POSCO's Argentine lithium lake valuation backfires

Hombre Muerto salt lake in Argentina / Courtesy of POSCO

By Nam Hyun-woo

POSCO's self-promotion of its investment into an Argentine lake having lithium reserves appears to be backfiring, as analysts and industry officials have raised doubts about the company's prediction that sales from the project will reach 35 trillion won ($31 billion).

Last week, POSCO said it was expecting a whopping "35 trillion won in value" from the lithium reserves in the Hombre Muerto salt lake in Argentina, which the company acquired extraction rights to from Australia's Galaxy Resources for 310 billion won in 2018.

POSCO said that it expects this because it confirmed last year that there were 13.5 million tons of lithium in the lake, a six-fold increase from the 2.2 million tons estimated at the time of the investment, and the sharp hike in lithium prices over the last several months. But the company did not specify how it calculated the 35 trillion won.

This has sparked confusion over the meaning of value, and the company later corrected its press release to state that the 35 trillion won was its own forecast on "accumulated sales from the extraction."

Despite the correction, the stock prices of POSCO and its affiliates were boosted by the lithium issue with the former gaining 3.34 percent Thursday, and POSCO M-Tech, in charge of its materials business, ending with a daily limit-up high of 30 percent for the second straight trading session the same day.

This graph shows lithium carbonate price (in yuan/renminbi) per kilogram. / Captured from Korea Resources Corp.

Regarding its "35 trillion won calculation," POSCO claimed it reached that number by multiplying the lithium price by the reserves and production yield. In a press release, POSCO stated the lithium price in February stood at $11,000 and the reserves were 13.5 million tons. When this is multiplied by an average 20 percent production yield, the number stands at $29.7 billion, which is 33 trillion won.

However, industry officials said the number does not seem to have significance due to fluctuations in the price of lithium.

According to the Korea Resources Corp., the price of lithium carbonate was 155 yuan ($23.86) per kilogram, Nov. 2, 2017, but steadily fell to 72 yuan, April 18, 2019, and 49.5 yuan, Oct. 16. It further plunged to 38.5 yuan, April 17 last year, and hit bottom at 34 yuan, Aug. 20. It then bounced back to 60 yuan, Jan. 19, and reached 80 yuan, March 4.

"The lithium price has been showing extreme volatility despite the rosy outlook on electric vehicle battery demand," an industry official said. "Also, changes in extraction rates seem possible depending on the condition of the lithium reserves and the process of making lithium carbonate and lithium hydroxide."

POSCO's lithium demo plant near the Hombre Muerto salt lake in Argentina / Courtesy of POSCO

Another question over POSCO's calculation is how many years it will take for the sales to reach 35 trillion won.

POSCO began the operation of its Argentina Demo Plant, a test facility for the lake's development, in August last year. Plus, it plans to complete a full lithium plant there in 2023 with an annual capacity of 25,000 tons. The company plans to raise the capacity to 68,000 tons by 2030.

Based on this assumption, Shinhan Financial Investment analyst Kim Hyun-wook came up with scenarios depending on three anticipated lithium prices in 2023 ― 80 yuan, 100 yuan and 120 yuan. In the best case scenario of the 120 yuan price, rising 15 percent every year, sales from the lake will reach 3.7 trillion won in 2030. This means, it will take at least 10 years from now for POSCO to see the accumulated sales reach 35 trillion won.

"Unless there is a dramatic improvement in the company's production yield, 35 trillion won in revenue seems to be a story for the future," the official said.

Regarding this, a POSCO spokesman said; "we want this to be interpreted as our forecast on the revenue growth from the lithium lake."

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