Ever wondered how the Tesla you see on the street is so quiet, or how it is so energy efficient in comparison to the everyday fuel-based car? Lithium has seemingly become something of a buzzword within the ASX in recent times, with several domestic lithium players garnering serious attention from both retail and institutional investors. Understanding the lithium sector and the use case for it can be challenging, and it can be even more daunting to pick lithium stocks for your portfolio to gain exposure to this surging market. Luckily, our analysts at Maqro have been hard at work to provide insight into some of the lithium players on the ASX. But first, what even is lithium, and what is it used for?
Lithium is one of the lightest raw metals on earth, with several new-age tech applications such as batteries that power electric vehicles, energy storages and other electronic devices, as well as being used in the manufacturing process for certain aircraft. Lithium has also become a fundamental input for some medicines with FDA approval, with usefulness in treating bipolar disorder as well as depression and schizophrenia. Focusing more on technological use, lithium-ion batteries have become widespread due to their lightweight, innate capacity to maintain high charge and ability to maintain stability over numerous recharges, despite their remarkable energy density and voltage capacity. So how will lithium impact technology and markets in our own backyard?
Australian miners are well-positioned to take full advantage of the structural shift towards the use of electric vehicles in the future, with surging demand driving the market. Australia is the world’s top provider of lithium and is home to some of the largest natural deposits of metal globally. You may have heard or read about mines in Western Australia such as in the Pilbara region, which is often home to these lithium sources. The trend and upshot of lithium demand are exemplified through Volkswagen, the world’s largest car manufacturer, which has openly committed to targeting 50% of its car production being electric by 2030. European and Chinese demand is the key driver of this trend, where Australia is favourably situated to become the go-to exporter of lithium, especially as Australia plans to shift away from coal exports into the future to meet proposed ‘net-zero’ and ‘carbon-neutral’ plans. Below we see the dramatic uptake in lithium price/kg within the scope of 2021. We also saw high prices in 2017-18, but this was more down to the market pricing in the expectation of lithium’s use, rather than actual exports and sales – which made it more volatile until demand increase in late 2020. So then, which companies on the ASX have got the right kind of lithium mojo that we’re looking for?
Lithium prices suffered post-2018 but have shown promising momentum in recent times.
Pilbara Minerals Limited (PLS) is an Australian strategic metals producer, focusing its operations on exploration, development, and mining of mineral resources. PLS owns the Pilgangoora Lithium-Tantalite project, a large lithium deposit mine in Western Australia, which houses over 213 metric tons of lithium. We find PLS interesting as it proves itself as a strong beneficiary of the ongoing lithium related themes on the ASX. As outlined above, lithium is a central input for future technologies due to its advanced nature, and PLS is likely to take advantage of this ongoing theme. The aforementioned shift towards lithium-ion batteries will engender a notable deficit in supply throughout the coming years, which is exacerbated by the fact that lithium production slowed down during the downturn in price over the last few years. Hence, there is a structural misalignment between the number of facilities to produce lithium against the burgeoning demand for it. Given the often-elongated timeframes to find and subsequently establish lithium mines, PLS and other lithium producers are placed well to ride the wave of high demand, with short supply.
Perhaps most notably, PLS has been making waves with the launch of their new battery metals exchange (BMX) which enables PLS to auction off uncommitted lithium, now and in the future. The first implementation of the BMX proved extremely fruitful, with PLS auctioning over ten thousand dry metric tons (DMT) of lithium at $1,250/DMT – a markup of 34.1% to the prices at the time. Following this resounding success, PLS held a second auction on their BMX platform in September, auctioning 8,000 metric tons of lithium. The highest bid for the shipment totalled US$2,240/DMT – a 79% increase on their initial auction price. This has stunned market analysts and traders, who originally expected a maximum bid of US$2,000/DMT. Consequently, PLS have announced that they plan on channelling more sales through the BMX into the future due to the high yields they’ve enjoyed thus far. This fundamentally underpins the notion of rapid demand uptake, where production is lagging behind.
The ACDC ETF (Exchange-Traded Fund) aims to provide its investors with appropriate exposure to energy storage and the production of lithium. The ACDC ETF also includes those companies that facilitate this megatrend such as supply chain and production services for battery tech and lithium mining. The ETF itself currently has over A$391m in funds under management (FUM), trading at a net asset value (NAV) per unit of ~A$88.9, and an associated management fee of 0.69% p.a. We are intrigued by this ETF due to the ongoing proliferation of global decarbonisation trends coupled with the substantial role of hydrocarbons being used in fuel production for transport and energy.
