For those that don’t know, Under the Radar’s team spends its time looking for “value” based investments, and the lithium sector is genuinely going in the other direction. Mineral Resources (MIN) shares have climbed nearly five fold since the start of 2016 and other more “pure play” lithium stocks have done even better. This is what a momentum sector looks like. This isn’t to say that I ignore it. In fact Under the Radar covered the lithium sector in detail a month ago and we’ve already returned an average of over 13% on the stocks that we analysed at the start of the month!
Last week MinRes simply re-affirmed its projected lithium production guidance, talked up its iron ore business and it being a leader in “innovation” in mining services. All this amid some news that the company had received its “second strike” against its remuneration report, which caused managing direct Chris Ellison to throw a tantrum! He’s getting paid well and his share price is going up, what’s the problem?
Let’s look at some more and you will see that rather ho-hum company announcements capture investors’ imaginations in the “lithium rush”. A more specialist play in the lithium sector, Orocobre (ORE) has been under the pump to ramp up the production from its 66.5 per cent owned Olaroz facility in Northern Argentina. The expectations were that it would double capacity over time, but as with all lithium brine (an evaporated salt lake) developments progress is slow and cumbersome.
Orocobre delivered a presentation in mid-November which simply implied there would be “multiple expansions”, without any noticeable evidence backing this up. The lithium company’s shares have spiked 24 per cent in the past few weeks.
Altura Mining (AJM) is a West Australian company that long-term Under the Radar followers will have heard me talk about in its various guises. These days the company has hitched itself onto the lithium bandwagon having secured off-take contracts and a scheduled production of 200,000 tonnes a year at 6 per cent spodumene concentrate, planned from the first quarter of CY2018. Altura’s stock has increased 10 per cent in the past few week on not much news at all really, other than at its AGM it said that stage one of its project is on track and 50 per cent complete.
The sector flag bearer for many is Pilbara Minerals, which has returned about 17% in the past weeks on pretty much no news, except that it’s in a non-binding discussion with a Korean company to build a lithium hydroxide plant in Korea. Into the never-never we go.
Will it keep going is the US$64 billion (A$84bn) question.
I think so. We are a big believer that electric cars are only going to increase, and of course this means that batteries will be needed in bigger and bigger supply. Based on our calculations, you would need 35 times the capacity of one Tesla gigafactory to supply the world’s electric vehicles in the next decade. That’s a lot of lithium.
Batteries are made of other substances, namely graphite, cobalt and nickel, but lithium offers the best opportunities for investors because its producers are generating cash flow now or in the near future.
Australia is in the box seat because it’s got some mines that are in production or are nearing production.
To date lithium brines, which are predominantly in South America, have provided the majority of lithium supply. Brines have produced high value end products such as lithium carbonate and lithium hydroxide, which can be used almost directly by battery makers. However, faced with the sharp increase in demand from a number of new, large scale battery makers, lithium brine sources will not meet the demand because of longer construction lead times for the mines, high capital intensity, greater technical complexity and political considerations.
Hard rock lithium mining is providing the alternative. It is a complex process and results in an extracted “spodumene” concentrate being shipped to a ‘converter’, normally in China. Approximately 7.5 tonnes of concentrate is required to produce 1 tonne of lithium carbonate.
The spodumene concentrate is a lower value product than the lithium carbonate of the brine producers but can be very profitable, if produced efficiently at low cost in open pit mine operations.
Under the Radar’s view is that the miners, both the existing producers and those that are nearing production will experience big increases in cash flow, which will lead to a re-rating of those stocks. Cash is still king in the momentum based world of battery based speculation.