04 Nov Preliminary economic results of the lithium contract: YLB – Uranium
Nowadays the Bolivian Assembly is discussing a document with the following long… very long title: “Accidental Association Contract for the Development of a Direct Lithium Extraction Plant – EDL and Lithium Carbonation in the Salar de Uyuni in the Department of Potosí, Bolivia, signed on September 11, 2024, between the National Strategic Company of Bolivian Lithium Deposits – YLB and the Uranium One Group Join Stock Company Bolivia Branch”.
Last year (and part of this one) Oxfam Bolivia was kind enough to organize a study about the impact of the lithium exploitation in Bolivia, the final document can be downloaded at this link. That’s why I began to familiarize myself with the economic-financial details resulting from the exploitation of lithium carbonate in the “Salar de Uyuni”.
In this post, I want to comment some preliminary results that I found in the contract (the one with the long title) that I referred before. Let’s go through some points that seem relevant to me.
To start let me say that the legal engineering of this contract is complex, it couldn’t be otherwise, since it was necessary to make compatible the delirious articles of our Constitution with a standard contract for the exploitation of a natural resource. Here’s how it goes:
1. Uranium finances the construction of a processing plant to manage 14,000 tons per year
2. Once production starts, Uranium operates the plant and delivers the production to YLB
3. YLB receives the production and sells it to Uranium at the plant gate
4. Uranium is responsible for exporting it
5. With the sale of lithium carbonate, YLB recognizes “recoverable costs” to Uranium company, both for the investment made and the operating costs
6. YLB pays royalties to Potosí
7. YLB and the Uranium pay, in turn, the taxes on profits
8. After all payments, the profit is divided: 51% for YLB and 49% for Uranium
You can see the long hours of legal work that went into the design of this contract which I hope I have decoded correctly.
Well, now let’s look at some of the most important assumptions and results:
* In the past, (https://www.mhe.gob.bo/2023/07/03/produccion-de-carbonato-de-litio-de-inversionistas-supera-metas-del-plan-de-desarrollo-economico-y-social/ ) the Bolivian government reported that a production of 50 thousand tons was achieved with an initial investment of USD 1,400 million. The contract that I am now analyzing establishes a maximum production of 14 thousand tons with an initial investment of USD 976 million. En other words, in the past the investment cost was USD 28,000 per ton; under the current contract it is USD 70,000 per ton. A not inconsiderable increase.
* In our previous document we called attention to the supposed “legal loophole” referring to the fact that the lithium carbonate production would not be taxed with the additional profits tax (law 3787). Reading this contract, it seems that this supposed gap will be filled with YLB’s participation. In simply words, the Government take in this contract will be consolidated with YLB’s participation, as can be seen in the following figure. Of the 100% of the Government Take, 42% will be received by YLB.
* Making the comparison with the Bolivian natural gas exports, from the 100% gross income, Uranium “keeps” 68% to cover its profit, operating costs and investment. For its part, the Bolivian government keeps 32%. See the following figure (the data is expressed in Present Value).
* In absolute values, Potosí would receive USD 10 million per year, the National Treasury USD 84 million and YLB 110 million, as seen in the following figure.
* Since the details of the sale price were not published, I estimated the price that would generate an income of USD 415 million per year. The result is, the price used in the Cash Flow, presented to the Assembly, could be USD 32,937 per ton. High? Low? It is difficult to see giving such volatility with the international prices of lithium carbonate. But what is clear is that Uranium has every incentive to pay the lowest possible price to YLB, since they (Uranium) will be in charge of international marketing.
Two comments remain from this (and the previous) numerical analysis: a) this project is 10 to 15 times smaller than the export of natural gas (at its best moment) and; b) in Potosí they should lower their expectations regarding possible income from royalties… they are very, very far away from what Tarija received.
There are many more details that could be discussed, but I will leave the post here. Experience shows me that a reading of more than 2 minutes is quickly abandoned.
I wish you an excellent week.
S. Mauricio Medinaceli
November 3th, 2024
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