In yet another example of how a sector once bestowed market darling status can quickly descend to market dog, ASX lithium miners, red hot throughout most of 2016, went ice cold for the second half of 2016 and well into the first half of 2017, recovering through the end of the year only to fall again in the first half of 2018. The story behind the rise and fall might seem familiar to Aussie investors left stranded in the wake of the collapse of the mining boom. The demand for iron ore skyrockets; suppliers ramp up production to benefit from the price rise; oversupply conditions set in; and in the face of shaky demand, the price of the hot commodity declines, dragging sector stocks down with it.
Ardent mega-trend followers noticed article after article touting the coming electric vehicle revolution, powered by the Lithium-Ion battery. Investors began to flock to any company even remotely connected to lithium production, regardless of what kind of lithium or where it was produced. Prices rose, and oversupply concerns set in as the world’s biggest lithium producers planned production ramp-ups. Short-sellers moved in and two of our top lithium stocks fell, only to rise and then fall again.
The loss of rabid interest in lithium miners was fueled in part by the “discovery” of other metals critical to the production of Li Ion batteries, like graphite and cobalt.
What it seems some Aussie investors are missing is the fact that, unlike the iron ore stocks, both the demand for and the price of lithium remain robust. From Bloomberg New Energy Finance, here is a demand forecast for EV (electric vehicle) sales.
Annual global electric vehicle sales are forecast to hit 24.4 million by 2030
There are differences of opinion regarding price movement for lithium, with Deutsche Bank predicting declines, but UBS sees prices rebounding into 2024 following the early 2018 declines.
It would appear the massive increase in demand for battery powered Electric Vehicles justify investing in solid producers of battery components. The question is what components and which producers?
Innovative technology always poses a risk in mega-trends and there are alternatives to the dominant Li Ion battery under development. To date, none come close to the cost and performance efficiencies of the various combinations of materials requiring lithium.
Searching for producers should begin with the understanding not all lithium production is the same. Lithium can be extracted from brine salt mines or mined from hard rock deposits. Brine production today is dominated by South American countries, while local Australian producers rely on hard rock deposits, or through assets held in foreign countries.
Conventional wisdom found in many expert articles touts the cost advantage of brine production. However, there are those who point to a significant disadvantage that can wipe out the cost edge over hard rock mining – weather. Brine production relies on a long evaporation process that requires near perfect weather. In addition, the capital expenditures associated with lithium brine operations are higher than for hard rock mining and the production process is longer.
Another benefit in favor of hard rock producers is entering the picture. Raw lithium ends up in battery applications in compound form with other minerals. Currently, lithium carbonate is the key driver of lithium demand. However, a further refinement of the lithium carbonate end product – lithium carbonate equivalent – contains both lithium carbonate and lithium hydroxide. A recent report from international metals and minerals research firm Roskill claims that “despite its higher price, lithium hydroxide offers higher performance in lithium-ion batteries, especially given the new regulatory requirements in countries such as China where range and energy density is strictly controlled.”
Lithium hydroxide is a preferred component for use in the nickel/cobalt/aluminum batteries used by US EV manufacturer Tesla, as well as in the nickel/cobalt/manganese battery cathode in use by other manufacturers.
Lithium hydroxide produced from brine-extracted lithium production suffers from lower purity of the extracted lithium and higher costs. There is a new “membrane technology” under development that could solve some of these issues. So as of this moment, it appears hard-rock lithium mining will have the competitive edge when it comes to production of the higher priced lithium hydroxide, used to improve battery storage applications as well.
Many Aussie investors learned the hard way from the iron ore run-up that junior miners are far riskier than established players with the ability to withstand downturns. The majority of large cap iron ore miners on the ASX have survived. Common sense would seem to suggest sticking with established players in the lithium space, either already generating both profits and revenue or forecasted to do so, is the soundest investment strategy for those with minimal risk tolerance.
For high risk tolerant investors and punters, there are more than 30 ASX stocks with lithium connections from which to choose. The following table looks at lithium miners, all with positive two-year earnings growth forecasts.
Note that despite the volatility of share price movements over the last five years for lithium producers, all these stocks delivered positive total shareholder return over three and five-year periods. Orocobre Limited (ORE) is strictly a brine producer, with operating assets in Argentina and one in development in Canada. Galaxy Resources (GXY) has both hard rock and brine operations. Pilbara Minerals (PLS) and Mineral Resources (MIN) focus exclusively on hard rock operations.
Pilbara Minerals (PLS) is the sole owner of the Pilangoora Lithium-Tantalum Project, with the company forecasted to report positive earnings per share of $0.03 by FY 2019.
The company claims its flagship Pilangoora Project, set for commissioning this year and beginning production in 2019, will be “one of the world’s largest lithium mines, also producing tantalite as a valuable by-product.” In February Korean steelmaker POSCO took a 4.75% stake in Pilbara and signed a long-term agreement to buy 240,000 tonnes of lithium concentrate per year to supply POSCO customers producing EVs.
