Royalty Pains: Arkansas Rights Owners Call Lithium Offer Too Low

Attorney G. Alan Perkins of Little Rock represents south Arkansas mineral rights holders. (Steve Lewis)

Five big players in south Arkansas’ emerging lithium industry are proposing a royalty rate for mineral rights owners, but they may have to dig a little deeper.

At 1.82% of the market value of battery-quality lithium carbonate, the companies’ number is just too low, according to the South Arkansas Minerals Association. The nonprofit represents landowners in a four-county region where companies hope to pump up brine to extract the valuable bromine and lithium within.

Emon A. Mahony Jr. of El Dorado used just one word to describe the proposed 1.82% rate. “Pitiful,” he said. “I’ve got some property down here and I’ve got some lithium on it. I want to get paid a fair price for it.”

That, in his view, would be about seven times the amount offered by bromine producer Lanxess, Standard Lithium subsidiary SWA Lithium, Albemarle Corp., Tetra Technologies and Saltwerx LLC, a subsidiary of Exxon Mobil.

Mahony owns Mahony Corp. of El Dorado, an oil and gas exploration and drilling company that also handles timber management. He’s also the founder and original president of the Minerals Association, which is fighting the royalty application. The five companies applied for the 1.82% royalty last month. Their business plans call for extracting lithium directly from Smackover Formation brine in south Arkansas and east Texas.

Mahony and his old friend Robert M. Reynolds, who succeeded him as association president, believe the lithium royalty rate for mineral owners should be set at 12.5% of sales of lithium carbonate equivalents derived from their brine fields.

Arkansas-produced lithium can’t be sold lawfully until the state establishes a royalty rate, making royalty promulgation the next step for the nascent south Arkansas lithium industry, which still faces questions about its long-term commercial viability and scalability.

AOGC to Set Rate

Arkansas law requires the Oil & Gas Commission to set the royalty rate, and the panel plans to address the issue at its Sept. 24 meeting in El Dorado. To satisfy public interest, the commission will meet at an auditorium at South Arkansas College, rather than its El Dorado offices.

“They anticipate more people than they have chairs at the Oil & Gas Commission,” Reynolds said.

Reynolds, president of Shuler Drilling Co. of El Dorado, is an oil, gas and brine industry veteran who calls Exxon, Lanxess, Albemarle, Standard Lithium and Tetra “the big five.”

“These five publicly traded companies have combined their resources to steamroll Arkansas brine owners and force a minimal royalty rate on them,” Reynolds’ association said in an Aug. 7 statement. “Without providing a single page of financial justification … they want the Commission to trust them that they know best about what is fair and equitable.”

Attorney G. Alan Perkins of PPGMR Law in Little Rock is representing the association.

“We haven’t submitted our more detailed objection [to the companies’ joint royalty application], so I’m a little bit limited on what I can say,” Perkins said in an interview. “But generally speaking, it’s just too low. And they haven’t provided any sort of financial backup for what they are proposing. They basically want a statewide lithium royalty to be adopted by the commission at 1.82%.”

Perkins said the companies are also making a veiled threat to abandon Arkansas if they don’t get the rate they want. “They’ll just take their ball and go home,” he said. “I don’t believe it, is all I’ll say. The resource is there; someone’s going to take advantage of it.”

Legal Frontier

Royalty rates for lithium brine mineral owners are a legal frontier in the United States, which for years has had only one commercial lithium mine, in Esmeralda County, Nevada.

Albemarle, the largest lithium producer in the world, owns the Silver Peak Mine outright. It employs about 100 people there, using evaporation ponds to extract the brine, a far more environmentally invasive method than direct extraction.

Australia is the world’s largest lithium producer, using hard rock mining to gather the metal. Chile is next, deriving it from brine evaporation pools, followed by China, Argentina and Brazil.

Arkansas’ brine fields are in Columbia, Lafayette, Miller and Union counties.

A 1970s state law gave the Oil & Gas Commission the duty to set “fair and equitable” royalties on brine minerals. But lithium is new to the process.

“This is a unique endavor for the commissioners,” Reynolds said. “But I don’t believe the novelty bothers them.”

