Surging energy use, including AI, driving Rinehart & Co’s huge lithium appetite

Lithium stormed back to investment prominence this week, not because the price of the metal rose, but solely because billionaires are buying.

By Tim Treadgold.

EnergyMarket

As an example of follow the money it doesn’t get much better than watching, and perhaps following, the move by Gina Rinehart to partner a bid for control of Azure Minerals.

If successful, Australia’s richest person will have a major interest in two of the most promising lithium deposits in the world, the Andover discovery of Azure and the Kathleen Valley project of Liontown.

The details of what Rinehart is doing are not as important as understanding what’s driving her interest in lithium; a global shortage of energy in any form and the certainty that prices will rise, and not just from conventional demand.

Artificial intelligence (AI), not a technology normally associated with energy, could become the surprise packet of energy demand next year, described during the week in the Wall Street Journal newspaper as being “ravenously hungry for energy”.

A Dutch academic, Alex de Vries, estimates that computer heavy AI could soon require 15 gigawatts of continuous electricity, the same amount consumed in the Netherlands.

UBS, an investment bank, told clients that Rinehart’s bid for Azure with Chile’s lithium champion, SQM, demonstrated that corporate players remain positive about lithium in the medium to long term.

“Our modelling suggests the Azure bid implies a spodumene price of US$1630 a tonne, approximately 55% higher than the spot price of US$1000-to-US$1100/t,” UBS said.

In other words, Rinehart and other well-heeled investors are looking through the smoke left by this year’s 80% lithium-price crash to see an opportunity to bulk up ahead of a recovery.

Uranium is a second example of the energy rush (up 70% this year) which has also seen a revival in the oil price (up 8% this week) thanks to carriers being diverted from a worsening situation in the Red Sea.

A second theme developing as 2023 draws to a close is the effect of falling interest rates on gold which has had a good year, rising by 12% as most other asset classes fell.

The new year should see a continuation of gains by stocks exposed to energy and gold, along with an overall improvement in the Australian and global economies as the last effects of the Covid crisis wash through the system and something close to normality returns.

Westpac Bank signalled a solid year of growth in ’24 with a report released yesterday (Thursday) that its leading index had flipped from negative to positive for the first time in 18 months.

Looking back, the past 12-months have been tricky for investors to negotiate, weighed down early by the burden of rising interest rates, and then buoyed by the promise of a fall. The ASX all-ordinaries index rose by 7% from January, but only after a series of sharp moves up and down.

The metals and mining index, thanks to a surprise increase in the price of iron ore managed a rise of 6.8%. The gold index, unsurprisingly, is up 26%.

Looking ahead and it’s hard to resist a forecast that the seeds have been sown for a strong year for resources stocks, which is how UBS sees the next 12-months, summed up in this comment: “Looking to outperformance in ’24 after a tough ’23”.

Copper and aluminium are the top commodities on the UBS investment list, aided by energy transition, which means increased demand for base metals.

Wilsons Advisory took a broader look in its new year forecast with the expected start of “a significant rate cutting cycle in ‘24” which will provide a supportive backdrop for equities and fixed interest investments.

Another theme for the new year is likely to be increased merger and acquisition (M&A) activity of the sort seen in the lithium sector as investors with cash to spare buy an early seat at the table.

As a guide to stocks which might perform well next year, it’s worth a look at the Bell Potter stock picks which are handily divided into five sections, base metals, gold, energy, mining services, and strategic materials.

Best of the base metal stocks for ‘24, according to Bell Potter, are Aeris, a copper miner trading around 12c but heading up to 23c. Nickel Industries (at 68c but on track to reach $1.80). Mineral Resources, (from $68.86 to $90), and troubled IGO, ($8.98 to $11.30).

Regis ($2.15 to $2.31) and Santana (95c to $1.45) are Bell Potter’s gold picks. Boss Energy ($4.04 to $5.69) and Strike Energy (46c to 58c) are the energy picks.

Mining services on the Bell Potter list are Chrysos ($8.05 to $8.70), Matrix Composites (32c to 34c) and GenusPlus ($1.21 to $1.50).

Lynas ($6.75 to $8.80) is the top Bell Potter pick of the strategic materials stocks, followed by Talga (81c to $2.50), and Liontown ($1.63 to $2.75).

Lithium, thanks to Rinehart splashing a bit of the spare change from her iron ore billions, was the star of the week before Christmas with solid price moves among producers, developers and explorers, including:

  • First Lithium, up 24c (56%) to 71c after reporting a 111 metres intersection assaying 1.57% lithium at its Blakala prospect in Mali. Wilsons reckons that intersections over 50m are a key to eventually proving a resource of more than 50 million tonnes.
  • Allkem, up 84c to $10.49 after shareholders approved a merger with New York listed Livent. Jarden, a boutique investment bank, reckons Allkem will rise to $11.40.
  • Wildcat Resources, up 5.5c to 77c thanks to the “nearology” effect of being close to Azure’s Andover discovery. CG Capital Market has a speculative buy tip on Wildcat and a target share price of $1.15.
  • Patriot Battery Metals rose by 6c to $1.12 after reporting fresh drill results from its CV5 pegmatite in Canada, including 56.6m at 1.37% lithium. Macquarie sees Patriot rising to $2.10, and
  • Global Lithium slipping 2c lower to $1.24 despite a Shaw and Partners buy recommendation and target share price of $3.20 as encouraging exploration news flows from its Manna project in WA.

As a rough guide to possible share price moves next year it’s interesting to compare the current share prices of some stocks with what they might be if priced solely against the spot market for their principal commodity, an exercise updated this week by Morgan Stanley, an investment bank.

Mineral Resources, for example, could be trading at $106.45 (rather than its current $68.71) based on today’s prices for iron ore and lithium, according to Morgan Stanley. Sandfire, on the other hand, could be trading at $4.10 on the spot copper price compared with last trades at $6.91.

But the stock which really stands out is Whitehaven, producer of politically incorrect coal, trading today at $7.24 whereas with high coal prices (another example of the energy theme for ’24) the price could be as high as $15.60.

Gold stocks, despite the gold price edging up to US$2038 an ounce, had a mixed week, led by Capricorn Metals which added 10c to $4.64 after reporting an upgraded resource base of 3.25 million ounces of gold. Bell Potter sees the stock rising to $5.70.

Sector leaders Northern Star and Evolution added 43c (to $13.57) and 10c (to $3.86) respectively, while Genesis ran out of puff, shedding 11c to $1.75.

Other news and market moves of interest included:

  • WA Resources rising by $1.32 to $9.15 after reporting more encouraging assays from drilling at its West Arunta niobium project in WA, including a 114m intersection at 0.5% niobium.
  • Nordic Nickel adding 1.5c to 16c after reporting the widest assays so far from its Pulju project in Finland, including 164.15m at 0.2% nickel.
  • Iluka Resources slipping 24c lower to $6.71 after reporting a cost blow-out at its Eneabba rare earth project. Macquarie believes the stock can recover, perhaps rising to $8.90, and
  • Australian Rare Earths adding 1.7c to 15c after reporting a fresh batch of assays from its Koppamurra rare earths project in South Australia.

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