12:00AM November 25, 2017
MinRes shares have climbed nearly fivefold since the start of 2016 and other more “pure play” lithium stocks have done even better. Let’s look at some more and you will see that even ho-hum company announcements capture investors’ imaginations in the “lithium rush”. A more specialist play in the lithium sector, Orocobre has been under the pump to ramp up the production from its 66.5 per cent owned Olaroz facility in northern Argentina. The expectations were that it would double capacity over time, but progress has been slow and cumbersome. Orocobre delivered a presentation this month which simply implied there would be “multiple expansions”, without any noticeable evidence backing this up. Still, its shares have spiked 24 per cent in the past few weeks. Altura Mining is a West Australian company that has hitched itself on to the lithium bandwagon, having secured offtake contracts and a scheduled production of 200,000 tonnes a year. Altura’s stock has increased 10 per cent in the past few weeks on not much news at all really, other than that it said at its AGM that stage one of its project is on track and 50 per cent complete. The sector flag bearer for many in the lithium sector is Pilbara Minerals, which has returned about 17 per cent in the past weeks on pretty much no news except that it’s in a non-binding discussion with a Korean company to build a lithium hydroxide plant in Korea. Will it keep going is the $64 billion question. I think so. I am a big believer that electric cars are the future, and of course this means batteries will be needed in bigger and bigger supply. Based on current calculations, you would need 35 times the capacity of one Tesla gigafactory to supply the world’s electric vehicles in the next decade. That’s a lot of lithium. Batteries are made of other substances, namely graphite, cobalt and nickel, but lithium offers the best opportunities for investors because its producers are generating cash flow now or will do so in the near future. Australia is in the box seat because it’s got some mines that are in production or are nearing production. To date lithium brines — evaporated salt lakes — which are predominantly in South America, have provided the majority of lithium supply. Brines have produced high value end products such as lithium carbonate and lithium hydroxide, which can be used almost directly by battery makers. However, faced with the sharp increase in demand from a number of new, large-scale battery makers, lithium brine sources will not meet the demand because of longer construction lead times for the mines, high capital intensity, greater technical complexity and political considerations. Hard rock lithium mining is providing the alternative. It is a complex process and results in an extracted “spodumene” concentrate being shipped to a ‘converter’, normally in China. Approximately 7.5 tonnes of concentrate is required to produce 1 tonne of lithium carbonate. The spodumene concentrate is a lower value product than the lithium carbonate of the brine producers but can be very profitable, if produced efficiently at low cost in open pit mine operations. My view is that the existing producers and those that are nearing production will experience big increases in cash flow, which will lead to a rerating of those stocks. Cash is still king in the momentum-based world of battery speculation. Richard Hemming is an independent analyst who edits undertheradarreport.com.au
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