Black and White Program

Interview with Alex Walsh, CEO of Lithium Exploration Group

April 2nd, 2012 by John Eastman

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Lithium Exploration Group (LEXG_OTCBB) is a US based exploration and development company. Its focus is on the acquisition and development potential of lithium brines and other precious metals that demonstrate high probability for near-term production. Currently the company is gearing up for development of its Western Canada and South America properties, and investing in technology designed to efficiently mange wastewater at mining sites. Its technical report (43-101) that verifies its resource was announced on March 22, 2012. http://www.lithiumexplorationgroup.com/company-news.php

John Eastman interviewed Alex Walsh, CEO of Lithium Exploration Group in New York City for this article.

JE: I’d like to talk to you about the status of the 43-101 technical report. Tell me about it. Why is this significant? Why, and when will this matter to stakeholders of the company?

AW: The 43-101 is held as the gold standard in proving a resource. It’s a Canadian regulated body; it’s for mining companies, exploration companies. We went through a twelve-week testing cycle last spring, Q2, two of 2012. Our initial resource estimate covers 227,000 acres from 47 well samples. What we did was measure the content of the water in deep OIL field brine in the Swan Hills region of West Central Alberta, these oil field brines are located on the property that we control the metallic and industrial mineral rights to. Those tests were then put into a hydro-geological study showing the historical data compiled about the aquifer, where these valuable minerals are located, as total dissolved solids in a suspended solution between 2300 and 2600 meters below the surface. Then that hydro-geological study was married with the sample testing by Apex Geoscience, which is 43-101 certified, and put into a technical report. Now that technical report, 43-101, measures the amount of lithium, potassium, magnesium and other minerals PRESENT IN this aquifer. Our next steps are to quantify how much of that resource can be economically extracted and produced on an annual basis.

JE: This was all from the brine?

AW: From the brine – pumped out at a rate of X number of tons per day, we have Y number of solution, so every year you get this much increase and your overall resource is X for each of the minerals. What 43-101 does to the investment community, and really for a company like ours – and we publish it here in the next days and weeks – is it provides legitimacy behind what you are trying to do, because it shows that an independent party who is regulated by a certain regulatory body says – this is a resource, this is not pie-in-the-sky, the guy’s not guessing that there’s a resource down there. That’s why it’s an important milestone for Lithium Exploration Group and where we’re at today.

JE: The regulatory body that’s approving it, they’ve approved other 43-101s in Canada?

AW: Correct. Since each province has its own security submission that’s got an overarching body, it actually goes through three channels of regulatory bodies. They each review it, and they say, we’d like to see this change or we want more information about that calculation, more disclosure about this test that we saw.

JE: So there are bodies like this who use 43-101s in the United States?

AW: In the United States, the SEC regulates the way that a resource is measured in the United States. The 43-101 is the Canadian version of the way that the SEC regulates how they interpret a mineral reserve to be calculated.

JE: So since Lithium Exploration is a US based firm and trading in the US Stock Exchange, the Canadian certification is still valid?

AW: What the Canadian 43-101 standards say is that what we are producing is an inferred resource, which is a ‘here’s what we measure the resource to be’, but we don’t know its profitability yet because a full feasibility study has not been done.

JE: That’s the next step?

AW: That is the next step in our process. The SEC’s regulation and guides set under the SEC standards only recognizes a resource when it has been deemed to be economically viable and there has been a full feasibility study done. Now that is not why we went down the 43-101 road. We want this to meet 43-101 standards in the inferred resource, and the indicated and measured resource – which would be with a full feasibility study on the production of the resource – because it’s truly the gold standard globally. Everyone from Chile, Argentina, Australia, United States, Mexico and Canada, everyone understands 43-101 terminology and standards, and that’s the main reason that we’ve gone down that road.

JE: So when do you expect this stage to be completed and then subsequently the feasibility study to start?

