Headinsanditis is a dangerous condition where people become unwilling to recognise a problem, situation or a new reality. It’s particularly dangerous when the people suffering from it are people in positions of power or responsibility, like CEOs of public companies, or analysts and industry commentators. (Or senior members of government, but we won’t go into that since it’s outside my remit!).

I’m writing this blog because headinsanditis seems to be taking hold in parts of the lithium industry and I thought I should draw attention to this acute outbreak!

I posted at the end of last week on LinkedIn about my trip to China and my conclusions about the cost structure of the lithium industry and my view that the Australian hard rock producers (ex-Greenbushes) had a bad case of headinsanditis about their positioning on the cost curve. This was after multiple conversations with Australian hard rock management teams (both with assets inside and ex-Western Australia) over the past 6-12 months where they iterated again and again that China, Brazil and Africa should cut production because they were the high-cost producers.

I was mighty surprised then to find that headinsanditis has extended outside Australia all the way to the US when one well-known lithium commentator singled me out for criticism not once, but twice, in three days. He accused me of being one of the ‘newly minted “experts” that spend a few days in China and believe they learned “secrets” from the “horse’s mouth”’.

Of course, having been in an industry for a long, long time doesn’t necessarily make one right about everything. Being “newly minted” (despite the fact that I have now been covering lithium for over six years) doesn’t make me wrong about the situation either. Of course, it doesn’t make me right and, as an analyst, I know I’m probably going to be wrong 30-50% of the time. Because nobody’s always right, despite what some may tell you.

As an analyst (and by the way, even though I haven’t been a lithium analyst for longer than six years, I have been a successful equity and commodity analyst for nearly 25 years), I’ve always found it important to try to be open to new ideas. It’s alright to be blindsided by a new driver coming through in the industry, but it’s practically unforgivable to keep being wrong years later because you’re too stubborn to believe it or investigate it.

My criticism of Australian hard rock (ex-Greenbushes) seems to have hit a nerve. But I stand by it. I can’t say I’ve worked in China, but I have been travelling to China for over twenty years for site visits and meetings with company management teams.

As an equity analyst I’m pretty used to gauging when management teams are being totally truthful or are on cloud nine in their expectations. I’d be a pretty poor equity analyst if I wasn’t! I’ve been to quite a few mines and processing operations in my career as well. Probably well over three hundred. So I’m not a spring chicken at this.

One of the constants in my nearly twenty-five-year career is – never bet against the Chinese. Particularly when it comes to minerals processing. I’ve seen it in nickel (twice), aluminium, steel and now I’ve seen it in lithium. What have I seen, you ask?

I’m talking about the Chinese cookie cutter industrial approach to processing. Just like I’ve seen the Chinese innovate technically in such a way as to make existing Western technology look like it was developed a hundred years ago! I’ve seen the Chinese build processing technology at a fraction of the capital cost of Western competitors and operate it at a fraction of the operating cost.

And, by the way, a couple of times I’ve been in denial, just like others seem to be in lithium! I was at the beginning of this lithium downturn a few years ago, when we first got word of this. But I’d be a pretty bad analyst if I kept making the same mistake. And it’s been going on for long enough now in lithium that I think that we have to accept that it’s real.

Yes, China really can process SpodCon by DMS and flotation in Africa and China for a fraction of the cost of Australian producers. And yes, China can produce lithium from lepidolite and refine high quality lithium carbonate and hydroxide at a really low cost as well.

And, by the way, it’s not necessarily rocket science that these operations in Brazil, Africa and China can process SpodCon much cheaper than WA. Anyone who knows anything about geology could probably work that out. I’ve never been to Sigma Lithium’s mine in Brazil, but I’ve spoken to its management team many times (and the management teams of other Brazilian developers, and written on Brazilian lithium in Battery Materials Review as well). The Brazilian hard rock (and indeed a lot of the northern Quebec hard rock) has very coarse spodumene crystals. So it is viable to be processed by dense media separation (DMS) only and doesn’t need flotation.

Why does that matter? Because flotation requires a very fine grind. And this material, as its name suggests, is hard rock. And to grind a hard rock down to micron size requires a lot of power. And power costs in Western Australia are 2.3x what they are in Zimbabwe. And if I don’t need to do flotation in Brazil and Quebec, then I can just crush the material down to millimetre size which only requires a fraction of the power of grinding. I cover all of this in How to Invest in Hard Rock Lithium, a 52 page report on how the hard rock industry works.

And there’s an issue of mineralogy in there as well. Because many of the ex-Greenbushes Australian ores have a fair amount of iron in them and also mica minerals. That makes them even more complex to process and they often have to go through multiple rounds of concentrating. Which is more expensive.

And let’s not even get onto labour costs. A truck driver in Western Australia is on upwards of US$90,000 a year. I doubt a truck driver in Zimbabwe or Brazil is even on US$10,000 a year!

So that’s why Australian mining and concentrating (ex-Greenbushes) is more costly than the production of lithium concentrate in other parts of the world.

Of course, Australia does benefit from lower transportation charges than other regions due to its proximity to China. Speaking to Chinese producers last week, it’s costing about US$150-220/t to move concentrate material from mines in Africa to processing plants in China. It probably costs half that to move Australian material. But that still doesn’t make Australian operations cheaper than Brazil and Zimbabwe on a CFR China basis.

Go figure.

We then come back to the China lepidolite operations. I visited three different operations last week and spoke to three other management teams. And, over the last few weeks, I’ve spoken to several independent and investment bank lithium analysts. And they all tell the same story. That these operations can produce lithium chemicals at c.Rmb70-80,000/t (that’s US$9.75-11.10/kg on an LCE basis). Now that might not be the total cost. But even adding sustaining costs, which will be relatively low for processing operations (and by the way, the bulk of the mines are on hills and have very low stripping ratios) takes you to maybe US$11-12/kg. How is this possible you might ask?

Well, lepidolite is a totally different mineral to spodumene and requires a different mining and processing pathway. It’s a mica mineral which means it’d not as hard as spodumene which has implications in both mining and processing (the ore can be dug or scraped up rather than relying on drill and blast). And Gen#3 Chinese lepidolite operations are large-scale and much more ESG-friendly than I had expected. And they utilise a large amount of their by-products, which probably lowers their integrated operating costs by a good Rmb10-15,000/t. And they manage their waste really well as a result of this. And, of course, there’s barely any transport cost in China to move material 40-50km from concentrator to refiner…

Despite the fact that I haven’t been in the lithium industry for 25 years, I have been in the mining industry for 25 years. And I’ve visited enough operations by now to understand when an operation has been well put together, is efficient and is well-run. And I got those sort of vibes off the Chinese operations I visited. In spades.

Of course, the producers could be lying. But why would they? In addition to that, many of these stocks are listed. And, Chinese exchange or not, most stock exchanges do take exception to management teams lying about their operating costs to investors. It tends to lead to prosecutions and long prison sentences.

So I’m pretty sure on my numbers on the Chinese ops in China, and the Chinese ops in Zimbabwe. And I’m also pretty sure on my numbers on the Australians as well. Because they’re also listed. And they also report their numbers to their exchange. And most of those costs are higher than the Chinese costs are.

And that’s why I’m of the view that the Australian hard rock producers are the high cost producers at the moment.

And I’ll note that between when I posted my original comment after the China trip and when I published this blog, Mineral Resources has taken the decision to idle the Bald Hill mine, so some people are getting over their headinsanditis. I hope that others will too.

Matt Fernley is Editor of Battery Materials Review and Head of Research for Westbeck Capital’s Volta Energy Transition fund.