EV outlook makes timing of lithium’s recovery hotly debated – but a bumpy road is certain

A new special series from Prospector’s Diary looks at four commodities and their key players. This first edition focuses on lithium.
14th February 2020
Tim Treadgold

Lithium returned back as an investment favourite last week, riding on the back of a super-charged share-price performance from leading electric car maker Tesla, leaving many investors questioning what’s the best way for them to re-join the lithium race.

Lithium 101:

Volcanic eruptions often begin with preliminary tremors, but knowing exactly when the earth’s surface might burst open is an event geologists can’t predict, they just know something big is on the way – or, might be on the way.

Lithium, the lightest of metals with peculiar properties that include floating on water and spontaneous combustion, is a classic example of a commodity widely seen to have a brilliant future thanks to another property; storing electricity.

Electric vehicles (EVs) use a lot of lithium in their batteries, along with other metals which make up the family of battery metals, a group that includes cobalt, graphite, nickel and a number of lesser metals, with the combination varying with the recipe preferred by different battery makers.

Fifteen years ago, as EVs started to earn headlines, Tesla was launched as a pure EV maker, taking on the century-old petrol and diesel-powered car makers with most of the established players laughing at the audacity of Tesla’s leader, Elon Musk.

It was the original forecasts of EV demand which caused the price of lithium carbonate (one of several ways in which lithium is sold) to rocket from $US4 a pound to more than $US20/lb. Though, as with many earlier commodity booms, the demand forecasts proved to be wildly optimistic and supply estimates dramatically pessimistic.

When slow demand growth meets a rapid supply rise something happens, the price collapses, which is exactly what started to happened to lithium two years ago, sending the price back down to $US7/lb, and less, depending on the quality.

High-flying lithium miners fell sharply in a market flooded with material as EV sales, which depend today as much on tax and other incentives offered to consumers by governments, struggled to prosper – or even survive.

Orocobre, an Australian company with its best assets in Argentina, traded as high as $7.24 in early 2018 before diving to $2.31 last October, near the height of the China v US trade war.

Over the past three months, Orocobre has been on the rise, an early beneficiary of an improvement in EV demand and the removal of surplus lithium from the market and at its latest price of $3.44 appears to be on the way to the ultimate target of every mining company, sustainable profitability.

Other mining companies are also showing signs of recovery, but it would be wise to assume that the return of lithium will be a stop/start affair thanks to the multiple forces at work, ranging from EV demand to dormant supply waiting for a chance to restart – and there’s a lot of that waiting in the wings.

In time, lithium will boom again, if only because governments are determined to drive motorists out of their petrol and diesel cars into EVs and its that force which is the key to how quickly lithium returns and which stocks could be the biggest winners.

Six of the best:

Orocobre (ORE) – Bruised by the lithium-price crash, Orocobre is fighting back, slashing costs by 16% in the December quarter at the Olaroz lithium project in Argentina to successfully generate positive cash flow from the 3586 tonnes of lithium produced.

Sales volume was up 6% measured on a quarter-to-quarter basis though sales revenue was down 19%.

Investment banks are warming to the investment case for Orocobre, while not rushing back despite the spectacular performance by Tesla, which has seen its share price double since the start of 2020.

Citi is the bank leading the return to Orocobre, forecasting a continuation of the share price recovery with a tip of $4, implying a gain of another 16% on its latest price of $3.44.

Other banks believe Orocobre has already overshot, repeating the excess enthusiasm seen in the early years of lithium’s rise from obscurity to EV winner.

Morgan Stanley reckons the stock is fair value at $2.85, implying room for a 17% fall. Macquarie is the gloomiest, seeing $2 as fair, or for Orocobre to fall by 42%.

For the average investor, Orocobre is an example of the competing forces in lithium which remains in significant over-supply but should return to more balanced conditions towards the end 2020.

Liontown (LTR) – A pure exploration play with two emerging discoveries, Kathleen Valley located near the nickel mining centre of Leinster in WA, and Buldania near the goldmining centre of Norseman, also in WA.

Kathleen Valley is the most highly rated deposit with the potential to be one of Australia’s most significant lithium projects having already progressed to pre-feasibility status and with excellent drilling results continuing to flow.

