Reshuffling Lithium Supply

Futurists dating back to Alvin Toffler in the 1970’s and farther have provided investors with places to look for investing opportunities.  Toffler’s ground-breaking book Future Shock paved the way for the decade later work of another futurist, John Naisbitt, who coined the now ubiquitous term megatrend.

There are numerous definitions of the term but the one of closest interest for the investing world is that of major forces with the potential to impact product-buying behavior in the foreseeable future.

Any sector and the businesses within involved in any way with such macroeconomic forces stand to benefit from the emerging megatrend.  Financial websites of all types ensure investors have no shortage of lists of megatrends from which to search for worthy investments.  Who wouldn’t want to invest in a company with potentially gale-force winds at its back?

Given the fact the essence of the term “megatrend” implies something big into the future, one would assume megatrend investing would follow the classic buy and hold approach.  When buying a megatrend stock it would seem logical to hang on to the stock while the trend develops to its full potential.

One would be hard-pressed to find any list of megatrends that did not include in some way the already in progress revolution in energy applications through battery technology.  Portable power tools and other consumer devices once powered exclusively by Ni-Cad (nickel-cadmium) batteries got a major boost in power and recharge capability with the advent of the now dominant Lithium-Ion battery.

The consumer electronic applications exploded with the advent of the laptop and tablet computers and the most common consumer device now on the planet – the smartphone.  The emerging trend got its mega boost from the projected rise in demand for electrically powered vehicles (EV’s) and large-scale battery storage facilities.

As recently as five years ago investors were swarming in droves around the stocks of the companies producing the metals and minerals needed to produce Li-ion batteries.

Then, one by one, the euphoria turned to panic, and the share prices of miners of graphite, cobalt, nickel, and lithium collapsed.  Despite the long-term nature of a megatrend, one could make a strong case that share price movements of the metals miners were dominated by short-term thinking.  Why else would an astute investor dump a stock with a megatrend behind it?

As veterans of the rush of miners to shift focus to iron ore during the China infrastructure fueled boom led to oversupply and falling commodity prices should have been able to foresee, the “hot metal of the month” went ice cold as analysts and experts alike chimed in with gloomy projections, most short-term, of growth with these miners.  Time and time again investors read of “oversupply” conditions driving the price of the metal in question into the nether regions.

Amongst the metals the rise and fall and rise again of lithium miners may have been the most surprising, given that lithium is found in all current battery formulations.  Some  may exclude some metals or have more of one than another, but all depend on lithium.

Lithium did not escape the relentless cries of oversupply, without corresponding attention paid to demand, it would seem.  As recently as 29 January of this year, global energy and mining consultancy firm Woods Mackenzie was predicting a continuation of declining lithium prices as a result of even more supply coming to market, most notably from the ramp-up in Western Australia.

Some investors stop researching once they see the word “decline” and fail to recognise even the most bearish of analysts and experts on battery metals in general and lithium in particular acknowledge the long-term demand trend is robust. The world of financial websites is packed with demand charts like the one below from Bloomberg New Energy Finance (BNEF).

There are near-term reasons for Aussie investors to remain or become enthusiastic towards some of our lithium miners, with Western Australia expected to become a major player on the global stage.

First, there are two means of producing lithium – extraction from saltwater brines and mining from hard rock deposits.  The predominant method to this point in time is brine extraction, with production centered in South America where the climate is suitable for the lengthy extraction process.

Australian mines are hard rock, with massive deposits in Western Australia.  Historically brine production had a cost advantage over hard rock mining by some measures but that may be about to change dramatically, to the benefit of miners operating here in Australia.

Weather has always been an issue for brine production and added to that we now have a shift in the demand for lithium compounds as battery and EV producers look for more efficient batteries.

Regardless of its source, raw lithium must be processed further and ultimately ends up in compound form with other minerals.  Lithium carbonate was the current processed form used by battery and EV manufacturers and it was highly suitable for brine extraction.

