Financing lithium a challenge, but Arkansas environment favorable

Financing major lithium projects in south Arkansas will be a challenge because of the uncertainties surrounding the ventures, but Arkansas has a history in the extraction industry and a supportive political environment. Meanwhile, the United States will be advancing in an industry where China is already an aggressive player.

Those were two of the takeaways from the second day (Feb. 16) of the inaugural Arkansas Lithium Innovation Summit.

The summit brought to Little Rock nearly 700 energy sector executives, policymakers and stakeholders to discuss the growing lithium extraction industry in south Arkansas.

The excitement stems from Arkansas’ strategic position atop the Smackover Formation, a collection of saltwater brine 8,000 feet below the earth’s surface that stretches from Texas to the Florida panhandle.

The formation contains rich deposits of lithium, the key component in batteries that power electric vehicles. It can be extracted in Arkansas using the direct lithium extraction method, a much cleaner and easier process than traditional methods, making the brine an ideal source. Moreover, Arkansas is the only one of those states that has a developed bromine mining industry, meaning an infrastructure is already in place.

Investment advisors participating in a panel discussion were positive about lithium’s future but also discussed challenges involved in financing the transition. Yohan Sanmugan, principal, Appian Capital Advisory, said the fundamentals are strong and the long-term trajectories are robust.

However, Gerry Willinger, managing director, Marathon Capital, said production facilities require long lead times and years of development. Institutions will need time to get comfortable with investing large amounts of money in the ventures. Lithium prices have been volatile, and investors are looking for certainty in the wake of COVID. Some people believe that 75% of President Biden’s Inflation Reduction Act, which is investing in battery electric power, could be overturned after the presidential election.

Asked where the capital for lithium production will come from, Sanmugan said both public investment and private capital markets will have roles to play. Direct lithium extraction (DLE) is a proven technology, but it needs to be proven commercially at scale.

He said that “Arkansas has a lot going for it in terms of a DLE investment proposition because you have both above ground and below ground, you have a lot of risk mitigants. Below ground, you have decades of oil and gas production, or bromine production, that means you have a very clear understanding of the subsurface. And then above ground, you have a very pro-business environment. You have support from the politicians, from the community. Permitting is relatively much more attractive here than in other parts of the world.”

Jeff Fox, CEO and founder of The Circumference Group, said a resource company can be successful in Arkansas because the state is focused on the fact there is “beachfront property” here.

The former Alltel executive said Arkansas is a small entrepreneurial state where big things can be done. Referring to the major corporations that have called Arkansas home, he said it’s a “great place to build an organization and a team.”

“This is a state where when big things are available, the capital gets arranged,” he said.

Tommy Moll, Stephens Inc.’s managing director, institutional equities and research, said some of the financial volatility can be smoothed if companies partner with “large, lower cost of capital, incumbent participants.” Those would include companies involved in natural resources extraction, chemicals, and auto manufacturing.

Two former officials of the Trump and Biden administrations also spoke. Frank Fannon of Fannon Global Advisors was assistant secretary of state for energy resources under former President Donald Trump. Gary Stanley was the director of the Office of Critical Minerals and Metals at the U.S. Department of Commerce for President Joe Biden.

Fannon said one constraint in the United States is permitting. Many policies offer incentives to buy an electric vehicle. Unfortunately, while it takes three years to build a gigafactory, it takes 15 years to build a mine.

But permits can be obtained in Arkansas. He said the state could be a “major contributor to develop America’s national security.”

“Capital goes to where it’s wanted, and it’s wanted here in Arkansas,” he said.

Both said the COVID pandemic demonstrated the country’s supply chain vulnerability. Many of the minerals used in battery production have come from China. Stanley said the supply chain problem has been 50 years in the making and can’t be solved quickly.

Meanwhile, Chinese policies have strained supply chains. Fannon said U.S. policymakers became concerned about the country’s dependence on China in 2010 when that country banned rare earth exports to Japan over a fishing dispute. China has been flooding the market in some areas to undermine American investments in battery power. The one cobalt mine in the United States suspended development when the price became uneconomical as a result of Chinese actions.

Fannon said government policies so far have been mostly about carrots rather than sticks, but the United States will not be able to win a subsidy war with China.

He said American leaders should be honest about the realities of the current processes for producing green energy. They are based largely on slave and child labor, so changing them will create inflationary pressures. Politicians in the past have told the American people that great endeavors like World War II and the space race would be difficult, costly and worth it. That kind of resolve should be shown with the transition to cleaner energy.

The summit also included a discussion of Arkansas’ infrastructure needs. Lorie Tudor, Arkansas Department of Transportation director, said ARDOT has been creating a baseline road condition analysis of highways in the Smackover Formation area and has has been meeting with legislators and with industry stakeholders individually to discuss their anticipated needs.

Relatedly, she said ARDOT has launched a competitive procurement program to identify potential owner-operators of electric vehicle charging stations and will announce awards in April. It hopes the charging stations will begin to be installed beginning next year.

J.B. Hunt’s Jerrod Mounce, vice president of energy and sustainability, said of the company’s 22,000 trucks, 11 are battery operated, all in California. Because of that state’s regulations, that number will grow to 24-25 by the end of the year and would have to be 350 in 2027 and 1,500 by 2030.

But powering those trucks will require an enormous amount of electricity. While charging an electric car at home is “like a dripping faucet of electricity,” a big truck is a much bigger undertaking.

“It’s not a dripping faucet of electricity. It’s not a fire hose of electricity. It’s a bundle of firehoses of electricity,” he said.

Arkansas Public Service Commission Chair Doyle Webb, who attended the summit, said one issue is the lack of electrical transmission infrastructure currently serving the area. The area is served by electric cooperatives that currently would have to pass on costs to ratepayers to meet the demand the lithium industry could place on its system, without a certain long-term return.

“I think that we will have to be creative in the support that is given to develop the infrastructure in this area – whether it be private sector, or government support,” he said in an interview.