Arkansas Lithium Innovation Summit: Strategic Discussions - excerpt on royalty

Arkansas Lithium Innovation Summit: Strategic Discussions

by Brian Umberson February 7, 2024  armoneyandpolitics.com

This is a link to full article, Part One, which is somewhat lengthy so I am posting only the portion that addresses royalty as I think that is the topic of interest for most of our members.

https://armoneyandpolitics.com/arkansas-lithium-summit-discussions/

Lithium Royalty

Oil & gas can be sold from the well head, but raw Lithium requires expensive development of new technologies and processing at numerous levels to create a finished product to sell.  SLI has been in El Dorado developing this new DLE + brine well model since 2017, so it has taken them about 7 years to develop and prove the technology.

Mineral recoveries with high cost and risk typically allow the mineral company to keep more of the proceeds to reward the mineral company and provide a lower royalty to land and mineral rights owners. Mining royalties are typically single digit % and mining companies don’t need to invest in new technologies. The Salton Sea Lithium project was also a single digit royalty at 2% yet Berkshire Hathaway still backed away from the table.

Currently, the AOGC and SLI are awaiting the next royalty hearing to continue discussions from the December hearing.  The December hearing detailed the South Arkansas Minerals Association request for a high royalty of 12.5% for the landowner, which is in the range of a typical oil & gas royalty.  The requested royalty is much higher than anyone in the lithium industry expected, which appears to be causing serious concern within the Lithium industry.

In our case, the Lithium company develops new technologies and processes that require much higher expenses and risk than traditional oil & gas encounters, but our Lithium companies are expected to receive far less of the proceeds (87.5%) while the landowner receives a high 12.5% royalty.

Ironically, AOGC testimony disclosed that the current Brine-Bromine royalty per acre converted to a % equates to a 1% to 2% royalty. The brine is the base material for extraction of both bromine and lithium. SLI has offered what appears to be a 1.5% royalty (mirrors the 1% to 2% royalty) on what will be the lowest grade lithium project they will develop in Arkansas.  The DLE + Brine well production model is far more expensive to develop, prove and scale to production.

There is a large difference between 98.5% versus 87.5% of the proceeds for the Lithium companies, so 11% can have a dramatic impact upon the project ROI. Why does the South Arkansas Minerals Association think that our Lithium companies deserve a far smaller reward for the additional risk and expenses to create a new refined product? Furthermore, the Austin, Texas-based firm Applied Economics Consulting Group, Inc. provided a University of Texas educated expert to make the argument that the Arkansas royalty should be based on what a project can afford, essentially a profit-sharing model with only one side providing upfront monies and exposed to high risk.  Arkansas is in a capitalist society, and mineral royalties in this country are tied to the value of a mineral as it comes out of the ground, not after its gone through a series of advanced processing steps to make a final value-added product. Oil and gas does not pay a royalty based on jet fuel or specialty plastics, copper mines do not pay a royalty based on the price of copper wire and copper pipes, etc.

Oil and gas is marketable as a raw product at the wellhead, but the brine operator has to invest a lot in additional processing and lithium-extraction infrastructure to create a refined marketable product. SLI has pioneered the expensive development of the model over 7 years, but each company will have a different DLE technology that creates risk and requires investment.  Please keep in mind that the DLE + Brine well production model is environmentally responsible and the brine well process has been continuously improved for 60+ years.

 

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Scatter Shooting While Wonder What Blackie Sherrod would say.  Only old timers will get that little aside.

The Salton Sea royalty is not a good comparable for the Smackover Brine in my opinion.  A one eighth O&G royalty is not a “high royalty”, one quarter is the usual top of market royalty.  The value of lithium should not be comparable to bromine.  Bromine demand has been satisfied with the current supply for decades.  Lithium will be in rising demand for some years to come and more valuable.  The R&D for the extraction process is a sunk, one-time investment.  A processing facility will have regular operating costs but those should be somewhat stable and knowable.  A one eighth royalty for lithium may be high but I think that 1 to 2% is low.  As it usually works out, industry and regulators push for low extraction and processing costs while mineral owners want the best royalty they can get.  It will be interesting to see where the royalty percentage ends up.  Mineral owners should be prepared to be their own lobbyist and proponents for the best royalty they can get.  That means being loud and political.  Good luck.

