translates into a hefty 83% premium over its H-shares in Hong Kong.

There is a similar ‘A-H premium’ for Ganfeng, suggesting that international investors are more cautious in valuing companies from the sector than China’s local fund managers, and that the domestic shareholders have a smaller range of investment choices than their international peers.

The secondary listing in Hong Kong still boosted Tianqi’s total market value to about Rmb200 billion (before an overallotment option is potentially exercised), which is almost on a par with Ganfeng (Zijin, another big metals miner with lithium interests, is worth about Rmb230 billion).

Tianqi was already on its way to overtaking Ganfeng after its Shenzhen-listed stock more than doubled over the last two months on hopes that the Hong Kong listing would raise its international profile. Yet on the two trading sessions prior to its Hong Kong trading debut, Tianqi’s A-shares tumbled nearly 14%. The slide seems to have been triggered by a social media post from Ying Ying, the wife of Xu Xiang, formerly a star fund manager. Based on technical analysis, Ying claimed that Tianqi was already overvalued after a spectacular rally in recent years. “A few words from the wife of Xu was enough to wipe Rmb20 billion from Tianqi’s market value,” the news website 36Kr noted.

It’s worthwhile to digress a little on her market call. Ying isn’t a certified analyst and she insisted she has not been trading in the stock in the secondary market either. In fact, she should be familiar with the consequences of insider trading and market manipulation, because her husband was sentenced to five years in jail in 2017 for the same crimes (see WiC302). Xu was also given a record fine of more than Rmb200 million, which he was able to pay off rather easily. He has laid low since serving his time in prison but his wife’s weibo account has still been widely followed.

Ying posted her first remarks on the Sina social media platform in 2019. Prior to her market-moving comments on Tianqi this week, her posts have largely been related to divorce. Why she opted to switch to stock market commentary at this particular moment is anyone’s guess.

But back to Tianqi’s prospects: its secondary listing in Hong Kong means that China’s leading duo in lithium production are back to the same starting point in their race for investor attention. Both are now dual-listed in Hong Kong and Shenzhen, with Tianqi promising to use most of the proceeds from this week’s fundraising to pay off debts arising from the aforementioned SQM investment.

How did Tianqi survive the liquidity crunch two years ago?

According to Tianqi’s prospectus, Ganfeng’s $1.7 billion in revenues last year made it the world’s biggest lithium producer by sales. Next was North Carolina-based Albemarle ($1.4 billion), Tianqi ($1.2 billion) and SQM ($936 million).

SQM was, however, the world’s leading producer of lithium brine by output last year. That was part of the attraction in 2018 when Tianqi tabled a $4 billion bid for nearly a quarter of SQM, an outcome that would see Tianqi become the second biggest shareholder in the Chilean firm.

This was just one of the many deals that Chinese miners have been trying to pull off overseas, particularly in Latin America which has the world’s biggest lithium reserves.

The difficulty was that Tianqi was punching well above its weight in financial terms. The SQM investment was almost as big as its market capitalisation at the time and it had to finance the purchase with loans from state-backed lenders in China including Citic Bank.

It was also splashing out just when the lithium market was tipping over into a bear cycle. With a 70% decline in lithium prices in the following year, Tianqi’s income plunged by half (as did SQM’s share price).

Worse, capital expenditures were creeping up at the Greenbushes mine in Australia, a joint venture signed in 2016 with Albemarle to develop the world’s biggest lithium mineral mine. Interest expenses – to the tune of nearly Rmb2 billion a year – also weighed heavily on Tianqi’s financial health. Its auditors signed off with qualified reports on its financial statements in 2019 and 2020, with questions over the sustainability of its commercial prospects.

Reportedly Tianqi was looking for a white knight at this point. But no one – including CATL, China’s biggest EV battery maker, which has also been buying access to overseas lithium resources – seemed to be interested. In the meantime major creditors such as Citic Bank agreed to roll over Tianqi’s debts.

In late 2020 – after it warned of a potential default on a bank loan and was replaced by Ganfeng in the Shenzhen 100 Index – Tianqi agreed to sell its minority interest in the Greenbushes project to Australian miner IGO for $1.4 billion.

IGO snapped up a quality asset at a knockdown price. But there were benefits for Tianqi too, which skirted a potentially fatal credit crunch. A few months later the mood among investors turned positive after Chinese leader Xi Jinping announced at a United Nations conference that China would go carbon neutral in 2060. Champions of the EV industry celebrated it as a game changer for the sector’s prospects, despite the commitment being decades away.