AW: We have received feedback and we’re making the final changes to our 43-101, which are published to our website, and it will be released to the public. Immediately upon releasing that and having a finalized inferred resource we will move to the next stage of our feasibility study, which will include an engineering and environmental impact study. Economic feasibility of marketing these products to different places in the globe, potential buyers of these products, as well as the mineral processing technique and the economics behind how you’re going to take this brine from the suspended solution to the cake to the lithium carbonate, potassium chloride and magnesium hydroxide – all those things have to be studied and married into one report. We will begin the process of interviewing and selecting all of the required consultants to help with this next step on April 2st of 2012, and as best I can tell right now it’s going to be a nine- to twelve-month process to bring this project to full feasibility standards. I will spend the week of April 2, 2012 in Edmonton and Calgary to begin this process.

JE: So the 43-101 would be considered perhaps the first big milestone achieved?

AW: Exactly.

JE: And the feasibility study would be the second one?

AW: Exactly. It’s an extension of the technical report, and once brought to full economic feasibility study, it would then need guide setting standards of the SEC from our group declaring; we have this, and we have this resource and here’s our full study.

JE: If there are difficulties, delays, problematic issues with say the feasibility study, the company is prepared to just pursue it further, to continue? Is there a plan B?

AW: We have over 650,000 acres of metallic industrial mineral rights in Canada, and we have invested enough into the project and into the exploration of this asset to keep all of those lands meeting government standards for roughly five years. By bringing the study to a full feasibility report, the variables that we will be tackling are – how much is it going to cost to produce the lithium, the potassium and the magnesium? The risk that we have as a company is when we get to the end of that feasibility study – which is a very set and standard process. This is not groundbreaking stuff. This is just follow the guidelines, check the boxes, get your professionals to do their job. And we’ll have a study that says, at this price you can justify this much capital expenditure to build a facility that will produce this much lithium, potassium, magnesium hydroxides. The risks that we run as a company right now is saying that at 5,500 or 6,000 dollars, the production of lithium from this brine is not viable, but at a different price it is viable. At some point it becomes a viable project, and that’s the nice thing about where we sit today is that we feel strongly that we’re in a good position based on being able to piggy back on huge amounts of capital expenditure from the oil and gas industry and the fact that we don’t have to drill any of our own wells. We don’t have to build any of our roads or bring any power to our facility, because all of that stuff is already in place. The only capital expenditure that goes into this production facility and project will be literally the facility where the minerals are separated and produced into the final product. Most mining projects have huge amounts of up-front capital expenditure, which is then offset by profitable products. That’s the crux of what we’re trying to do with this project and why we feel very strongly that we’ll be in a good position. But as far as the near term, the actual viability, that’s something that we need to vet out.

JE: Okay. Tell me about the Valleyview Project please.

AW: Oil and gas in this region of Alberta is a seventy-year-old industry, and it was really the Mecca of oil and gas production for all of Canada and most of this part of North America for thirty years because of these deep oil and gas finds that were found back seventy or eighty years ago. What you’ve got now is a use of hydro-fracking and tar sands and other ways to produce oil and gas and other assets. In this section of Alberta, you’ve got a lot of old assets that are producing twenty times more water than oil today, and twenty times more than they were when they first came on production thirty and forty years ago. So the oil and gas companies are less focused on those assets. Our goal is to bring a new industry to the region, the production of the valuable minerals that lay with this oil and gas, in these deep well aquifers to the region. Because of the lack of interest, and because of a lot of the assets in this region are being foreclosed on by banks because they can’t afford the payments (similar to the housing industry in the United States bubble.) If an asset was bought in 2007 at eight dollar gas and leveraged to 270% cash flow, and gas drops by one-third or drops by two-thirds then gross profit, actually the gross revenue, can’t cover the debt load. Banks take it back, and give it out to someone else. So there’s really an opportunity for us to control our own destiny. In buying an asset, getting revenue on our bottom line, and having a footprint where we can then build our own production facility and not have to worry about calling on an oil and/or gas company and partnering with them on the production of our resources. Because if they control the land, and we’re just sub-leasing or having to build onto their property, it’s a risk to us, being able to access our own resources, because they own the wells, and infrastructure. The other component that I think is important, in part of that concept, is that we have very low overhead as a company, but we are exploration based. We don’t have any exploration revenue, and it will reasonably be another two years before we have revenue from the production of these brines. To keep the company going and expanding most exploration companies have to continually go back to the capital market, continue to dilute the existing shareholders. Our goal with the acquisition of an asset is to take capital once, have that capital serve two purposes: one purpose to provide revenue to the company so that we can make it go for an indefinite period of time; the other purpose is to own and control the asset where we want to build our production facility. This is a way of providing value to the existing shareholders that most exploration companies just don’t have, because they’re not located in areas where there’s the opportunity to partner with the oil and gas industry.

