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Wednesday, Jun 19, 2024
Mugglehead Magazine
Alternative investment news based in Vancouver, B.C.

Lithium

Chile and United States discuss benefits of Inflation Reduction Act

President Gabriel Boric’s government is trying to attract foreign investment for its lithium reserves

Chile and United States discuss benefits of Inflation Reduction Act
Presidents Biden and Boric meeting at the White House. Image from USMissionChile via USEmbassy.gov.

Lithium companies operating in Chile could be entitled to some tax breaks and other benefits in the future courtesy of the Inflation Reduction Act (IRA).

The Government of Chile met with the Biden Administration earlier this month to discuss the details of what United States-based companies could expect from the act if they chose to invest.

President Gabriel Boric’s government aims to attract foreign capital to use its access to the world’s largest lithium reserves and advance further in the battery supply chain as the clean energy transition gains momentum.

The country’s free-trade agreement with the United States indicates that incentives for manufacturing more electric vehicles in North America would be applicable to materials produced in Chile.

During a visit to Washington earlier this month, Boric mentioned that he had discussed opportunities in renewable energy, copper and lithium, each of which Chile offers.

On the same trip, Economy Minister Nicolas Grau met with representatives from the EV giant Tesla Inc. (NASDAQ: TSLA), as stated by Deputy Trade Minister Claudia Sanhueza in a separate interview on Friday at a summit hosted by Biden in San Francisco for leaders of the Asia-Pacific Economic Cooperation forum. Tesla is gearing up to commence operations in Chile.

Tax credits that exceed 10 per cent of the price of the average electric vehicle (EV) sold in the United States are prompting new investments in Mexico and Canada, and are initiating high-level political negotiations by U.S. partners such as the European Union and Japan.

Under the IRA, EVs and batteries manufactured in North America may qualify for substantial tax breaks. Electric vehicles equipped with batteries using critical minerals extracted or processed in countries that have a free trade agreement (FTA) with the U.S. can also receive partial tax breaks.

The Inflation Reduction Act revised the U.S. tax code’s Clean Vehicle Credit to offer consumers a USD$7,500 tax credit for purchasing a qualified vehicle like an EV. This credit is divided into USD$3,750 for vehicles that meet the criteria for critical minerals and USD$3,750 for those that meet the criteria for battery components.

Read more: Lithium South Development technical report shows 40% increase in lithium recovery

Read more: Lithium South Development first production well installed at Hombre Muerto lithium project

IRA benefits either in-country or friendly country processing or extraction

Under the critical minerals requirements, a qualified vehicle’s battery must contain a portion of critical minerals that were either extracted or processed in the U.S., a country with which the U.S. has a free trade agreement, or recycled in North America. For instance, in the case of vehicles placed in service in 2023, the applicable share must be a minimum of 40 per cent, with an annual increment of 10 per cent until it reaches 80 per cent for vehicles placed in service after 2026.

Regarding the battery components requirements, final assembly must take place in North America, and the proportion of the component value within the battery that was either manufactured or assembled in North America must meet or exceed the applicable percentage. For example, this percentage stands at 60 per cent for vehicles in 2024 and 2025, with a yearly increase of 10 per cent until it reaches 100 per cent beyond 2028.

International firms have a particular interest in the proposed treasury regulations. These regulations have produced a list of partner countries for the purposes of the Inflation Reduction Act.

A few of the listed countries include Australia, Bahrain, Canada, Chile, Colombia and Japan. The inclusion of Japan is a result of a critical minerals agreement signed with the U.S. on March 28, 2023, and it sets a precedent for other countries or regions to potentially follow the same path.

Argentina is not on that list but it is a lithium-rich country. Together with Bolivia and Chile it forms what’s been called the lithium triangle. Argentina doesn’t have an free trade agreement with the United States and therefore is not necessarily applicable to benefit from the IRA.

That doesn’t mean much for lithium giants like Albemarle Corporation (NYSE: ALB) and Livent Corporation (NYSE: LTHM), which have operations spread out in multiple jurisdictions including Argentina. But could mean missed opportunities for small scale and small cap lithium companies such as Lithium South Development Corporation (TSXV: LIS) (OTCQB: LISMF) (Frankfurt: OGPQ).

However, the United States and Argentina have entered into a bilateral investment treaty, and as of 2013, more than 500 U.S. companies have emerged as leading investors in Argentina. These include investments totalling nearly USD$20 billion. U.S. direct investment in Argentina primarily focuses on industry or agriculture, natural resources, finance and services sectors.

That produces options, especially given the evolving nature of trade agreements.

Read more: Lithium South Development expands production goals, updates PEA on Hombre Muerto lithium project

Read more: Lithium South Development updates leadership roster, appoints new director

The European Union may have an alternative option

After months of European officials expressing concerns about the potential impact of the Inflation Reduction Act in redirecting new EV investments from Europe to North America, President Biden and European Commission President von der Leyen initiated discussions in March 2023 to establish a new critical minerals agreement.

This agreement would be recognized as an FTA for the purpose of qualifying for critical minerals tax breaks under the IRA. The two sides intend to enhance coordination for the substantial subsidies that will be accessible to various clean tech industries under both the IRA and the EU’s Green Deal Industrial Plan.

Redefining what constitutes a free trade agreement could have ripple effects across multiple industries, potentially opening discussions with countries that had been hesitant to join or perhaps outright barred from said agreements due to political disagreements.

That means that sometime in the future companies like Lithium South and others may not need to miss out on the friendly nation benefits offered by the IRA.

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Lithium South Development Corporation is a sponsor of Mugglehead news coverage

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