LOOKING AT LITHIUM
Tesla, Volkswagen, batteries, emissions, mergers. These are the buzzwords that dominate the lithium market conversation. Lithium and all that it entails is by no means a new thematic, rather, one that is being revisited with new eyes. It’s a sensitive topic for some, given the industry is coming out of a significant downturn in which supply outstripped demand for a number of years. Expansion plans were put on hold and business reviews peppered the 2019 landscape. Galaxy Resources Limited (ASX: GXY)’s lithium exports slumped almost 30% in what was labelled ‘an industry-wide collapse’. Even big end-of-town names like BHP (ASX: BHP) said they had reservations about entering the game, as they saw oversupply putting a cap on prices.
The landscape is brighter now with the macro picture also becoming more favourable according to Perennial Value Management portfolio manager, Samuel Berridge, who says “it will be a decade-long phenomenon” as we migrate to cleaner energy generation. The rapid appreciation of companies like Tesla (NASDAQ: TSLA) and the global push for renewables support the argument. S&P sees global production in 2025 topping 1.5 million tonnes on a “lithium carbonate equivalent” basis. A count that includes products like the increasingly favoured lithium hydroxide, a compound that allows greater energy storage and better range in electric vehicles.
Battery material prices have soared on increased demand, as big car manufacturers such as Volkswagen Group invest billions into electric vehicle production. Sales of China’s “new energy” electric vehicles and hybrid electric vehicles combined are expected to increase 15-fold by 2035, according to Wood Mackenzie, making up 80% of all new car sales in the country. Australia is only expected to reach 50% by the same year. China is also pushing hard to achieve its emissions target, with President Xi Jinping in September surprising the world and many members of his own party by declaring a net-zero emissions target by 2060. An ambition that has renewables and battery technology as key players. Australia has also put measures in place that lay the groundwork for more battery production domestically, creating a $15 billion loan scheme to facilitate the manufacture of products locally. There are calls it could include producing more batteries using lithium rather than exporting lithium and then importing batteries.
While commodity prices for battery materials such as nickel and lithium have made a strong start to the year, the story could have much further to go. Lithium carbonate has jumped more than 100% since this time last year. Nickel up ~30% over the same period. The $4bn merger of lithium miners Orocobre and Galaxy earlier in the week has stoked calls about consolidation in the sector and pushed even more eyes back in the EV battery direction.
One headwind to the story is the current chip shortage, which is crimping production of a massive range of products from home appliances to cars. A series of ‘freak-events’ have reportedly knocked the wind out of suppliers with US-China tensions only adding to the backlog. The Wall Street Journal noting the holdup is likely to continue into next year. Auto makers including Toyota and GM have been forced to idle or reduce production at some plants. Another growing concern for Australian producers of materials central to the renewables, car making, electronics and defence sectors is the dramatic increase in production out of China. While demand is robust, China’s move to boost production will likely steal some gloss from the sector.
That said, there is arguably more pressure pushing the battery and EV narrative forward in the medium to long term for the big players in Australia. Lynas CEO Amanda Lacaze, tried to frame it positively saying “increasing production output is a significant indicator China expects that the market will continue to grow and will continue to flourish.”
On the desk we asked, what was the best was to play this theme? Mining companies the resounding response. Argonaut natural resources fund manager David Franklyn shared that sentiment in a recent conversation with the AFR and believes the rapid growth in the EV market will create enormous demand for commodities such as copper, nickel, lithium and rare earths. Below are the performance tables for the aforementioned commodities. Lithium companies not surprisingly the standout.
GXY in the top two as prices for the type of lithium it aims to make in Argentina almost doubling over the past nine months. GXY now moving ahead on a $US153m plan to build the first stage of its Sal de Vida project in Argentina. But the big news is the $4bn merger of equals with Orocobre (ASX: ORE). Orocobre will control the majority, which will be run by chief executive Martin Perez de Solay. Galaxy chairman Martin Rowley will be in charge of the board.
It will become the fifth largest lithium company in the world, adding scale and diversification to its bolstered arsenal. There is also speculation it has ambitions of securing a place in the top 100 stocks in the ASX. Enhancing the offering is increased scope for growth projects but also the merged company having different revenue generating assets across different geographies, which can produce two different lithium products. Talk about diversification. That said, sovereign risk plays more of a role.
While it’s not included in the table, Rio Tinto’s plan to make lithium from its Californian borates mine is gathering momentum, although not likely to be a major revenue contributor with estimates of $US60m revenue p.a. at current commodity prices.
IGO Limited (ASX: IGO) recently sunk $2bn in Greenbushes lithium mine in WA with Wesfarmers (ASX: WES) adding focus on its Mount Holland project, all of which point to a heightened level of enthusiasm for the sector.
Brokers not overly optimistic going off target prices. Commentary surrounding the tie-up between GXY and ORE talks about synergies and a stronger base to fund growth projects from. Favourable commodity prices predictably named as a tailwind. On Citi’s calculations, ‘MergeCo’ could be 5-12% EPS accretive in FY22 and FY23 to combined shareholders.
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