JE: But there’s a long history of development in this area of oil and gas?

AW: Sixty plus years and billions upon billions of dollars – roads, rail, power, skilled labor force – all things that any mining company is desperate for when they look at building an asset. And most mining projects are in such remote locations that they have to bring all of that as part of their up-front capital expenditure to bring a mine, and we’re just going to basically come in and participate in that for free.

JE: That represents significantly less expense and less risk for what you’re doing?

AW: It certainly is a risk mitigator, because we’re not as dependent upon a huge capital expenditure on the front end, which allows us a lot more flexibility on an internal rate of return basis on the back end of our project and its potential profitability.

JE: Let’s talk about revenue. So explain to me beyond 43-101s, and feasibility study. If I’m looking at this company as a buyer, where is this company going to get its revenue from, if all of these milestones are met and this is a go?

AW: Once we begin to move forward on the feasibility study – we’ve talked about the potential revenue of the oil and gas asset that we could potentially buy – that would be our path of least resistance to revenue from one of the company’s subsidiaries that will offset the expense of running the company and continue to develop the project.

From a mining perspective, once we get the 43-101 complete, it will take us about a year to build the facility and bring that to production. The revenue from the mining side will come from lithium carbonate, potassium chloride, magnesium hydroxide, calcium fluoride, and sodium chloride. Unlike most other mining projects – and this is an important long-term, part of our thought process on being as efficient as possible with the resources we have and the assets that we have and the infrastructure around us – is that all of our waste by-products (after the production of lithium, potassium and magnesium as core money makers), is a waste salt that could be thrown on any road in North America as a de-icing agent. There are no toxic agents or chemicals that could not be used as any de-icing cake that they throw on the roads in New York City or Toronto or West Central Alberta. So considering that’s your sodium chloride and all the other minerals in that, that not only are we not going to have to pay to dispose of those, we could actually get revenue from the sale of our wastes in an agreement with one of the major salt providers in the region for de-icing agents and let them do with it what they choose as part of their purposes.

Calcium chloride has an interesting dynamic, which is probably the second largest waste bi-product that we’ll have from production. Calcium chloride salt is re-mixed back into fresh water to produce what’s called work-over fluid or heavy water that’s manufactured specifically for the oil and gas service industry, because they have to use water that has a certain specific gravity to hold down the oil and gas while they work on the casings. That will be another source of revenue for company. So we’re not just going to produce the lithium and have a huge expense of waste bi-products. We’re going to take all of our waste and get it into downstream revenue generating opportunities, specifically the mining site. Now we haven’t talked at all about the technology.

JE: Of the waste from the process of mining the lithium, what percent do you think turns into revenue, of that bi-product which normally is an expense? We talked about salt for instance. Do you think fifty percent of your waste turns into revenue potential? Seventy-five percent?

AW: I wouldn’t like to put a number on it because I think that that is a critical component of the feasibility study. From the mineral processing technique which has already been designed and needs to be tested in a lab, they will be able to tell us the dynamic of the waste stream, and they’ll be able to tell us how easily it can be put into different products and what those products are worth. That’s one of the components of the feasibility study is answering, what are you going to do with your waste? but also how are you going to market the various products that you have? In concept we know where they are going to go, but until I can put a price tag on it and have a number from the study, I’m not necessarily comfortable yet throwing anything against the wall. It wouldn’t be as accurate as it should.

JE: That’s fair. So you’re working on developing some technology regarding the use of waste water?

