Clean TeQ’s (ASX: CLQ; US-OTC: CTEQF) Sunrise project in New South Wales, Australia, is one of the largest nickel/cobalt deposits in the world and one of the largest and highest grade accumulations of scandium ever discovered. The project has proven and probable reserves of 143.3 million tonnes grading 0.59% nickel, 0.10% cobalt and 47 parts per million of scandium for 843,000 tonnes of contained nickel, 142,000 tonnes of cobalt and 10,300 tonnes of scandium oxide – enough ore reserves to support a mine life of more than 50 years. The project envisions delivering 2.5 million tonnes of ore to the leach circuit every year. Nickel and cobalt production will be refined on site to either battery grade sulphate or, as envisaged in the latest phase of studies, cathode precursor for the global lithium ion battery market. Production will support anywhere between 1-2 million electric vehicles per year. In addition to the nickel and cobalt, the Sunrise mineral resource contains enough scandium to produce 16 million tonnes of aluminum-scandium alloy, the company says.
Average annual (metal equivalent) production rates in the first decade of the mine life are forecast to total 21,293 tonnes a year of nickel and 4,366 tonnes of cobalt. Capex, including a contingency, is forecast to come in at about US$1.83 billion. Average annual post-tax free cash flow is estimated at US$306 million on revenues over the life of mine of US$16.3 billion, based on US$24,200 per tonne nickel (inclusive of sulphate premia); US$59,200 per tonne cobalt; and US$1,500 per kilogram of scandium oxide. At an 8% discount rate, Sunrise is expected to generate a post-tax net present value of US$1.21 billion, a post-tax internal rate of return of 15.4% and pay back the capex in just over five years.
The Northern Miner recently caught up with Clean TeQ’s Melbourne-based CEO Sam Riggall, and asked him for an update on the project and his outlook for nickel and cobalt markets.
The Northern Miner: An integrated Clean TeQ/Fluor engineering team completed a project execution plan for the Sunrise project late last year. How far along are you with the project now?
Sam Riggall: The project is permitted and ready to commence development. We delivered the Project Execution Plan in September 2020, which updated the definitive feasibility study (DFS) with a significant amount of engineering — in fact, we’ve spent about A$70-A$80 million (US$53-61 million) in the past 18 months —to ensure we’ve front-end loaded the project for successful delivery. Construction will take about three years. So the focus now is on financing. We have a strong consortium of international banks on the debt side, targeting gearing of about 50% for the project.
On the equity side, we are looking for one or more strategic partners into whose supply chain Sunrise can be fully integrated, with a view to controlling and driving down battery raw material costs. This includes cell manufacturers, cathode producers, auto original equipment manufacturers (OEMs) and trading houses, all of whom are looking for long-term, safe and reliable supply of battery materials. Electric vehicles demand new approaches to supply chain management, which is reflected in Sunrise’s design philosophy. Overall, the project is in really good shape. It is a large, unique asset in a market that needs ridiculous volumes of these key metals.
TNM: Clean TeQ says without controlling nickel and cobalt costs there is no economic EV strategy. And Sunrise will have negative C1 cash cost per lb. of nickel after by-product credits over the first 25 years of its mine life. How can Clean TeQ keep the cost so low?
Riggall: Recent estimates suggest nickel and cobalt use in batteries will need to grow, respectively, at 35% and 20% annually over the next decade, mostly because of electric vehicle demand. These are growth rates that these metal markets have never encountered, let alone sustained. When you look at the global pipeline of new nickel and cobalt projects it’s difficult to see where this metal is coming from, even if you anticipate high incentive prices. In our view, metal consultants and industry analysts are playing a very dangerous game, having little regard to the development challenges for these two metals when assessing the true potential of industry project pipelines. This is not lithium, where resources are geologically abundant, in safer parts of the world and with relatively low capital intensity. So, in a market that is on the cusp of explosive growth, the nickel and cobalt cupboard is relatively bare, a fact that we believe is not well understood in the boardrooms of the global automakers. But even if we assume individual OEMs can secure the metal they need over the next decade or two, they are horribly exposed to metal price volatility. We estimate that for a battery plant the size of Tesla’s Gigafactory in Nevada, a move back to historic high nickel and cobalt prices adds about US$1.8 billion in additional nickel and cobalt procurement costs, when compared to fully integrating raw material supply with a cost structure similar to Sunrise. It adds about US$50 per kilowatt hour to pack costs, which is simply unsustainable.