Now there is a shift toward further processing with the result being lithium hydroxide.  With current technology lithium hydroxide processed from hard rock is cheaper than processing from brine and the result is higher in purity, highly desirable for both EV and battery storage applications.

The upcoming Federal Elections may be boosting the fortunes of hard rock lithium miners as well.  Labor Leader Bill Shorten responded to the Liberal Party’s stopping the funding for a program (Exploring the Future) planning for the use of advanced technology to find deposit prospects using underground maps, with a pledge to invest $75 million dollars towards discovery of mining resources, especially lithium.

The 29 April newsletter from Australian Mining features major announcements from three ASX lithium miners.  The most positive development, however, came back on 18 November of 2018 when US-based specialty chemicals company with leading positions in lithium, Albemarle Corporation (NYSE:ALB) announced it had taken a 50% stake in the Wodgina hard rock lithium deposit in a joint venture with ASX listed Mineral Resources (MIN).   Mineral Resources will continue to own and operate the mine with Albemarle handling marketing and sales of the lithium hydroxide from the deposit.

The share price of Mineral Resources jumped 33% on the news.  Of equal significance was Albemarle’s announcement it was changing plans to expand the capacity of its brine operations in Chile, turning its focus instead to expanding its Australian Kemerton plan in Western Australia to process lithium hydroxide.

The following table lists four ASX listed hard rock lithium miners worthy of consideration.

Mineral Resources (MIN) and Pilbara Minerals (PLS) have solid history behind them and positive earnings growth ahead.

Pilbara posted negative earnings per share (EPS) in FY 2018 and is expected to do so again before rebounding to a positive $0.037 EPS in FY 2020.  Despite its attraction to Aussie short sellers, the company appears poised to turn profitable.  Its flagship project is the Pilgangoora Lithium-Tantalum Project, with full ownership.  The operation is now in Stage 3 Development with substantive offtake agreements in place for Stage 1 and Stage 2 production, including South Korea’s Posco and China’s Jiangxi Ganfeng Lithium.  Pilbara shipped its first lithium in October of 2018.

Mineral Resources (MIN) is an oddly diversified mining company, with mining operations encompassing iron ore, manganese, and lithium as well as being a mining services provider.  The company’s Wodgina hard-rock lithium deposit and its jointly owned Mt. Marion Lithium Project began shipping in 2017, and will supply the Joint Venture lithium hydroxide plant.

The company generates substantial revenue – $1.6 billion in FY 2018 – and net profit after tax (NPAT) – $272 million in FY 2018 up from $201 million.  Mineral Resources pays a fully franked dividend with a current yield of 3.5% and a two-year dividend growth forecast of 26.5%.

The remaining shares are speculative junior miners, although both have producing operations in place.  Altura owns and operates the Altura Lithium Mine at Pilgangoora in Western Australia. The mine went into production in 2018 and announced commencement of commercial operations in March of 2019.  The company is planning for a Stage 2 Expansion, doubling its current production capacity of 222,000tpa (tonnes per annum) to 440,000tpa, with a Definitive Feasibility Study already in place.

The expansion is expected to be complete in the first half of 2020.  The company has continued to meet its production targets, despite March disruptions from Tropical Cyclone Veronica.  Altura is also exploring two additional prospects in the region.

Alliance Mineral Assets (A40) listed on the ASX in December of 2018 following a merger with Tawana Resources assuming ownership of the Bald Hill lithium-tantalum mine in the Eastern Goldfields.  The joint company is also listed on the Singapore Exchange.  Tawana began commercial lithium production in January of 2018.

On 29 April the Alliance announced a potential Hydroxide Joint Venture arrangement with China’s Jiangxi Special Electric Motor.  If the Memorandum of Understanding (MOU) leads to acceptable terms, hard rock lithium (spodumene) from Alliance’s Bald Hill mine will be shipped to the Jiangxi conversion plant in China, at no additional cost to Alliance.  Capital expenditures will be absorbed by the JV.