/Nemaska Lithium gets lifeline, just as Tesla wins new interest in China

Nemaska Lithium gets lifeline, just as Tesla wins new interest in China

On Tuesday, the same day that Elon Musk awkwardly danced on a stage outside Shanghai and delivered the first “made in China” Tesla Model 3, the Canadian company that hopes to build a foundation for an electric vehicle revolution in North America received a lifeline in Quebec.

The province’s Superior Court Judge Louis J. Gouin gave Nemaska Lithium an additional month to figure out a way forward, under court-granted creditor protection, as it seeks to build the country’s first mine and electrochemical conversion plant to produce battery-grade lithium to power electric vehicles.

Early last year, Nemaska was forced to pause construction on its project in Northern Quebec after a dispute with its bondholders and cost overruns created a roughly $600-million funding shortfall. While Gouin has stayed claims against the company by creditors and others, it’s clear that Nemaska — which less than two years ago received a $100-million investment from Japan’s Softbank, and $130 million from Investissement Quebec but now has been delisted from the TSX — is struggling for survival amid declining lithium prices.

Guy Bourassa, chief executive of Nemaska, told the Financial Post he is hopeful that a new financing package could be arranged within six months.

“We’re not working on a scenario of selling off assets,” he said. “We’re working on a scenario of financing our assets.”

Despite its problems, many investors remain bullish on the growth of electric vehicles: Indeed, there are 115 lithium ion battery megafactories proposed for construction by 2029 around the world, according to Benchmark Intelligence.

Still, companies such as Nemaska that are building the new supply chain necessary for that sector have encountered problems.

Earlier this week, for example, the U.S.-headquartered lithium producer Livent blamed poor prices for a 15- to 20-per-cent drop in its expected fourth quarter revenue. It said it is reviewing expansion plans amid a continued decline in prices in 2020.

A Nemaska failure kind of puts a black eye on the whole industry

Chris Berry, president of House Mountain Partners

At the start of 2019, Nemaska had just finished raising roughly $1 billion and was busy constructing its mine and electrochemical plant.

But about a year ago, Bourassa said the company discovered that higher than expected labour costs, and a lack of detail in some of the engineering designs, added hundreds of millions of dollars in costs.

That triggered a dispute with bondholders, who are now arguing that because of the cost overruns and construction delays, the company owes it roughly $90 million in penalties and interest, Bourassa said.

The company had been counting on bondholders for $350 million, and so the dispute magnified the effect of the cost overruns, which were also exacerbated by declining lithium prices.

In July, Nemaska announced that the global investor Pallinghurst Group was considering a $200-million initial investment, plus backstopping up to an additional $400 million for the company. But months passed with no completion of that deal, and in December, the company sought creditor protection amid the dispute with bondholders and others.

“A Nemaska failure kind of puts a black eye on the whole industry,” said Chris Berry, president of House Mountain Partners, which advises lithium exploration companies. “It gives investors pause.”

Berry said the company was in a bind because it couldn’t raise enough money to build both the mine and the electrochemical plant, but the project only made sense if both were built. Without an electrochemical plant, the company would be forced to rely on converters in Asia who would sap most of the profits, and they probably needed the mine to supply feedstock for the plant.

“If you want to be in this game, and you want to survive, you’ve got to be vertically integrated, and it’s just not easy to do,” he said.

With prices in the doldrums for the foreseeable future, Berry predicted 2020 would be a “waiting game” for lithium companies.

Still, Bourassa said he is still finding reason to be optimistic. Even as videos of Musk dancing went viral on the internet, Tesla’s stock had surged 16 per cent since the start of the week to $494.67.

Bourassa suggested that as more Model 3s begin rolling out of Tesla’s freshly constructed factory near Shanghai — its first outside the U.S. — it could spark investor excitement that could spread and help rejuvenate investor interest in Nemaska.

“If the Chinese do buy that vehicle, there is definitely going to be a new start in the hype about lithium,” said Bourassa.

Financial Post

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