The reason Sunrise has a negative nickel cash cost is that it benefits from exceptionally high cobalt by-product credits. The project’s cobalt-to-nickel ratio is between three and five times higher than existing laterite operations today, so at today’s cobalt price, our cobalt revenue would cover all our cash production costs. We also benefit from very low acid consumption given the relative absence of alkali minerals in the resource. Sunrise is one of the largest, if not the largest, cobalt resources in the world outside the DRC.
TNM: Are you concerned at all about new or evolving battery technologies that might use less cobalt or perhaps none at all?
Riggall: Despite battery manufacturers wanting to reduce their dependence on cobalt it is still extremely important. We still see significant interest in cobalt when discussing offtake for Sunrise, which suggests to us that, despite the public announcements, most OEMs see it having a role in their future cell chemistries. We should also recognise the good work that the auto and mining industries are doing to raise awareness of supply chain issues in DRC and working to fix them. For those OEMs who don’t want to manage that risk, a project like Sunrise provides an alternative.
Cobalt thrifting has a downside, by doing little more than rearranging the deckchairs on the Titanic. Because in an NMC811 chemistry you replace cobalt with nickel, a 10% increase in nickel prices now has a four times greater impact on cell cost than an equivalent 10% increase in cobalt prices. Of course, there is always the option to migrate to chemistries with no nickel or cobalt, such as lithium-iron-phosphate (LFP) or lithium-manganese-oxide (LMO).
But there are significant trade-offs in energy density, stability and power that need to be managed. In a competitive market where vehicle range is going to be a critical differentiator for first-time EV purchasers, we think nickel/cobalt chemistries will have a large market share. Likewise, some people hope that step-change technologies, such as solid-state batteries, will solve the problem without ever recognising that they usually contain the same cathode metals.
TNM: What are the current dynamics around cobalt supply?
Riggall: It’s hard to identify where future cobalt supply is going to come from, even under the most conservative EV forecasts. Bear in mind that, as a by-product, companies rarely decide to build a new cobalt mine. It is usually copper and nickel pricing that drives the economics of new cobalt supply, which adds an additional layer of complexity for forecasts. The DRC will remain the key source of supply for the foreseeable future because geologically there is no alternative. But as I said earlier, we expect the supply chain in DRC to mature and provide a level of transparency and assurance that automakers will eventually be comfortable with. And that would be a great outcome for a country that needs foreign investment and communities that will benefit from new industrial development.
Rarely mentioned are other markets for cobalt. Cobalt is a non-substitutable metal in high temperature super-alloys for jet aircraft engines, both civilian and defense. Likewise, it’s important in some chemical industry applications. As you can imagine, for a country like the United States, as the world’s largest manufacturer of advanced jet aircraft engines, almost 100% reliance on DRC mining and Chinese refining creates some supply chain vulnerabilities and strategic dependencies.
With new and recommissioned mine developments in DRC over coming years we expect the cobalt market to be relatively well balanced until 2023/2024. Beyond that it is hard to see what other projects are available. That’s where Sunrise is important. It will rank in the top 10 cobalt producers globally — the largest outside DRC — which provides alternatives for customers looking for lower risk. New laterite developments in Indonesia will also provide some additional tonnage in the near term, but we expect some of these projects to be delayed and over budget, now the Indonesian government has banned deep sea tailings disposal. If you’re a director of a global automaker, the first question you should be asking your management and procurement teams is: do we have enough nickel and cobalt for the back half of this decade? While supply-demand curves look at metal balances in a given year, procurement discussions for those metals can commence many years earlier, and you may therefore find markets tightening much faster than expected. I think we are starting to see some of that now reflected in strong moves with metal pricing.
TNM: Where you do see prices for nickel heading over the next few years?
Riggall: We know the nickel market well, but we don’t have a better crystal ball than anyone else. That said, of all the battery metals, nickel is the one that will really hurt the auto sector. What we do know is two things — future nickel supply for EVs depends heavily on development of laterite resources, and laterite development is capital intensive and slow. There just aren’t any quality nickel sulfide resources in the world right now that could deliver what the car industry needs. Capital intensity for laterite development is, we believe, between US$50,000 and US$60,000 per tonne of installed nickel capacity. We think that’s realistic given the complexity of these projects, including what we’ve seen built by China in the past. Despite the claims that Chinese companies in Indonesia can do it at a fraction of the cost, half the time and with lower risk, that remains to be demonstrated. What all this suggests to us is that nickel prices will need to move closer to invective pricing, about US$25,000 per tonne, if there is to be a global EV industry. My bet is that it will go quite a bit higher.
TNM: You believe that nickel oxide deposits (laterites) will be the major source of nickel and cobalt for future EV supply chains and that they require higher incentive prices to develop. Why is there such scarcity of nickel sulphide projects?
