Our editor Richard Hemming wrote for the Australian this week.
Are there still lithium buying opportunities?
In November ASX investors have decided once again that lithium stocks are worth owning, driving up the prices of the likes of Pilbara Minerals (PLS), Orocobre (ORE) and Galaxy Resources (GXY) between 50 to 80%. Have investors missed the boat?
Background to lithum stocks
An important qualifier is that lithium stocks have very different risk profiles. In late September ASX investors took notice of lithium when to much fanfare, the US based and ASX listed Piedmont Lithium (PLL) reached a deal to supply Tesla. Its stock went from 9 cents to 66 cents. It’s now back to 39 cents.
The key takeout is that Piedmont’s North Carolina project is not advanced, while the stocks listed above are all in production, hence there is less uncertainty and they’re in a better position to benefit from rising battery demand. The trend for electric vehicles is gathering pace, particularly in Europe, where there are mandates that new petrol vehicles cease production at a certain date. EV production is ramping up and lithium is an essential input.
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ORE and PLS now spec buys
In February this year we upgraded ORE and PLS to Spec Buys, the main reason being the exposure gained to one of the two key inputs (the other being nickel) in rechargeable batteries that are required by the growing numbers of electric vehicles. Also, we thought they were cheap. If you had bought into PLS and ORE, subscribers would have more than doubled your money now that sentiment towards lithium is improving. Get 14-days free to Under the Radar Report and explore more lithium stocks to buy now.
Why are the stock prices climbing so quickly?
The Tesla deal caused investors to take notice of the all-important supply and demand equation for the periodic table’s lightest metal.
ASX investors are once again taking notice of the fundamentals. On current estimates of EV production, the supply of lithium needs to increase exponentially over the next decade to keep up with demand. Current levels are 300,000 tonnes a year (tpa) of Lithium Carbonate Equivalent (LCE), while 900,000tpa should be required in 2025. This climbs to 2 million tonnes a year (2mtpa) LCE in 2030, 3.5mtpa in 2035 and over 5mtpa LCE in 2040.
What are the challenges to lithum
On the supply side, marginal projects, or those with too much debt, have fallen by the wayside as lithium prices fell owing to short-term oversupply. Altura Mining went into receivership, the Wesfarmers/SWM Mount Holland project was mothballed. COVID-19 further reduced lithium supply as a further layer of uncertainty was added.
It has also become difficult to finance new projects, partly because unlike some commodities, it is very difficult to ramp up lithium production to meet increasing demand because of the complexity of the extraction process.
Another key is that no one wants to be reliant on China anymore. Although demand has been ramping up, it’s coming from a very small base. Rhetoric in the past few months from Elon Musk about creating his own lithium supply channel underscores supply chain fears. Politicians and executives of car manufactures are actively seeking to reduce and even cut reliance on the giant Chinese battery manufacturers. European car makers are beginning rival China in EV production. They are probably looking back to the example of Henry Ford, who purchased rubber plantations in the Amazon to make tyres.
The key takeout
In sum, demand for EVs is only going to climb, but there is a risk that lithium production may struggle to match. A structural deficit and significantly higher prices could loom as early as 2022 and by 2025 at the latest. Already, several producers have reported that lithium pricing appeared to have reached a bottom in the September quarter 2020 and expect prices to be higher in the next quarter.
The lithium boat is leaving and investors don’t want to miss it. The good news is that we continue to believe there is value in the stocks we touted earlier this year.