Folks should read this wearing their own state hats.  I can speak only to Texas which does not have a regulated royalty structure like Arkansas.  A Texas owner is free to negotiate with a company seeking to lease mineral rights.  This article is interesting but is focused on the "producers" side of the negotiation in Arkansas.  Indeed in the first paragraph the sponsor of the Arkansas Lithium Innovation Summit is identified - The idea for this event was first instigated by Arkansas native and Director of Government Relations for Standard Lithium, Jesse R. Edmondson, who is a critical minerals geologist passionate about establishing sustainable domestic supply chains. 

Lithium players to gather in Arkansas as low prices pressure industry

Reuters | February 14, 2024 

Exxon Mobil, Albemarle and others eyeing ways to tap Arkansas’s vast lithium reserves will gather in Little Rock this week as the industry grapples with sagging prices for the battery metal that have spooked investors and fueled layoffs.

More than 625 people – including policymakers, bankers and corporate executives – are set to attend the sold-out Arkansas Lithium Innovation Summit on Thursday and Friday.

Among topics for discussion is how direct lithium extraction (DLE) technologies could be used to make Arkansas the epicenter of the US lithium industry by filtering the metal from the underground Smackover brine formation.

“This could be a big boon for our state,” Arkansas Governor Sarah Huckabee Sanders, a Republican, told Reuters. “We have the resource, we have the right regulatory environment, and we have a very business-friendly climate.”

Bromine – a chemical used in fire extinguishers – has been extracted from the Smackover’s salty brines for decades by Lanxess, Albemarle and others.

DLE offers the prospect of also filtering lithium from that brine before it is reinjected back underground without the use of traditional evaporation ponds, something that has never before been done at commercial scale.

Extracting lithium from brine is a complex chemical process and there have also been practical considerations to address, such as tackling pipe corrosion.

Nonetheless, a crop of companies is in hot competition to be the first to commercially deploy DLE.

Analysts estimate the Smackover could contain more than 4 million metric tons of lithium, enough to make millions of electric vehicles and other electronic devices.

While lithium demand is expected to jump later this decade, recent overproduction in China has dragged on prices. A basket of lithium prices compiled by Benchmark Mineral Intelligence has dropped 80% in the past year.

That led Albemarle to lay off workers and slash its budget last month, although the company said it would continue to fund its Arkansas DLE project. Rival Piedmont Lithium, which is developing a North Carolina lithium project, cut nearly a third of its staff this month.

Summit Nanotech, a privately held DLE technology developer that is a conference co-sponsor, said it is less concerned about short-term lithium prices and more interested in US growth.

“We’re all trying to understand the potential and challenges of the market in Arkansas,” said Sandro Mazzini, Summit’s chief commercial officer.

The Arkansas Oil and Gas Commission, which oversees brine extraction, has not yet set the state’s crucial lithium royalty rate, for instance.

“I want us to be very thoughtful so that however we set this (lithium royalty) up, it’s done correctly,” said Sanders, who served as White House press secretary from 2017 to 2019 under former President Donald Trump. Sanders said Trump sees lithium production as part of his push to bolster US energy independence.

“I have full confidence that President Trump sees the importance of lithium to an all-of-the-above energy strategy,” Sanders said.

Exxon – which last year paid more than $100 million for lithium-rich Arkansas acreage – and partner Tetra Technologies aim to be the first to produce the metal in Arkansas by 2026.

Tetra, which produces chemicals for water treatment and recycling, said it hopes the royalty reflects technical challenges to filter lithium.

“We’ll have to spend a lot of money and deploy a lot of technology to extract pretty small volumes of lithium out of large volumes of brine,” said Brady Murphy, Tetra’s CEO. “That’s part of the complexity of getting this equation right.”

Koch Industries-backed Standard Lithium, which has been trying to produce lithium in the state since at least 2018, is also a conference co-sponsor.

(By Ernest Scheyder; Editing by Jan Harvey)

Albemarle will provide BMW Group with lithium for car batteries

  • Feb 22, 2024 magnoliareporter.com

Albemarle Corporation has made an agreement with BMW Group to deliver battery-grade lithium to help the automaker pursue high-performance, premium electric vehicles (EVs).

The multi-year agreement, which takes effect in 2025, is one of the company’s largest ever globally and is of significant volume and value. In addition to supplying the BMW Group with lithium hydroxide, the two companies will partner on technology for safer and more energy dense lithium-ion batteries.

“Albemarle is committed to building a more resilient world,” said Albemarle Energy Storage President Eric Norris. “We welcome the opportunity to work alongside the BMW Group to further enable the clean energy transition.”

This is the second supply agreement between the companies, but the first to include a shared interest in research opportunities to accelerate lithium battery innovations.

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