CAC Specialty’s Fred Smith on the Risks and Opportunities in Lithium Extraction

Lithium is a key element in the building of batteries for electric vehicles. Reports of discoveries of massive lithium deposits in the U.S. could indicate a game changing moment in the U.S. mining and manufacturing sectors. In mid-November, Dan Reynolds, the editor-in-chief of Risk & Insurance, caught up with Fred Smith,  Executive Vice President, Head of Mining and Metals at CAC Specialty, to get his take on some of the risks and opportunities involved. What follows is a transcript of that discussion, edited for length and clarity.

Risk & Insurance:  A recent discovery in Arkansas revealed a trove of what could be 19 million tons of lithium. How significant is this discovery in terms of its potential impact on the industry?

Fred Smith: 95% of the world’s lithium reserves are located outside the US, so the discovery of this reserve in Arkansas could be a real game changer. Especially considering that until recently, domestic lithium exploration in the U.S. had been limited.

Some of these newly discovered reserves have the potential to be among the largest in the world.  but it’s important to note that there is a difference between the initial estimates of what is believed to be present and what ultimately becomes classified as reserves. The numbers may be pared back a bit once the resources are further evaluated. Nonetheless, this discovery is absolutely significant in light of U.S. efforts to create a robust domestic supply chain.

R&I: What are the environmental and operational risks associated with mining and transporting lithium?

FS: The operational and environmental risks associated with lithium are consistent with other mining operations. On the operational side, the risks include equipment breakdown, fires, and production halts, which are common in both traditional mining and brine production.

Environmentally, the main concerns are air and water impacts. Water has received more attention in regard to lithium mining because the production process requires a tremendous amount of water use, and deposits are often found in areas already under water stress. There are also risks of groundwater contamination, especially in Arkansas where lithium extraction involves pumping out brine and reinjecting the unused portion back into the earth, potentially creating fissures and upsetting the balance in underwater aquifers.

That said, these challenges and risks are not new, and the ways companies have dealt with them in the past can be applied to the lithium mining process.

R&I: Seems like lithium extraction is very similar to fracking.

FS: Extraction of lithium through brine extraction shares similarities with fracking, but it’s important to note that lithium can also be obtained from hard rock deposits. The method discussed in relation to the lithium in Arkansas specifically refers to brine extraction.

R&I: Is lithium extraction more expensive than natural gas or oil extraction?

FS: The cost of lithium extraction depends on various factors like location and extraction method. Initially, extracting lithium from brine has lower entry costs compared to hard rock mining, but brine extraction ultimately becomes more expensive in the end.

Brine extraction is a slower process that involves pumping the brine into evaporation ponds, which requires significant time and land use. Additionally, it involves a complex and capital-intensive chemical process to refine it.

Companies in Arkansas are exploring a newer technology called direct lithium extraction, which aims to address the challenges of brine extraction such as time, water usage, carbon emissions and cost. Although not yet proven on a commercial scale, many companies are investing in direct lithium extraction in the hopes that it will eventually become a more cost-effective and sustainable alternative to traditional brine extraction methods.

R&I: What is the current status of environmental regulations for lithium extraction in the United States, and do we have a well-developed protocol in place?

FS: The regulatory framework for permitting a new lithium mine in the U.S. is largely in place. Some projects have faced challenges related to the Endangered Species Act, but the overall permitting structure is established. This includes posting financial assurance to ensure proper site restoration, obtaining mining permits, air quality permits, and securing water discharge permits.

However, with certain states being more advanced than others in addressing these issues, there are some challenges surrounding the valuation of lithium in the ground and the royalty structure

R&I: Is the lithium mining industry a significant opportunity for insurers in the United States?

FS: It is a significant opportunity for insurers in the U.S., as it typically aligns well with their risk appetite. The inherent risks in lithium mining operations, whether property risks   or environmental risks, are similar to those already being managed in similar operations by insurers.

Currently, there is only one producing lithium mine in the U.S., and more than 70 proposed projects in the pipeline. This presents a substantial growth opportunity for insurers, as the U.S. has historically not been a major player in the lithium market.

R&I: What are the main types of claims that electric vehicle manufacturers face?

FS: Electric vehicle manufacturers often face two main types of claims. The first is product defect claims, related to fires or spontaneous combustion. These claims frequently make headlines..

The second category is intellectual property claims. This includes issues related to trade secrets and patent infringement. ach company’s battery chemistry is unique to establish with differences in charge duration andspeed, operating temperature, as well as other characteristics These variations in chemical compositions can lead to significant legal activity among companies as they strive to protect their proprietary secrets and technologies.

R&I: What are some of the concerns in the insurance market regarding the downstream side of the battery industry, such as manufacturing and recycling?

FS: There has been a significant increase in manufacturing and recycling events, which is not uncommon in a rapidly growing industry. Insurers are concerned about the disposal of batteries, and particularly the associated fire risks.

As the battery industry continues its upward trajectory in the U.S., insurers are keeping a close eye on these developments. Despite these concerns, it is an exciting and dynamic industry to watch as it evolves and matures. &