lithium producers brighten resource sector
TRANSCRIPT
Companies developing lithium
resources and other advanced
materials are providing a spark
in an improving resources sector. Potash
and gold stocks are also stronger, and
commodity prices are rising. But the
question is: ‘How long will it continue?’
Lithium is the standout. Several
lithium stocks have soared this year
amid expectations of rising demand
for lithium-ion batteries made by Tesla
Motors, and other car manufacturers
developing next-generation electric cars
with longer battery lives.
Promising graphene explorers, such
as Talga Resources, are also attracting
greater interest, although they are yet
to deliver the same returns as lithium
stocks this year.
Graphene promoters say the metal
is the thinnest and strongest ever
developed – and that it has a vital role
in developing lighter, more energy-
efficient products.
Lithium carbonate’s average
contract price is expected to rally from
about US$5000 per tonne in 2014 to
more than US$7500 per tonne in the
second quarter of 2016, according to
lithium producer Orocobre, providing
good margins for companies in
production. It expects further price
growth this year, as demand for battery
storage technology grows.
Demand for lithium batteries is
being driven by a continued increase
in their use in consumer and portable
electronics; rising demand for
advanced batteries of this type; growth
in hybrid and electric vehicles; and
increasing use in mass-energy storage
systems where lithium is becoming the
preferred technology.
Lithium producer Galaxy Resources
expects accelerating demand from China.
It notes China’s target of five million
electric vehicles on its roads by 2020,
and says the country is becoming the
global leader in lithium battery demand
across multiple segments.
Orocobre estimates that about
36 per cent of lithium demand is
for rechargeable batteries, followed
by ceramics and glass. It says that
Growing demand for more efficient battery storage catches the market’s attention.
Lithium producers brighten resource sectorBY TONY FEATHERSTONE
FEATURE ARTICLE
Demand for lithium batteries is being driven by a continued increase in their use in consumer and portable electronics; rising demand for advanced batteries of this type; growth in hybrid and electric vehicles; and increasing use in mass-energy storage systems where lithium is becoming the preferred technology
2 • Australian Resources and Investment • Volume 10 Number 2
Volume 10 Number 2 • Australian Resources and Investment • 3
FEATURE ARTICLE
the world has a limited number of
economically extractable lithium
resources, and that new supply is
constrained. Lithium demand is
expected to outstrip supply in 2016,
leading to higher prices.
In a recent company presentation,
Orocobre pointed to several battery
megafactories starting in the next few
years, run by the likes of Tesla and
South Korea’s LG Chem, which will
drive continued demand for lithium
compounds – a key battery component.
Beware the risksInvestors with longer memories will
recall hype about a range of so-called
exotic metals over the years, and
chronic wealth destruction. Rare earths
prices, for example, rocketed in 2010
when the Chinese Government slashed
its export quota. China supplies almost
all of the world’s rare earths.
Rare earths are a group of 15 metallic
elements used in devices such as smart
phones, disk drives, flat-screen TVs,
hybrid vehicles, rechargeable batteries
and wind turbines, among others. The
boom was short-lived, as the rare earths
price bubble burst, and commissioning
and production problems in larger
producers weighed on investor sentiment.
Inevitably, the rare earths boom
encouraged explorers with lower-grade
prospects to reposition themselves as
rare earths stocks and raise capital
through share market floats. Investors
who bought near the top of the rare
earths boom, and others like it, learnt
a painful lesson about buying into
mining hype.
Lithium’s promising outlookThe latest crop of advanced-materials
producers and explorers may have more
sustainable prospects, but investment
risks in lithium producers are high.
The World Economic Forum
describes advanced materials as one
of five technologies that will shape
the ‘fourth industrial revolution’,
which is just starting. (The other
technologies are artificial intelligence,
neurotechnology, 3D printing and
precision genome editing.)
Lighter, stronger and more energy-
efficient materials, such as graphene,
could drive a new generation of products
that require less power and make
renewable energy more viable. Several
Australian universities have increased
their focus on advanced-materials
research as industry seeks lighter
products and less reliance on fossil fuels.
A handful of companies worldwide
dominate lithium production, and
Chinese companies are particularly
strong. China’s Chengdu Tianqi
Industry Group took over the large,
high-grade Greenbushes mine, about
250 kilometres south of Perth, in 2012.
Neometals and Mineral Resources
announced in July 2015 that their
jointly owned subsidiary, Mineral
Resources Limited, had entered into
an agreement with Jiangxi Ganfeng
Lithium Co., China’s second-largest
lithium producer, for the Mt Marion
Lithium project in Western Australia.
Ganfeng now controls 43 per cent of
the deposit, and minority partners
Mineral Resources and Neometals hold
30 per cent and 27 per cent respectively.
Ganfeng is taking all of Mt Marion’s
production, expected to be 5000 tonnes
per year, through an offtake agreement.
Australian mining players benefiting from lithium interest South America–focused miner Orocobre
is developing the Olaroz Lithium project
as a joint venture with Toyota Tsusho
Corporation and Jujuy Energia y
Mineria Sociedad del Estado. The project
is in Argentina’s Jujuy Province.
