Four battery stocks to charge up your portfolio
The last time I covered this theme was just over four months ago in mid-December 2020 and if you invested in the stocks I promoted Pilbara Minerals (PLS), Orocobre (ORE) and Galaxy Resources (GXY) you would have made 34% on your money, which includes a 46% gain on Pilbara Minerals. Back then the stocks had already surged 60% to 90%, but in my opinion the good news is that this momentum is far from over. But wait, there’s more! We’re giving nabtrade customers another battery stock that is close to home: the nickel, cobalt and copper developer Panoramic Resources (PAN). I hope it goes well; I own it.
Here is what Under the Radar Report’s resources analyst Peter Chilton thinks of our favourites:
Galaxy Resources (GXY) – Galaxy is fast transitioning from being a single mine hard rock lithium producer into a three-mine company, proving that it has much more life ahead to cater to the increasing demand for lithium from battery producers. The company recently completed a $160m equity raising and now has significant cash for Stage One of its Sal de Vida project in Argentina and is developing its James Bay hard rock project in Quebec. GXY is also ramping up its existing WA mine Mt Cattlin to full capacity and lithium prices are moving in the right direction. SPEC BUY.
Panoramic Resources (PAN) – This company is higher risk in than the others but has a great deal of upside because there is little in its price for growth. Panoramic’s Savannah nickel project in WA is on the road to production before Christmas. Market fears of an equity capital raising in our view are unfounded, as the company is close to having debt funding in place. Mine development ready to support a potential production start in 2H22, debt finance being put in place. Nickel price upside from strong demand for the EV market. High margins with all in site costs (AISC) of US$5.27/lb payable nickel. SPEC BUY.
Pilbara Minerals (PLS) – The miner is capitalising on its status as the largest hard rock lithium operation in the world. In response to the upward trajectory of the lithium market Pilbara Minerals has recently witnessed a material increase in potential buyers for its spodumene concentrates, with several chemical producers either entering the market for the first time or existing producers with expansions under way. Higher lithium prices in 2021 and higher spodumene sales should lead to earnings growth. Recent share price weakness provides a buying opportunity. SPEC BUY.
Orocobre (ORE) – The company is a big beneficiary of increasing Chinese spot lithium carbonate prices, which have climbed 50% between September 2020 and December 2020. Orocobre owns 66.5% of the Olaroz lithium production facility in Argentina, which is brine or salt lake based, rather than the hard rock producers here in Australia. The good news is also that this company is in an expansion phase. Stage 2 is progressing and expected to commence in the second half of CY22. It will more than double output, increasing it by 25k tonnes a year lithium carbonate equivalate to 40-42ktpa. SPEC BUY.
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What's driving the growth?
Last weekend Under the Radar Report’s mining analyst Peter Chilton sat behind the wheel of a Tesla and was impressed by the car’s performance, to say the least. It’s not a coincidence that I recently drove a different electric car, Hyundai’s Kona, which also goes to show just how independent we are. Charge it up and we’ll drive it. Heck, we’ll even buy it.
You can shuffle the chairs at AGL Energy all you like, becoming a gentailer one year, then splitting up the next, but the future is about batteries. It’s why we are revisiting a theme that we’ve harped on about for some time: the mismatch between supply and demand when it comes to battery inputs.
Peter has been doing analysis on a number of fronts relating to batteries, but before I get into that, let’s look at why lithium is so important in the battery composition, which consists also of nickel and cobalt.
Lithium is important because it has one of the highest energy densities of any battery technology. It is crucial in limiting the size of the battery. Because the periodic table’s lightest metal is less than 10% of the cost of producing batteries, if its price goes up, batteries will still be economic. Lithium also stands out because of the amount of processing involved in reaching the purity requirement for batteries. These barriers of entry are highly supportive of the lithium price and of existing producers such as those listed above.
The primary driver of battery demand is electric vehicles, for which lithium-ion batteries are the enabling technology.
A catalyst for EVs to increase their market share is price parity with internal combustion vehicles, which is forecast to be reached by the mid-2020s. There are segments that should achieve parity earlier (large cars in Europe by 2022) while others later (small cars in India and Japan after 2030).
Factors hastening EV take-up include new European Union CO2 emissions targets in 2025; a range of cheaper EV models to coincide with this change. Car maker Jaguar will go all electric in 2025, Volvo in 2030 with General Motors by 2035.
In 2021, lithium demand for all applications is expected to be approximately 350k tonnes. This is going to sky rocket when you consider that there were close to 2.5 million electric cars sold in 2020. If you then extrapolate from research done by the likes of Wood Mackenzie and BloombergNEF, the demand for lithium is going to climb very quickly.
Says Peter: “In 2021 lithium demand for all applications is expected to be 350k tonnes. Assuming global sales of 54 million EVs in 2040, lithium demand solely from EVs in 2040 would be 2.3 million tonnes, implying a minimum seven fold increase in just 20 years! This isn’t including other applications such as grid batteries and commercial vehicles.”
Battery gigafactories, the large scale producers of lithium-ion batteries, give the EV transformation proverbial legs. Only 10 years ago there were only one or two. A handful emerged in 2017. Fast forward to today and 180 are built or under construction, which will produce 500 giga watt hours per year. It only goes up from here. Planned production to 2030 by major battery and automotive groups point to a six-fold increase in capacity to around 3,000 GWh.
The lithium required to fuel this incredible surge in battery production is the equivalent of around 50 Orocobres in 10 years or 120 if you are looking 20 years out. Think about that!