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Six ASX listed lithium miners have soared by as much as +380% since beginning of the trading year to June. Here is a chart comparing the big winners.

Over the past three months, however, lithium stocks on the ASX have lost some of their lustre.  The following price movement chart compares the performance of the top two Lithium Miners on the ASX – Galaxy Resources Limited (GXY) and Orocobre Limited (ORE).

The other big winners from 2016 are in earlier start-up phases with only one seeing a share price increase over the last three months.  Altura Mining (AJM) is up 10% while Prospect Resources Limited (PSC) has dropped 18% and Dakota Mining Limited (DKO) shares fell 22%. In May of 2016 Galaxy merged with General Mining (GMM).  

As is often the case with “next big thing” sectors companies often rush in for the big payoff.  Miners abandon exploring for other minerals and chase the “hot” item, such as happened with iron ore.  Demand for iron ore skyrocketed as China embarked on massive infrastructure projects.  Supplies rose and when demand slowed prices fell.

The demand for lithium is coming from its use in batteries for a variety of applications, chief among them smartphones and electric vehicles (EV’s).  In February of 2016 Bloomberg put out an article entitled “Here’s How Electric Cars Will Cause the Next Oil Crisis.”

Bloomberg New Energy Finance (BNEF) expects EV’s to reach price parity with gasoline powered vehicles by 2022.  The price of lithium-ion batteries fell 35% during 2015.  The following chart is the stuff that sets investor’s blood pumping.

So why the decline over the past three months?  

Retail investors who have been in the game for a while are aware “next big thing” stocks don’t always deliver. Therefore, it sometimes doesn’t take much to send nervous investors heading for the exits.  In January, celebration of the Chinese Lunar Year softened commodity prices, as it always does, as commodity traders there close up shop to celebrate the week-long holiday.

In late February US Investment Bank Goldman Sachs downgraded US EV manufacturer Tesla Motors (NASDAQ: TSLA) to SELL, citing concerns the company would miss the launch date of its newest entry to the market, the Model 3 Electric Sedan, with an expected sticker price of US$35,000. Analysts at UBS and Morgan Stanley were also bearish in their outlook.

Finally, another Bloomberg article appearing in early March of this year highlighted the government of Argentina’s recent regulatory changes with an eye towards “Lithium Superpower Status.” Speculation abounds that Argentina “flooding the market” will drive down the price of lithium while miners across the globe are ramping up supply.

US investors appear to be betting Tesla and other EV manufacturers can absorb the supply.  Despite selling far fewer vehicles, Tesla’s market cap recently passed Ford Motor Company (NYSE: F) to take second place among US auto makers, trailing General Motors.

The following price movement chart for Tesla suggests investors momentarily lost faith with the Goldman downgrade but regained confidence with the prospect of increased supply, which Tesla and others will need. 

Tesla’s success along with the company’s planned “Gigafactory” for research and development of batteries for energy storage and use in EV’s have arguably played an enormous role in the perception of lithium as the “next big thing.”  Current skeptics would do well to recall the company’s history.

Tesla launched its first model, the Tesla Roadster with a sticker price of US$109,000, back in 2009 and critics scoffed at a miniscule market for such an expensive vehicle.  Next came the Model S with a starting sticker price of US$69,000.  Analysts remained unconvinced and by early May of 2013, Thomson Reuters StarMine was reporting Tesla stock was “more heavily shorted by investors than 98% of the 4,200 companies tracked by the service.”

On 3 April of this year, Tesla reported record quarterly vehicle deliveries – 25,418 units – besting deliveries for the same period last year by 69%, and beating Goldman’s forecast.

Investors with an appetite for risk should consider the possibility the forecasted demand projections may be low, given Tesla’s repeated besting of analyst expectations.

There are three ASX listed lithium miners with positive two-year earnings growth forecasts and relatively attractive valuations at current levels.  