AW: The technology is a patented process by which waste water is forced through a generator, and modifications made within the area that that water flows, which are patented, force a process called a cavitation. A cavitation is a naturally occurring ultrasonic occurrence, and simply defined, it’s the popping of micro-bubbles, bubbles that you probably could barely see with the naked eye, but when micro-bubbles pop there’s an energy release, and we’ve got a million bubbles popping per square unit. There are huge amounts of energy that are released, and what the technology is going to do is produce extreme heat, which is required to separate solids from water. Through flashing off the water in the form of dry steam, the solids that are in a suspended state within the water cannot travel in steam. It’s not physically possible. Solids can’t vaporize. It’s a solid for a reason and will essentially fall out of solution into a collection area where it will be then sent for processing. That’s how we intend to use the technology for the purposes of our project. By utilizing a naturally occurring heat source it will mean that we need far less natural gas or electricity to effectuate heat during separation.

Because of the dynamic of the way that the technology works, and what is generates, it’s on a much smaller footprint than other traditional technologies, which are natural gas fired evaporators and reverse osmosis membrane technologies. It will allow us to do all of the things that we need to do to get the lithium and other valuable minerals out of their water state and into a state where they can be further chemically separated into final products that are for sale. We entered into an agreement with the technology provider a year ago. We funded, in May, the development of this pilot unit, of the patented process. The technology is now finished and is ready to be tested. They’re going through all of the quality control and permitting and zoning issues to test this unit and tie it into a water source, and that’s going to be our first step of proof of the concept. Proof that cavitation is happening under pressure and is producing enough heat to effectuate.

JE: This is a patent that Lithium has rights to?

AW: We have rights to this patented process specific to the mining industry in Canada. Because we invested in the building of this pilot unit, which we are going to use for our project, our core asset lithium project. So any company that wants to use the technology for a mining project in Canada has to be a licensed from Lithium Exploration group or we have to be a joint venture partner for them to access this technology. It should work, as we all hope it will.

JE: When do you expect this technology project to move forward?

AW: I expect to have our first set of tests in the next week. That will tell us that the water is being heated and whether or not it’s being heated to a sufficient temperature, and it will tell us the ballpark of how much water they’re able to flow through this on a minute or hourly basis. We’re going to test it for about a week. We’re going to have data that, upon approval of our technology department, we will be releasing to our shareholders. Most importantly, we want to show them a video of the process taking place, because it is much easier to see something and know that it’s real and that we’re working on it. The steps beyond that are to test the unit with different types of brine at different percentages of dissolved solids for its efficiency, and being able to measure – specific to the percentage of content that we have at our project at Alberta – the volume that it can produce on an hourly, minute, and daily basis and the energy that it took to run the event. So that can be part of our strategy and our feasibility study going into the production of our plant. That testing process will last 90 to 120 days. At that point it’s mounted on a traditional tractor/trailer chassis, driven to Alberta to a site of our discretion at that point, where it will end up on our own property, and we’ll begin testing it for ourselves and utilizing the technology. Now you’ll notice that there’s a difference in when the technology will be on site and when we’re going to be ready to produce lithium and other valuable minerals.

JE: Right. My question is when you essentially apply this technology to an existing project how does this affect it? Does it result in less energy, more production, more efficiency?

AW: Less infrastructure, expense, steel and all of the other factors that goes into an evaporation technology. You’re spending less money to build it, taking on less of a footprint, and less energy required to run the unit. So you’re going to have a certain fraction of the capital expenditure and then a certain fraction of the energy input required to produce that separation. Those numbers I can’t give you today as we are waiting for data and how it will affect our project.

JE: It will be your project that is first to use this technology?

AW: That’s correct. We will be the first ones to use the technology. Now, between the time that we are ready to have our separation facility in place and market the products that are coming out, we will essentially be sub-licensing the unit to an oil and gas company, or to ourselves in treating water and taking corrosive solids out of the water. They tell me from their production we’ll be charging them to do so. Again, from a revenue perspective, when we get the unit to Canada it is saving someone money, because in the oil and gas industry it can be enormously expensive to dispose of this waste water. If you don’t have your own injection well – which traditionally costs you a million to two million dollars – if you’re a small operator you don’t, so you pay a waste disposal company twenty dollars per ton to truck it away and ten dollars per ton to dispose of it. So if we can bring a unit on site and extract all the corrosive solids, give the oil company back fresh water or sell that fresh water to someone else, we can charge them to produce. And if the technology works the way we hope it’s going to work, there’s dozens of companies that I’ve already spoken with that would be interested to have this technology on site. In the meantime, we are proving our resource.