Orocobre has been among the
market’s best-performed small-cap
resource stocks, with an average annual
return of 37 per cent over three years
to April 2016. Its share price has more
than doubled in the past 12 months.
Orocobre said in April that it had
produced 2332 tonnes of lithium
carbonate for the first quarter of
2016, in line with guidance of around
2400 tonnes. It looks like one of the
more promising ASX-listed lithium
companies, given its more advanced
operations and large resource.
The growth in hybrid and electric vehicles is increasing demand for lithium batteries
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FEATURE ARTICLE
Galaxy Resources soared from a
52-week low of two cents to 40 cents,
delivering spectacular returns for its
true believers. It fully owns the Sal de
Vida Project in north-west Argentina
in its so-called ‘lithium triangle’.
Argentina is one the world’s largest
lithium producers.
Galaxy also has the James Bay
lithium project in Quebec, Canada, and
the Mt Cattlin project in Ravensthorpe,
Western Australia.
Galaxy says Mt Cattlin is the world’s
only lithium mine to begin production
since recent large gains in lithium
prices. It expects significant cash flows
from Mt Cattlin, with first delivery
expected in July/August 2016.
The market’s other lithium producer,
General Mining Corporation, soared
from a 52-week low of four cents to
58 cents in April 2016. It has an
exclusive right to earn a 50 per cent
equity interest in Galaxy’s Mt Cattlin
and James Bay projects by providing
$23 million of developing funding over
three years. General Mining’s exposure
to Mt Cattlin is capturing the interest of
institutional and retail investors.
Lithium developers share in gainsEarlier-stage lithium companies are also
delivering stunning share-price gains.
Pilbara Minerals has soared from a 52-
week low of three cents to 60 cents in
April 2016. It fully owns the Pilgangoora
Lithium-Tantalum project in Western
Australia’s famed Pilbara region.
Pilbara Minerals says Pilgangoora is
the world’s second-largest spodumene
tantalite resource, and that a recently
completed pre-feasibility study confirms
the technical and financial viability
of a two-million-tonne-per-annum
development. A definitive feasibility
study, currently underway, is expected
in the third quarter of 2016.
Pilbara Minerals is targeting plant
construction from December 2016 and
plant commissioning from December
2017, and it believes that it can become
a low-cost producer of lithium and
tantalum at its Pilgangoora project,
which is 120 kilometres south of Port
Hedland in Western Australia.
Another emerging lithium explorer,
Neometals, has also delivered strong
gains. Its share price soared from a
52-week low of seven cents to 40 cents
as the market paid greater attention to
its part-owned Mt Marion project.
The well-run Neometals expects
to commence crushing at Mt Marion
in the second quarter of 2016, with
first shipment in the third quarter. A
parallel drilling program will lead to the
announcement of a new resource and
reserves in the second half of 2016.
Altura Mining, another lithium
explorer, is also attracting market
attention. Its shares have soared from
a 52-week low of one cent to 25 cents
in April 2016. Altura is involved in
the Pilbara through its Pilgangoora
Lithium project.
It commenced lithium exploration in
the area in 2009, invested $6 million
in drilling and other studies, and
defined its resource in 2012. Altura
says its project is a top-five hard-rock
lithium deposit by global standards: its
total resource has 372,000 contained
tonnes of lithium, 70 per cent of it in
the indicated category, which complies
with the Joint Ore Reserves Committee
(JORC) Code. All drilling is completed.
Altura expects to complete a
definitive feasibility study at Pilgangoora
Lithium by June 2016, and to
commence plant construction in the
fourth quarter of 2016. First production
from the project, which is thought to
have a straightforward ore body, is
expected in the third quarter of 2017.
Altura has a letter of intent with
Lionergy, a China-based downstream
lithium production and investment
company, to supply 100,000–150,000
tonnes of spodumene concentrate
annually. Lionergy invested $3 million
in Altura via a share placement.
Early-stage explorers to watchEmerging lithium companies, such as
Lithium Australia, Dakota Minerals,
Ardiden and Metalicity, have rallied
this year, albeit off low bases. They are
less advanced than ASX-listed lithium
companies in production or getting close
to first delivery of the commodity, and
some have lower grades.
But these companies have interesting
prospects if lithium prices remain high
in the next few years as demand for
battery storage technology grows.
Their strong price gains could
encourage other lithium hopefuls to
launch initial public offerings (IPOs),
raise capital and list on the ASX this
year. If successful, they would break
a near-total absence of exploration
companies in the IPO market in the past
two years.
A rush of lithium offers, however,
could also signal that the market for
this commodity is becoming overheated,
given the potential for existing lithium
producers to increase supply to meet an
expected rise in demand, thus limiting
price gains and making it harder for
aspiring lithium producers.
Tony Featherstone is a former managing editor
of BRW and Shares magazines. This column
does not imply any stock recommendations
or offer financial advice. Readers should do
further research of their own or talk to their
advisers before acting on themes in this article.
All prices and analysis current at time of print.
A rush of lithium offers, however, could also signal that the market for this commodity is becoming overheated, given the potential for existing lithium producers to increase supply to meet an expected rise in demand
*See page 66 for our special Batteries and Technology feature
for more lithium news