Riggall: They are geologically scarce. Except for a few district-scale discoveries that the world has been exploiting for many decades, nickel sulfide discoveries tend to be high grade, but small and localised. Because they often have a short mine life development risk is high because they are vulnerable to missing longer price cycles. You’re not going to solve the nickel supply problem for EVs with nickel sulfide projects.
On the other side people say that laterites are too expensive and complex. And some of them have a poor track record of delivery. But that is exactly why projects like Sunrise are important. We need to develop capability in building and operating assets like this. The companies that do this, and develop valuable intellectual property (IP) and know-how in the process, will be incredibly well positioned to ride the wave of a decarbonising economy. But if we continue to do the same things we’ve always done, we will make the same mistakes. That’s why Sunrise has been designed using a very different philosophy — never viewed it as a mine, but part of an integrated automotive supply chain solution.
TNM: Where do you see cobalt prices in a year or two?
Riggall: Like nickel, closer to incentive prices. Maybe US$60,000 per tonne. But again, no one has a crystal ball. It is far better to focus on the cost structure of projects in the pipeline, than where you think metal prices are going to be. On that metric, with a negative nickel cash cost, Sunrise stacks up exceptionally well. You need projects that will generate cash throughout the economic cycle.
TNM: You’ve mentioned a couple of times the design philosophy for Sunrise. Can you explain what you mean by that?
Riggall: Most people have yet to truly understand the impact that electrification and decarbonisation will have across the global economy, whether in transport, grid-scale power, and even manufacturing. The implications for mining are extraordinary and I’m not sure that even the mining industry fully appreciates this yet. When we talk about the design philosophy for Sunrise, it’s how to build and operate a project that acknowledges this emerging reality, incorporates input from customers and delivers a plan for how to do things cheaper and better. We had the option to build another nickel mine producing low value intermediate products or servicing steel makers. We chose a different path.
Clean TeQ’s expertise is in materials separation and extraction using ion exchange, specifically hydrometallurgy. We developed our proprietary IX systems — originally in partnership with BHP and Vale — to produce high concentration solutions of nickel and cobalt. We did this because we believe this is the lowest risk and lowest cost approach to producing high value metal units for the battery industry. Keeping metal in solution gives us degrees of freedom in extraction and purification, such as the ability to keep nickel and cobalt together in solution for cathode precursor manufacture, without the need to precipitate out and crystallise intermediate or separate products. The savings here are very significant.
The mine and plant have been designed to run on 100% renewable power, which will give it one of the lowest carbon footprints in the nickel industry — a 50%-75% lower carbon footprint than current nickel laterite producers. The life of mine carbon saving is equivalent to taking one million gasoline cars off the road for an entire year.
With input from the auto sector, we have designed our refinery to be able to accommodate a significant recycling stream to recover nickel, cobalt and potentially also lithium. In principle, we want to be able to take back the metal we sell and resurrect it for our customers for a second, third and fourth use. While we expect mechanical recycling technologies to improve with time, it’s the chemical recycling and the wet chemistry we are focused on. If you think about it logically, the best place to purify and recover metal is the place that generated it in the first place — the capital has been sunk, it delivers a known and consistent product and it can provide an assurance about the recycled content of the products it sells.
Finally, we shouldn’t ignore scandium. If there is a metal that will ultimately transform the automotive and aerospace sectors, it is aluminum-scandium alloys. It is stronger, weldable and more printable than existing aluminum alloys, in an era when the aluminum content in vehicles is growing at a rapid rate. Sometimes the best way to improve the range of an electric car is simply to make it lighter, not to give it a bigger battery.
So this is what we mean by a philosophy of design — cost, carbon and re-use. There is nothing new or risky in this approach; it integrates proven processes to deliver a plug and play solution for these new EV supply chains.
TNM: Are companies in the EV supply chain receptive to your approach at Sunrise?
Riggall: Yes, we are certainly seeing interest. Proposals that can substantially reduce cost and risk are always welcome.
That said, what we are advocating requires far greater integration across supply chains than currently exists today. If you are large global automaker trying to manage supply and pricing risk around the technology that sits at the heart of your consumer offering, it would be unwise to build your strategy on the hope that the metal will be there and at the right price.
Of course, it doesn’t mean you need to own a mine. There are contracting structures that can deliver the long-term certainty that the auto industry needs, while underwriting new supply growth. Already we are seeing carmakers and mining companies interact directly on supply issues, and over time we expect a more strategic approach to connecting the bookends of these supply chains.