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Mineral Resources CEO Chris Ellison chooses Australia over China for lithium business

Mineral Resources (ASX:MIN), led by CEO Chris Ellison, has made a strategic decision to forego its plan of constructing lithium hydroxide refineries in China. Instead, the company is shifting its focus to producing a lithium sulphate product in Australia. According to Mr. Ellison, the returns from this new approach justify avoiding the costs and risks associated with moving fully downstream into battery chemicals in China.

In a discussion with analysts on Wednesday, Chris Ellison revealed that MinRes had abandoned its deal with lithium giant Albemarle to invest in lithium hydroxide plants in China. The company is now convinced that producing a lithium sulphate product in Australia will yield higher profits, despite facing lower construction costs in China.

Operating in China brings significant financial challenges due to various taxes and withholding rates. Mr. Ellison explained that the value-added tax (VAT) on spodumene concentrate in China is 13 per cent, and when selling hydroxide within the country, businesses face additional taxes and a year-long waiting period before funds can be moved elsewhere. Moreover, transferring hydroxide directly from China to Australia incurs a 10 per cent withholding tax.

As a result, MinRes would rather operate within Australia, where operational expenses are comparatively lower.

The decision to avoid China is in line with MinRes’ previous move to shift most of its manufacturing facilities back to Australia. The company is apprehensive about the risks associated with doing business in China, especially following China’s ban on importing Australian coal, wine, and agricultural products.

Looking ahead, MinRes is in negotiations with potential buyers in Europe and the US for its long-term plans. In the interim, the company plans to either sell lithium concentrate directly to buyers or pay Chinese refiners to process the concentrate for resale to other chemical companies.

As part of the recent restructure of its joint venture with Albemarle, MinRes will exit its ownership stake in the US lithium giant’s lithium hydroxide refinery in Western Australia. In return, MinRes will receive $US380 million to $US400 million in cash and increase its stake in their jointly-owned Wodgina lithium mine in the Pilbara to 50 per cent.

MinRes is now focusing on building a local plant to convert its produced concentrate, which grades from 3.7 to 6 per cent, into lithium sulphate with 25 to 30 per cent lithium concentrate. This product will be directly exported to Europe and the US through long-term contracts with original equipment manufacturers.

In its June quarter production report, MinRes stated that it had achieved its revised guidance for total iron ore and lithium shipments, along with its mining services division. Following the announcement of the new strategy, shares in the company rose 3.6 per cent to $73.50 in afternoon trade.