Last week, Liontown reported spectacular intersections of up to 3.8% lithium over 10.4 metres, material contained within a wider zone grading 3.1% over 13.1m.

Lithium assays above 3% are rare and have the potential to upgrade the project which is already showing signs of being a world-class discovery.

As PD was going to press, Liontown obliged with an “interim” 86% resource upgrade, blowing its exploration target out of the water with an updated resource of 139 million tonnes grading 1.3% Li2O and 140ppm Ta2O5.

The company said it expects this number to grow further, with five drill rigs continuing to work away until the end of February. A final resource number is expected in March that will underpin the company’s definitive feasibility study.

Over the past 12-months the stock has been tracking higher and should continue to gain ground as news flow accelerates.

Galaxy Resources (GXY) – Another example of a stock which flew high in the first flush of the lithium boom before diving in the flooded market – and which is now in the early stages of a revival.

Grand ambitions which were once a hallmark of Galaxy have been scaled back with current production from one project, Mt Cattlin in WA, with an emerging project at Sal de Vida in Argentina, and a wild card at James Bay in Canada.

After biting off more than it could chew, Galaxy has the benefit of a reliable, low-cost, mine at Mt Cattlin which sold 29,778 tonnes of lithium concentrate in the December quarter.

The latest result caught the eye of a number analysts including those at Credit Suisse who see the stock moving higher later this year, from its current $1.10 up to $1.50 – though that forecast is down on a previous price tip of $1.80.

With one operating mine in Australia, another project emerging in Argentina and a long-dated prospect in Canada, Galaxy should be well placed to rise when the lithium market picks up.

Pilbara Minerals (PLS) – One of the early movers in Australian lithium which has been sold down during the price-crushing glut of surplus material but which now appears to have found a bottom.

The December quarter report revealed reduced production of 14,711 tonnes of lithium (spodumene) concentrate, well down on the 21,332 tonnes in the September quarter, a pointer to the campaign-style operation which is a key to keeping costs down.

During the current slowdown in demand, Pilbara is making headway with process plant improvements in readiness for a recovery.

A recent $111.5 million capital raising on top of a $50 million investment from a leading Chinese lithium-chemicals maker (plus a $20 million share purchase plan last October) has bolstered Pilbara’s financial position, ensuring that it will be one of the survivors in what has been a torrid time for everyone in the industry.

Credit Suisse is the most optimistic of the banks in their assessments of Pilbara with a price tip of 55c, the best part of 70% up on last sales at 32c. Macquarie is gloomiest with a price tip of 31c, down 34% -- a split which underlines the divided opinions of lithium.

Mineral Resources (MIN) – A truly diversified resources company with fingers in many pies, ranging from mine services and engineering to iron ore and exposure to a small lithium mine in WA, Mt Marion.

But the asset which offers the most promise, even if frozen today, is a 40% stake in the MARBL Lithium Joint Venture with U.S. specialist chemical maker (and global lithium leader) Albemarle Corporation.

MARBL owns the Wodgina lithium mine in WA’s Pilbara region which was mothballed late last year just as construction was complete, but it will eventually become one of the world’s top lithium mines, and the joint venture also owns two lithium hydroxide conversion units being built at Kemerton, near Bunbury in WA.

A close association with Albemarle means that Mineral Resources will emerge from the lithium downturn as a globally important lithium supplier, with other assets to help ride out commodity-sector downturns.

Pioneer Resources (PIO) – A mining minnow which had struggled to interest investors in the caesium, a rare element, it has been producing as pollucite from the recently-completed Sinclair pit on the Pioneer Dome near Norseman in WA.

Cash from caesium sales has left Pioneer with a small pot of cash to fund a closer look at a lithium discovery also on the Pioneer Dome.

Thinly-traded, Pioneer’s share price has barely moved over the past year but that could change as investors with a taste for lithium find the time to analyse from the latest drilling on the Dome which has returned assays up 1.72% lithium over 22.2 metres.

Before those assays were released last week the Cade deposit on the Dome had been estimated to contain 8.2 million tonnes of material at 1.23% lithium.

More can be expected as drilling continues and with a stock market value of just $18 million anything significant should see Pioneer re-rated.

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