Four lithium stocks for your long term portfolio

Just two years ago, Australia had stolen a march on the electric vehicles (EVs) revolution, with Australian miners poised to supply big portions of the world’s demand for metals to support the shift to EVs, and for renewable energy. 

That is still the case, but the investment side of this has not worked out. However, the world’s need for battery metals – in particular, lithium – is only going to grow, and Australian companies will play a major role. 

Lithium is on the rise, with its use in the lithium-ion battery value chain expected to result in a $2 trillion market by the middle of the decade. Last year, car giant Volkswagen described lithium as the “irreplaceable element of the electric era.” But the perennial problem in the mining industry – supply expanding to meet higher prices, and eventually bringing prices down – has raised its head again. 

Since mid-2018, the price for high-end 99.5% battery grade lithium carbonate has dropped by two-thirds, from US$22 a kilogram to US$7.50 a kilogram, on the back of increased lithium supply from new mines in Australia, and China’s cut in government subsidies for purchasers of EVs – China is the world’s largest market. 

The Chinese companies that convert Australian spodumene (lithium ore) into battery-grade lithium carbonate found themselves last year with an excess supply of spodumene, which flowed into an oversupply of lithium carbonate in China. 

The Covid-19 pandemic further depressed demand for EVs, as the global economy ground to a halt. But as uptake of EVs around the world eventually picks up, the market will rebalance; the industry expects the lithium market to start coming under “significant pressure” from 2022, meaning the price will swing higher. 

In the meantime, the price falls pushed the lithium producers to take action they’d rather not have taken. 

• Australian lithium miner Mineral Resources (MIN) that operates the Wodgina mine in Western Australia as 40% joint venture partner with US company Albemarle (the world’s biggest lithium producer), mothballed the mine last November and won’t reopen it until prices improve. The partners remain confident in lithium’s long-term positive fundamentals and in Wodgina’s future, saying it is a world-class asset with a mine life of more than 30 years. MinRes also operates the Mt Marion lithium mine near Kalgoorlie, which is still operating.
• In January, Wesfarmers (WES) who got involved in lithium when it took over Kidman Resources last year, just as the lithium bubble started to burst, delayed the final investment decision on its Mt Holland lithium project, which includes building a 45,000 tonnes-a-year lithium hydroxide plant until the first quarter of 2021. WES is developing the mine and processing plant in partnership with global lithium heavyweight SQM of Chile.
• Pilbara Minerals (PLS), which owns and operates the Pilgangoora Lithium-Tantalum project in the eponymous Western Australian region, cut back lithium production in June 2019, with current production only intending to meet already ordered demand. However, the company struck a new offtake agreement with a Chinese customer earlier this year and is poised to ramp-up production when the market begins to recover.
• Galaxy Resources (GXY) who own and operate the Mt Cattlin mine in Ravensthorpe, Western Australia, which produces spodumene and tantalum concentrate, cut production at Mt Cattlin in October 2019, (Galaxy also owns the James Bay lithium pegmatite [another lithium ore] project in Canada, and is developing the Sal de Vida lithium and potash brine project in Argentina. 

This has had heavy impact on share prices, although MinRes has the diversification of iron ore and mining services to protect it. It was even worse news for shareholders in lithium miner Alita Resources, which owns the Bald Hill lithium and tantalum mine in Western Australia – their company went into receivership in August 2019. 

Let’s look at the companies more closely. 

Arguably, Galaxy Resources, Pilbara Minerals and Orocobre have all been slashed back to price levels that could generate strong returns for those investors who can look over the horizon to a picture of lithium demand that first, clears up the over-supply, and then pushes the market into deficit. With lithium’s role in batteries and batteries’ increasing applications, that is not an investment stab in the dark. 

1. Galaxy Resources (GXY:ASX)

Market capitalisation: $414 million

Three-year total return: –20.8% a year

Analysts’ consensus target price: $1.16 (Thomson Reuters), 93.8 cents (FN Arena)

Galaxy has lost three-quarters of its value since early 2018, and is nursing its Mt Cattlin operation through the lithium market downturn with a “market-driven strategy” that sees Mt Cattlin being run to produce positive free cash flow to help fund development spending at Sal de Vida and James Bay. As Morgan Stanley puts it, “the relevance of production metrics in the first quarter is limited,” because the lithium market won’t always be in the doldrums. Broker Ord Minnett describes Galaxy Resources as “well-placed to ride out the lows in the lithium sector,” although the broker says it does need to make a final investment decision on Sal de Vida soon, in order to benefit from a future recovery in prices. 

Galaxy is not profitable and is not expected to be in 2020 or 2021 (it uses the calendar year as its financial year). But as a hard-rock miner it is well-positioned for a market recovery: last year, Volkswagen described hard-rock lithium mining as the “future-proof solution, both commercially and in terms of sustainability.” 