JE: In the press, in some of the market publications, there has been some negative information suggesting Lithium Exploration is a shell company, has missed milestones that have been promised and not made, etc. How do you answer that? What’s different now?

AW: I started doing research on the lithium industry in early 2010 and found it to be an industry that was lacking innovative thinking. Realizing that there were studied brines in Canada that had never been exploited I developed a strategy around how to enter the space and was able to complete our reverse merger and takeover as CEO of Mariposa resources in November of 2010. Mariposa was a company that made an attempt at doing some mining projects and essentially went nowhere. I brought in a director that had capital markets experience. I brought in a director who is a mining engineer at a major copper mine in Arizona – he works for Freeport McMoran – and started to develop the strategy in conjunction with my geological team at Edmonton around producing from these brines. I had found out about this technology around the same time that I started to research the lithium industry, and they all just had this really nice synergistic relationship, which is why I came up with the concept of bringing this to the fore.

We then changed our name to Lithium Exploration Group and optioning our initial property in Alberta in December of that year. There was a third party promotion done on our stock, having nothing to do with the management and/or directors of LEXG, but essentially taking advantage of this world that we live in – the internet and e-mail blasts –they essentially went out and paid someone to tell the world via the internet that we were the greatest thing since sliced bread, when we weren’t the greatest thing since sliced bread. We were a company trying to build a concept and trying to utilize the capital markets to do so, which is what the capital markets are here for, and doing it in an interesting way. What that led to, was people who looked at it and said, well, that’s wrong. That company is not the greatest thing ever, they’re just some startup, and why is this doing this, and why did this stock go from ten cents to a dollar? Why did it go from a dollar to two dollars, and why did it go from two dollars to three dollars? And then that led to a lot of other people on the internet – who had a very vested interest in seeing our stock go down because they had a very significant short position saying that we were nothing, which was also not true, because we were in an early stage of a company trying to develop a concept around producing lithium. There are two sides of the equation – one wants it to go up, and one wants it to go down – and what happened to our issuance was basically the atomic bomb of the bulletin boards, and there’s not a whole lot that we can do to control that. We try not to get wrapped up in the positive or negative sentiment. Our goal is to execute on the plans that we have laid out in our filings and provide long term value to our shareholders.

Some of our vendors have missed their set dates for progress but we continue to work hard every day to improve our communication with our shareholders and execute on our strategy. All of the delays that we have had in publishing our 43-101 and finishing our technology unit have been ones that are temporary in nature and stem from wanting to do it right and taking all precautionary steps to ensure our long term success.

My philosophy on it from back then and still to today is I have not changed what I’m trying to do with this company. My company fundamentally has not changed. We continue to try and develop the resource that we tested in the early part of 2011, spent the second half of 2011 building a technical report and all the geological settings – which will now be complete here in the first part of 2012 – and then taking it to a feasibility study. In conjunction with that we invested in our technology, got certain exclusivity and distribution provisions to help the company with revenue, should it be the home run that we all hope it is. We’re trying to protect the shareholders on both sides by getting the upside that you want to see in the capital markets in lithium and in the technology that could be game changing but also not making us a one-trick pony.

We are in a very exciting position to change the way valuable minerals are extracted from solution and monetized. It is our position as a potentially game changing company.

JE: So existing shareholders, interested parties, and stakeholders should pay attention to the milestones and act accordingly?

AW: The next six months are going to be very, very interesting for us, and we have a number of milestones that all run parallel to each other, rather than consecutively. If and when they all get done and we execute on the things that we need to do and, as you said, the milestones, people should pay attention and they should read our discussion about it. We’re going to provide a forum where they can ask questions about it, and we can have that dialogue, because sometimes it’s a little hard to understand. But that’s where we want to be.

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