Water Wars In Nevada?

Written by Gerardo Del Real
Posted May 15, 2017 at 7:36PM

The lithium boom is real. The supply-demand fundamentals are compelling.

Currently, lithium supply and demand is roughly 170,000 tpa LCE. Demand is expected to rise at roughly a 16% CAGR with supply able to keep pace over the next couple of years, then falling behind entering the 2020s, according to Eight Capital and Roskill.

Eight Capital went on to explain the potential impact from Tesla as well as established car makers. Here’s its explanation:

"Tesla (Not Rated) has always been a great poster child for the EV space, but we believe the real impact will come from the more established car makers. World car production was estimated at 75 MM units in 2016, with GM, Ford, VW and Chinese auto makers representing 70% market share. For each 1% of EV penetration, representing ~525,000 EV, is roughly equal to the impact Tesla may have...assuming it achieves its maximum planned capacity of 500,000 cars by 2018. China is looking to achieve a minimum sales rate of 8% EVs by the end of 2018, so we expect the market share of GM, Ford, VW and Chinese automakers to rise. We estimate that both Tesla, and every 1% penetration by those four companies listed, would require 27,500 tpa of LCE or LiOH to satisfy their battery needs. That’s about the equivalent of an entire year's worth of LCE from a large producing lithium mine."

Recent activity in Nevada involving lithium explorers Pure Energy, Lithium X, Nevada Sunrise, Advantage Lithium, and the only lithium producer in North America, mining giant Albemarle, have brought the area back into focus.

Once upon a time Nevada Sunrise owned an option to what I believed were very important and strategic water rights in the Clayton Valley.

Albemarle agreed and the water rights that Nevada Sunrise (TSX-V: NEV) owned — which were subsequently optioned by Advantage Lithium (TSX-V: AAL) — were later forfeited after a push from Albemarle’s lawyers.

However, those rights may now be in play again as litigation continues behind the scenes.

Here’s an interesting tidbit I picked up while speaking with a source.

Did you know that the judge — Judge Elliot — who was overseeing the water rights litigation between Pure Energy and Albemarle, has a wife who is a partner of the firm currently representing Albemarle, the company challenging everyone’s water rights application?

I say was because, as of a few weeks ago, that judge was told he could not continue on the case. I’m sure the judge was in no way biased and didn’t feel any conflict of interest.

Ok, I believe the second part as I think the judge was probably pretty clear about his interest but regardless, this is a positive development — for everyone but the judge and probably his wife — as there is a chance that those water rights may find themselves back in Nevada Sunrise’s — and Advantage Lithium’s — hands.

A positive development in what truly looks like a David vs. Goliath scenario. A development which could lead to merging between companies in the Clayton Valley if they figure out that it's easier to develop their resources together as opposed to independently.

A consolidation of the basin may be underway as Lithium X (TSX-V: LIX) and Pure Energy (TSX-V: PE) have agreed to develop Lithium X’s Nevada lithium assets.

clayton valley lida target areas

On May 11, 2017, Pure Energy announced it had entered into a series of agreements with Lithium X Energy, GeoXplor Corp., and Clayton Valley Lithium to acquire Lithium X’s interest in 756 unpatented mineral claims covering approximately 15,000 acres in Clayton Valley, Nevada.

With the addition of the LIX Claims, Pure Energy will have an interest in 1,104 unpatented mineral claims covering approximately 26,300 acres in Esmeralda County.

If any of the lithium explorers in the area are successful — and that is a big if — they will need water to produce.

Back in December of 2015 Nevada Sunrise received a written appraisal from an independent appraiser certified in the State of Nevada. That appraisal valued the permit at US$1.42 million.

According to the appraisal report, the Clayton Valley basin is currently “over-appropriated”, with Albemarle Corp.’s (NYSE: ALB) Silver Peak lithium mine being the largest consumer of water in the area.

The report further states that any new application for water use in an over-appropriated basin would be carefully reviewed by the Nevada Division of Water Resources, and that it is uncertain if any new applications would be granted.

On March 29, 2016 Lithium-X filed applications no. 86051 and no. 86052 requesting permission to appropriate water.

On April 21, 2017, the state of Nevada made clear its intention. The state denied Lithium X’s application and Esmeralda Minerals (Pure Energy’s subsidiary) stating that “there is no unappropriated water in the source and to issue a permit under this application would conflict with existing rights."

It’s important to us who speculate in this high-risk sector to know that the companies involved acknowledge what will be required to make their projects work.

In this case, everyone needs water. No water, no lithium mining.

Or as Pure Energy put it in its application “an adequate supply of groundwater supply is critical to ensure feasibility of the project to demonstrate and operate a sustainable, effective and efficient lithium extraction process.”

Pure Energy estimates it will need a consumptive amount of 0.967 CFS (700 AFA).

These projects will not work without water.

Two of the bigger exploration players in the basin — Lithium X and Pure Energy — acknowledge that.

The basin is over-appropriated and the current permitted volume is 118% of the perennial yield, a factor which played a part in the denial.

If new rights aren’t granted, the next logical step would be to secure water rights from an existing owner.

Once upon a time Nevada Sunrise and Advantage Lithium were those owners. The next few months should provide clarity as to who, if anyone, will be allowed a water permit in the area.

Consider Albemarle (NYSE: ALB) and its $7.5 billion market cap. At some point, it might make sense for Albemarle to buy out the Nevada assets of all four companies and be done with it.

Nevada Sunrise — and JV partner Advantage Lithium’s (which can earn-into 70% into Clayton NE and 100% of the water rights) — Clayton NE project lies immediately adjacent to the core focus of Pure Energy's land package; and south of Albemarle’s producing Silver Peak lithium brine mine.

I don’t know if any one of the many juniors exploring for lithium in Nevada in hopes of a Tesla or Panasonic deal will ever produce anything other than news releases about how excited they are to look for lithium.

But I do know that the lithium story is a real story and that if anyone does develop a lithium asset they will need water.

Nevada Sunrise and Advantage Lithium’s pending litigation for restoration of the water rights may provide the path forward.

To your wealth,

gerardo-sig

Gerardo Del Real
Editor, Resource Stock Digest Premium and Junior Mining Trader.

For the past decade, Gerardo Del Real has worked behind-the-scenes providing research, due diligence and advice to large institutional players, fund managers, newsletter writers and some of the most active high net worth investors in the resource space. Now, he is bringing his extensive experience to the public through Outsider Club, Resource Stock Digest Premium, and Junior Mining Trader. For more about Gerardo, check out his editor page.

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