In addition, Pilbara has a JV arrangement with POSCO for a conversion plant in south Korea to produce both lithium carbonate and lithium hydroxide from the concentrate.
Pilbara states the company already has binding off-take agreements or Memorandums of Understanding with major off-take partners in China, Japan, the Americas and Europe, accounting for 100% of the company’s projected production. The list of offtake partners includes Chinese companies General Lithium, Ganfeng Lithium, Great Wall Motors; as well as Korea’s POSCO. The project is fully funded.
The share price took a dip with the early 2018 downturn in lithium prices but is recovering and has posted the best performance of any major lithium producer on the ASX.
Orocobre Limited (ORE) has 73% ownership of its flagship operation – the Olaroz Lithium Project in Argentina – with Japan’s Toyota Tsusho Corporation holding 23%. The partnership between the two companies has been expanded with Toyota increasing its ownership stake to 15%, providing Orocobre with funds needed to double its production capacity at Olaroz. The Joint Venture has plans to construct the Naraha Lithium Hydroxide Plant in Japan, with production capacity of 10,000 tonnes per annum (tpa). Naraha is expected to be fully commissioned in 2019, with the Japanese government partially subsidising the project.
The company also operates a Borax mine in Argentina and has entered into a partnership arrangement with Advantage Lithium to develop lithium brine projects in Canada. 2017 was the first full year of operation for Olaroz, helping Orocobre to report its first profit of US$19.l4 million.
Galaxy Resources (GXY) has a lithium brine project in Argentina – Sal de Vida – as well as hard rock projects at Mt Caitlin here in Australia and James Bay in Canada.
The Mt Caitlin Project is 100% owned and fully operational, with a production capacity of 180,000 tpa of lithium oxide concentrate. The bulk concentrate is shipped to China for further processing. In November of 2017 the company reached offtake agreements with Asian customers accounting for 100% of the planned production of Mt. Caitlin’s lithium concentrate for 5 years, beginning in 2018.
James Bay is in advanced feasibility study stages while Sal de Vida has the potential to generate total annual revenues in the region of US$354 million and operating cash flow before interest and tax of US$273 million per annum at full production rates, according to the company. Reserve estimates found 1.1 million tonnes of retrievable lithium carbonate equivalent and 4.2 million tonnes of potassium chloride (potash or KCI). The 2016 Feasibility Study also indicated Sal de Vida could reach lithium carbonate production of 25,000 tpa, along with 95,000 tpa of potassium chloride.
With a capital expenditure price tag of US$474 million, Galaxy was rumoured to be looking for buyers for some of its exploration tenements in the area for funding. On 29 May, Galaxy announced a US$280 million-dollar deal with POSCO for “a package of tenements” north of Sal de Vida. Investors applauded the news, driving up the stock price 13%.
The company reported negative earnings per share for FY 2017, with estimated EPS for FY 2018 of $0.136 and $0.155 for FY 2019.
Mining sector enthusiasts looking for diversified earnings streams might consider Mineral Resources (MIN), a company operating both as a miner and a mining services provider. The company mines iron ore, manganese, and lithium. The lithium operation at Mt Marion in Western Australia is jointly owned by Mineral Resources (43.1%), Ganfeng Lithium (43.1%), and Neometals Limited (NML) with the remaining 13.8%.
Half Year 2018 Financial Results for Mineral Resources showed a 22% revenue increase and a 25% EPS increase, with strong results from Mt Marion complementing solid performances from mining services and iron ore mining.
In April the company acquired Atlas Iron (AGO), inheriting that company’s Wodgina Mine, with Mineral Resources considering lithium mining at that site. In addition, the company recently confirmed an Australian Financial Review article speculating on the construction of lithium hydroxide processing plants at Wodgina. The company’s statement indicated it would announce its decision following a Feasibility Study, currently underway.
In December of 2016, an analyst at global investment banking giant Goldman Sachs dubbed lithium as “the new gasoline.” Lithium miners appear to be gaining favor with the investment community again, with the latest evidence coming from the surprising announcement of an agreement between US EV giant Tesla Motors and our own lithium developer Kidman Resources (KDR).
Kidman had already surprised and delighted investors with its July of 2017 announcement of a 50/50 joint venture with one of the world’s “Big Three” lithium producers, Sociedad Química y Minera de Chile S.A. (SQM,) to both develop and operate the Mt Holland Lithium Project as well as to develop a refinery operation for both lithium carbonate and lithium hydroxide. SQM will fund the initial project costs.
On 17 May Kidman surprised again, announcing a three-year binding contract with US based Tesla Motors for refined lithium hydroxide, with two three-year extension options.
The stock price is now up 385% year over year.
Mt Holland refinery construction will not begin until 2019, with commissioning expected in 2021. It would appear Tesla Motors is planning for the long-term!
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