However, Galaxy’s share price could go a lot lower than it currently is. In fact, Galaxy exemplifies the dilemma for investors contemplating lithium exposure. On the same day, 24 April, broker Macquarie issued an “underperform” call on the stock, with a price target of 34 cents, while rival broker UBS issued a “neutral” rating on GXY, with a price target of $1.09. 

2. Mineral Resources (MIN:ASX)

Market capitalisation: $3.8 billion

Three-year total return: 31.8% a year

Analysts’ consensus target price: $19.97 (Thomson Reuters), $19.07 (FN Arena)

MinRes is one of the world’s top five lithium miners, owning 40% of the largest hard rock lithium deposit, Wodgina. Although currently on “care and maintenance,” Wodgina is the world’s largest known hard rock lithium resource, with an expected mine life of more than 30 years, shipping 750,000 tonnes a year of 6% spodumene concentrate to Chinese customers. The partners say Wodgina will remain idle until demand for spodumene warrants a re-start. MinRes’ Mt Marion spodumene lithium mine near Kalgoorlie is still operating but delivered a sharp fall in earnings as the lithium price continued its tumble in 2019. 

The attraction of getting lithium exposure through MinRes is that investors also have the diversification benefits of the company also being Australia’s fifth-largest iron ore producer and also having a stable base of cash flow and profits coming off the mining services business. MinRes is the world’s largest crushing contractor, and a leading “pit-to-port” mining services supplier. Because of this diversification, Mineral Resources is a dividend payer, with a forecast (analysts’ consensus) fully franked yield of 3.3% for FY20, and 3.2% for FY21, which equate to about 4.6%–4.7% grossed-up. Against that, the stock looks fully valued. 

3. Pilbara Minerals (PLS:ASX)

Market capitalisation: $689 million

Three-year total return: –7% a year

Analysts’ consensus target price: 21 cents (Thomson Reuters), 21.8 cents (FN Arena)

Pilbara Minerals has taken the lithium slump hard, falling from $1.20 in January 2018, to 31 cents. The company owns and operates the Pilgangoora Lithium-Tantalum Project, which has cut back production. 

Pilgangoora is a world-class asset and it is a hard-rock lithium source with strong offtake agreements with Chinese customers. It also has an agreement with Korean metals giant POSCO to proceed with the development of a 40,000 tonnes-a-year conversion facility in South Korea, which will its lithium ore to lithium carbonate equivalent (LCE), supported by POSCO’s leading purification technology, PosLX. 

Post-Covid, Pilbara Minerals is going to be involved in supplying lithium to the battery markets for a long time, from a proven operation; but it has a similar problem to Galaxy, in that Macquarie is very bearish on the stock, with a price target of 10 cents. Credit Suisse, however, has a target of 40 cents. It also has not helped the share price that PLS fell out of the S&P/ASX 200 this month (effective 22 June). 

4. Orocobre (ORE:ASX)

Market capitalisation: $676 million

Three-year total return: –14.1% a year

Analysts’ consensus target price: $2.65 (Thomson Reuters), $2.68 (FN Arena)

Orocobre is trading 65% lower than it was at its peak before the lithium bubble popped. 

The Australian-listed Orocobre owns 66.5 per cent of the Olaroz lithium facility in Argentina’s high desert, where briny groundwater is pumped to the surface, concentrated in evaporation ponds, then purified into lithium carbonate of more than 99% purity. As such, it is different to its hard-rock mining rivals – it bills itself as a supplier of lithium chemicals rather than lithium ore. 

Olaroz shuttered production in March – because of the Argentinian government’s Covid-19 quarantine restrictions, not the state of the lithium market – but recommenced production and shipping of lithium carbonate at Olaroz in April. March quarter production was 11.1% lower than the March 2019 quarter. 

Orocobre was profitable in FY19, but profit does not appear to be in the offing for FY20 and FY21. The investment premise for Orocobre relies on its world-class, long-life asset at Olaroz, its strong links with Japanese customers and lenders – its joint venture partner at Olaroz is Toyota Tsusho, Toyota’s industrial arm – and it has Japanese government debt guaranteed. Orocobre’s Japanese links are being strengthened with construction of a lithium hydroxide processing facility in Fukushima. Post-Covid-19, Orocobre will be back on track to double production at Olaroz. The stock appears to have good upside, with Morgans the most optimistic broker, with a price target of $4.07 – which it actually lowered from $4.80, in April. 

If investors don’t want to take single-stock risk, they could consider a broader exposure such as ETFs like the ETFS Battery Tech & Lithium ETF (ASX code: ACDC), which offers exposure across the battery technology supply chain globally.