The commission’s director, Lawrence E. Bengal, told Arkansas Business that he expects the panel to “review the application, ask appropriate questions during the presentation and testimony from all parties, in order to make a determination.”

One question the mineral owners want answered concerns projected profitability.

‘We’re Businesspeople’

“We’re mindful of the need for profitability,” Reynolds said with a chuckle. “If you can’t make a profit, you don’t have an enterprise. After all, we’re businesspeople too. But the only statements relating to profitability which have been published were done by Standard Lithium. None have been published by Lanxess, none by Albemarle, none by Exxon Mobil, none by Tetra Technologies.”

Standard’s published projection for its Lanxess South project in El Dorado was based on a price of $30,000 per metric ton for lithium carbonate equivalent.

Lithium prices have dropped drastically since that projection was published a few years ago, to about $13,000 per metric ton.

Standard’s estimate of internal return was 31% to 33% at $30,000 a ton, with no royalty rate factored in.

“That’s an impressive number, naturally, so we compared that to other industries,” Reynolds said. “In the mining industry, 14% is the internal rate of return. In my own industry, unhappily, oil and gas production, we average a 4.5% internal rate of return.

“So using those numbers, we just penciled in a 12.5% royalty, and that reduced the internal rate of return somewhere between 27% and 28%, which is far above what other people are able to accomplish,” Reynolds said. “But when asked to explain profitability to the Oil & Gas Commission, the companies declined.”

Jesse Edmondson, Standard Lithium’s director of government relations, said in an email to Arkansas Business that royalty rates should be based on “the value of the raw mineral being extracted, not based on project economics.”

The five companies’ royalty application, filed July 26 by attorney Thomas A. Dailey of the Dailey & Woods firm of Fort Smith, said that the companies should not be compelled to reveal trade secrets in the royalty-setting process.

“Each Co-Applicant’s costs and its methodology used to manufacture such products will also constitute valuable trade secrets of that company which must not be shared with other Co-Applicants or released into the public domain,” the application said. “Likewise, details regarding each Co-Applicant’s actual contracted sales of products will be proprietary trade secrets.”

‘Transparent Framework’

The application seeks to base royalties on the lithium carbonate equivalent market price index, with mineral rights owners getting 1.82% of the market index price of lithium products sold.

“Establishing a connection between a market price and royalty, as opposed to a mere per-acre payment, ensures the alignment of interest and proportional value sharing between developers and brine royalty owners throughout the life of a Development,” the application says.

Several of the applicant companies did not respond to requests for comment for this article. In a written statement, Albemarle said the application presents a “clear and transparent framework for compensating brine royalty owners” and a “consistent approach” for the industry in Arkansas. “The application proposes a rate that incentivizes investment while also fairly compensating royalty owners.”

Edmondson, the Standard Lithium executive, said the proposed rate is “simple, transparent” and applicable “to any project in the state, which ensures fairness for both industry and mineral owners.” He said that by tying the royalty to a market price, “mineral owners will benefit from increased royalty payments when lithium prices are high.”

He said his company views the royalty debate as “a regulatory process and not a negotiation with individual mineral owners groups, as there are many mineral owners involved with this process from across south Arkansas.”

He said the 1.82% rate “is within the range of comparable lithium royalties. Landowners in Texas reported early this year that they were getting lease offers for their brine rights promising a royalty rate of 2.5% for any lithium their brine produces. Arkansas’ royalty rate for bromine pays rights owners about $60 per acre per year.

“The proposed royalty structure enables Arkansas to be competitive both globally and regionally, and it also provides certainty for all potential lithium producers in Arkansas to make an investment decision thus supporting local job growth, opportunities for local service providers and small businesses, and an increased tax base,” Edmondson said.

Reynolds, of the minerals group, said Arkansas’ commissioners take their job seriously and will pursue the profitability question.

“They won’t fly blind,” he said. “They’ll quit flying, and I think that was demonstrated by the commission in December. They said bring us the numbers, bring the numbers to the staff, and then we’ll reconvene.

“To me, the same answer applies [now],” Reynolds said. “If the information is not forthcoming, I anticipate that the commission will give them a chance to provide that information or dismiss the matter.”

The hearing will be streamed at youtube.com/@arkansasdepartmentofenergy6731.