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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.
Here is what Under the Radar Report’s resources analysis Peter Chilton thinks of our favourites:
Pilbara Minerals (PLS) – Spec Buy. Hard rock lithium. Altura acquisition confirmed, equity raising underway. Creates even greater scale, many synergies, substantial optionality to lift production and respond to demand, owns 100% of the combined Pilgangoora assets.
Orocobre (ORE) – Spec Buy. Lithium brine producer. Strong, fully contracted production growth to FY25. Owns 66.5% of the brine assets, Toyota is a partner. Has interests in additional properties for further expansions. See our analysis on its capital raise on page x.
Galaxy Resources (GXY) – Hold. Hard rock lithium production plus Sal de Vida project (lithium brine) and James Bay project (hard rock lithium). Funding in place for the next development phase. All assets 100% owned.
At the tail end of 2020 investors have decided once again that lithium stocks have a future, driving up the prices of the likes of Pilbara Minerals (PLS), Orocobre (ORE) and Galaxy Resources (GXY) in the past six weeks between 50 to 120%. Have investors missed the boat?
An important qualifier is that lithium stocks have very different risk profiles. In late September 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 33 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.
Then there is the big deal we talk about in one of our recent issues, where Australian nickel and gold producer Independence Group (IGO) is paying almost $2bn for Australia’s largest lithium mine in Western Australia. The move mirrors the view that Under the Radar Report has written about in recent issues, reflected in our positive recommendations on several lithium stocks. In line with our view, IGO believes it is acquiring lithium assets at the low point in the cycle for lithium.
The election of Joe Biden to the US Presidency means that renewable energy and emission reduction will be on everyone’s agenda.
In February this year we promoted owning the first two, 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, you would have more than doubled your money now that sentiment towards lithium is improving.