Based on recent performance Galaxy Resources appears to be the clear leader of the pack.  The company has lithium assets here in Australia at Mt Cattlin in Western Australia; at Sal de Vida in Argentina; and in Canada at James Bay in the province of Quebec.  The Canadian project is currently in maintenance phase while Sal de Vida has the potential to generate total annual revenues in the region of US$215 million per a DFS (Definitive Feasibility Study) completed by the company.  The project is ideally located in a region known as the “lithium triangle” due to the area’s annual production of lithium from brine reportedly accounting for more than 60% of total global production.

In addition to extracting lithium from seawater or surface water – brine – it can also be found in crystals in spodumene mines.  Galaxy’s flagship project at Mt Cattlin is a spodumene mine.  The company expects to produce 160,000 tonnes of lithium concentrate from Mt Cattlin in 2017. Galaxy already has binding agreements in place with Chinese customers for 120,000 tonnes at US$905 per tonne, based on content grade. In early February Galaxy completed an oversubscribed capital raise at $0.54 per share, raising about $61 million dollars.  

On Friday, 27 January, the shares of Orocobre Limited closed at $4.77. On the following Monday, the company disappointed investors with a Quarterly Update that revealed a 19% fall in revenues.  Investors were shocked again on 1 March when the company lowered production guidance for FY 2017 during its Half Year Results presentation, with the expectation of increasing production in 2018, but no formal guidance provided.  Investors chose to ignore the positive increases in revenue and profit.

Orocobre operates in Argentina, with assets in lithium and boron.  In 2012 Orocobre acquired Borax Argentina from Rio Tinto that included three operational open pit mines.  The company’s flagship project is Salar de Olaroz, a lithium from brine asset located in the “lithium triangle.”  

For FY 2016 Orocobre reported earnings per share of -$0.16, which is forecasted to grow to +$0.328 in FY 2017 and +$0.414 in 2018.  Comparing the 3-year total shareholder return for Orocobre of only 9.3% against the 101.6% return for Galaxy and the 173.5 return for Pilbara Minerals (PLS) suggests Orocobre shareholders have experienced a rocky ride.  A two-year price movement chart serves as evidence.

Salar de Olaroz officially opened in December of 2014 with its JV project partner, Toyota Tsusho holding purchase agreements for all the lithium carbonate produced at the project. The project has been plagued by technical and production issues as well as an unfriendly regulatory environment.  Given the changes in the Argentinian government’s stance towards lithium mining, Orocobre should benefit. 

Pilbara Minerals Limited (PLS) has a single project here in Western Australia, the Pilgangoora Lithium-Tantalite Project.  Pilbara is the sole owner and proclaims the project to contain one of the world’s largest deposits of spodumene and tantalite.  Spodumene is a crystal material from which lithium is extracted, as is the case at Mt. Cattlin operated by Galaxy.  Tantalite is used in electronic devices such as smartphones, game controllers, and DVD players.

On 29 March the company announced an agreement with Atlas Iron (AGO) to acquire and farm into (a leasing arrangement) the Atlas Cisco lithium asset, containing the same lithium grades found in the Pilangoora Project.  Pilbara also acquired a majority stake in Atlas Iron’s Mt. Francisco Lithium-Tantalum project. In addition, Atlas has agreed to provide logistical services for Pilbara’s project.

To date Pilbara has received its mining permit for the Pilangoora; secured a water supply; and signed a processing agreement with RCR Tomlinson (RCR).  The remaining challenges are somewhat formidable, including completing offtake agreements (purchasing contracts in advance of production) and financing.  Analysts estimate capex completion costs for the project at $209 million.  The company has yet to announce whether to finance completion of the project through debt or equity financing or a combination of both.

Pilbara has an existing offtake (purchase agreement for future production) agreement with a Chinese supplier of lithium products, General Lithium.  General Lithium will absorb 40% of Pilbara’s first year production, expected to commence in mid-2018.  

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