Interestingly in Australia, the state governments have been taking the initiative to incentivise Australians to look towards perhaps going electric for their next brand-new ride, offering rebates up to $3,000 for the first 25,000 electric vehicles (under $68,750 cost) purchased after 1st of September 2021. Compounding this, the NSW government has announced it will waive stamp duty for electric vehicles with a purchase price of $78,000 or less, equating to a potential $5,000 saving. These are both aspects of a $490m government plan to support the uptake of electric vehicle sales, including $131m geared towards a network of charging stations. With a global total of approximately 8bn smartphones currently employing the use of lithium-ion batteries and an electric vehicle market with an expected compound annual growth rate (CAGR) of 25% from 2021 to 2025, we find ACDC as perhaps a more simplified approach to potentially gaining lithium and battery tech exposure, through its ease-of-use ETF nature.
Electric vehicle sales are projected to demonstrate a notably strong upswing in the near term.
Liontown Resources is a battery metals exploration and development company with a tier-1 discovery at their central Kathleen Valley Lithium Tantalum Project in Western Australia, the world’s fourth-largest hard rock lithium deposit. The resources LTR holds at their Kathleen Valley project account for roughly 7% of global hard rock lithium operations and projects, making it the third-largest lithium project domestically. Given the accelerating trend in the green energy space, which is largely dependent on lithium batteries, Liontown, in a much similar vein to PLS, could prove a foundational beneficiary of the forward trend in lithium demand and use. Our view is in line with that of the broader market in regard to lithium’s outlook, in the sense that demand is likely to keep ticking upwards for the near-term horizon (1-2 years). At that point, there is a general expectation that market-leading participants such as Samsung will ‘crack-the-code’ as to how to improve lithium battery performance in terms of total charge and recharge speed.
In August of 2021, LTR announced that it was going to terminate a royalty agreement they had with Ramelius Resources, who had originally sold the Kathleen Valley project to LTR. The agreement was to be terminated for A$30m in cash to be paid to Ramelius. The termination of this agreement is viewed as likely to improve LTR’s value in the long-term, where the estimated potential benefit of the royalty agreement was approximated at $1bn over the projects 40-year lifetime. A final reason as to why we find LTR fascinating, is due to their strong leadership team, which has seemingly strategically positioned the company well in the right space. Holistically, LTR seems to be doing the right thing in an industry that is ripe for growth.
Lithium Australia is a company that centres itself around the ethical and sustainable supply of energy metals to the battery industry. LIT is able to achieve this through its ‘circular battery economy’ which aims to enhance energy and resource security. This means that LIT is involved in all facets of the supply of lithium materials, being involved in several joint ventures in lithium and other base metals explorations. LIT differentiate themselves through their strong commitment to sustainable and ethical practices pertaining to lithium and other metals, exhibited through their market-leading low-energy extraction methods and recycling strategies for old lithium-ion batteries that facilitate the production of new batteries. This makes LIT Australia’s only fully integrated mixed-battery recycling business. Moving forward, LIT is aiming to increase its global footprint, as they currently only have non-domestic operations in China.
LIT’s refreshing value proposition contributes to its individuality in an otherwise very mining-centric market (ASX), allowing it to grasp investors and our attention with its reusable lithium focus. In a world where ESG (environmental, social and governance) factors are becoming increasingly important as market forces, LIT’s commitment seems to be working well for them, as globally, lithium looks to be a defining input of production moving forward. This is also potentially amplified in the future… as you may have noticed, we talk a lot about lithium supply deficits, which gives rise to a bullish outlook for a number of companies in this sector, however, if the forecasted deficits are intensified beyond analyst expectations, its companies such as LIT that could benefit even further, as they are able to provide alternative battery metals through their innovative strategies in place of tightly constricted lithium.
Lithium is ostensible, a commodity of the future. Lithium proves a central factor in the advancement of everyday technology, which gives credence to the sentiment that lithium-oriented companies could perform well in the future. The companies we’ve discussed here, at least within the scope of the ASX, appear as though they have positioned themselves well to capture growth into the future, with large-scale projects and innovative solutions in an ever-expanding industry that is sure to redefine technology as it continues to be advanced and implemented.
All of the companies/assets we’ve detailed in our overview have enjoyed positive returns to their shareholders over the last year, demonstrating the uptake in market awareness of lithium’s importance.
(Source: Yahoo Finance)
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