Of course, that was good news for the miners too and lithium prices went on an extended gallop. By April, they had reached new records of $78,000 a tonne, even forcing Tesla CEO Elon Musk to float the idea of the electric carmaker opting to mine and refine the metal itself due to the “insane” increase in cost.

The talk of a tipping point in EV sales has been powering much of the boom, with claims that lithium production will need to quadruple by 2030 to keep up with demand. Despite retreating from its April highs, the lithium price had jumped more than 600% since the start of the year to June, from about $10,000 per metric tonne to $62,000, according to Benchmark Market Intelligence

Tianqi’s share price has gone on a spectacular bull run as a result.

Who is behind Tianqi?

In 2018 Tianqi’s founder and chairman Jiang Weiping turned 63 years-old. At the time Forbes magazine estimated that he was already worth Rmb19 billion. Others might have opted to retire in luxury at this point but Jiang ‘bet the ranch’ by investing in SQM. It was the latest of the three bold gambles that have marked his career, National Business Daily pointed out.

After obtaining a bachelor’s degree in engineering in 1982 at Chengdu College of Agricultural Machinery, Jiang started his career at a state-owned enterprise in Sichuan as an engineer.

In 1997 he resigned from his government job and started his own metals trading venture. He made the leap after visiting the Greenbushes mine in Australia, which was then owned by local miner Sons of Gwalia – and later spun off into Talison Lithium.

Jiang’s biggest client at the time was a state-owned lithium production plant in Sichuan. The lossmaking SOE was on the brink of collapse and with his own business also at stake, Jiang made his first major gamble by investing all of his personal wealth to take over the state firm in question, which became today’s Tianqi.

After years of working in lithium trade Jiang was early to identify the metal’s critical value in industrial production. He also came to the conclusion that global supply had been perennially controlled by just a few foreign firms, including Rockwood (now a unit of Albemarle), SQM and Talison.

In 2012 Talison became a takeover target of its rival Rockwood. In that same year CATL was only four years-old and the Warren Buffet-backed BYD was beginning to mass-produce its first electric car, the E6. According to National Business Daily, Jiang saw the opportunity to break the oligopoly of the international firms on lithium supply. He made his next big gamble: steering Tianqi into a leveraged buyout of Talison.

Tianqi’s success in taking control of Talison won widespread admiration at home (we didn’t write anything about this at the time – one of WiC’s bigger editorial oversights – only mentioning the deal in another article about lithium in 2018; see WiC411).

“Industry insiders have called the takeover [of Talison] the decisive battle of China’s new energy industry,” National Business Daily also noted. The experience reinforced Jiang’s belief in M&A, a tactic he would apply again in the SQM investment in 2018.

Ganfeng also had a busy week

Ganfeng’s founder and chairman Li Liangbin is 12 years younger then Tianqi’s Jiang. He initially worked as a technician at a state-owned lithium producing plant in Jiangxi before leaving his government post in 1997 when news broke in Chile that SQM had succeeded in extracting industrial grade lithium from its brine lakes.

Knowing that the breakthrough would result in slumping prices for lithium minerals – the core business of his employer – Li opted to start his own venture in lithium production, which became today’s Ganfeng.

Since 2011 Ganfeng has also made a string of acquisitions in upstream resources, including another deal announced this week for the $962 million takeover of a lithium brine deposit in Argentina, its third investment in the South American country. Reuters reports that privately-owned Lithea owns the rights to two lithium salt lakes in Argentina’s mineral-rich Salta province.

The Ganfeng bid comes on top of an existing joint venture it has in Argentina with Lithium Americas, which is aiming to start production by the end of this year.

The third major player from China in the lithium rush is Zijin Mining. It did a deal earlier this year to jointly develop lithium reserves in the Democratic Republic of Congo (see WiC585) and spent C$960 million ($744 million) in 2021 on the acquisition of Neo Lithium, a Canadian company with assets in Argentina. It announced further plans this month to spend another Rmb1.8 billion on a 71% stake in a company that’s mining for lithium in Hunan province.

At the rate at which these firms are taking key positions in the supply chain and investing in overseas mineral deposits, it may only be a matter of time before talk of a Chinese cartel starts to overshadow the wider sector.

Elon Musk weighed into the same debate this week when he warned on Thursday that “lithium batteries are the new oil”. 

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