Good article in the FIN today
Investors stampede mining’s electrification frenzySurging prices of battery minerals such as lithium have turned ASX minnows into emerging giants almost overnight. Will the frenzy of activity last?
Updated Sep 8, 2021 – 1.04pm,first published at 12.19pm
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One of Australia’s leading resources sector investment bankers calls it a “complete revolution”.
Another mining veteran says he’s as busy as he was during the China-driven super cycle that ended in 2014. A third insider likens it to feeding time at the zoo, as desperate investors clamour for a slice of the action.
Welcome to the Great Electrification Gold Rush, which is driving an investment and deal-making frenzy in Australia’s mining sector that’s unlikely to stop any time soon.
Electric car sales are underpinning surging lithium demand. David Rowe
While the wild gyrations in the
prices of iron ore and oil have grabbed headlines in the last 18 months, it is surging prices for copper, nickel, lithium,
rare earths and other key minerals needed to drive the world’s energy transition that could eventually remake Australia’s resources pecking order.
With the urgency of the
global energy transition growing by the day, demand for key minerals required to electrify transport and other sectors is surging.
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Reg Spencer, head of mining research at Canaccord Genuity, has watched Australia’s battery minerals minnows transform into emerging giants in the space of 12 months, and sees a revolution driving the sector’s growth.
“What you see here is a global structural change in how people move and what powers that movement. In itself, we haven’t seen anything like this since the Industrial Revolution,” he says.
The ASX can now claim a string of serious battery minerals players, including Pilbara Minerals (market capitalisation: $6.3 billion), IGO ($7.3 billion) and Orocobre ($6.2 billion), with Liontown Resources ($2.2 billion) and Vulcan Energy ($1.5 billion) on the next rung.
Chris Ellison’s Mineral Resources (market capitalisation: $9.8 billion) has extensive iron ore operations but is also producing lithium at its Mt Marion mine in Western Australia, aiming to bring the giant Wodgina mine back online, and is building a lithium hydroxide processing plant at Kemerton, in WA’s south-west.
From a hard place to rockin’ in a yearIf it feels like this group has come out of nowhere, that’s because they have.
Just 12 months ago, lithium prices were at cyclical lows, threatening the viability of miners around the world, and sending ASX-listed lithium stocks into the sin bin.
But a surge in the lithium price generally, and specifically in the hard rock spodumene that Australia produces - from about $US400 ($540) a tonne to more than $US900 a tonne - has sent share prices through the roof: Pilbara Minerals is up 572 per cent in the last 12 months, with Orocobre up 261 per cent – and kicked off a flood of mergers, acquisitions and joint ventures.
The canniest deals were done just after the bottom of the cycle.
In December 2020, IGO struck a $1.9 billion deal with struggling Chinese lithium group Tianqi to
buy a 24.99 per cent stake in the giant Greenbushes lithium mine in WA and a 49 per cent stake in an integrated battery-grade lithium hydroxide plant outside Perth.
It was an audacious pivot that transformed IGO from gold miner to a clean energy specialist, with interests in copper, nickel, cobalt and lithium.
In February,
Wesfarmers gave the green light to its Mount Holland lithium mine and processing plant project in WA, which had seemed close to being shelved just a few months earlier.
In April,
a $4 billion merger between ASX-listed lithium miners Orocobre and Galaxy Resources created the fifth-largest lithium chemicals company in the world, with the scale and diversification to ride the ups and downs of both the lithium market and of mine development.
The bigger pictureThe broader electrification story has created a string of deals across not just lithium but also copper, nickel and rare earths, including substantial capital raisings at the likes of Liontown, Core Lithium and cobalt junior Jervois.
The battle between BHP and Andrew Forrest for Canadian copper hopeful Noront, the new urgency at Rio Tinto to progress its Serbian lithium project, and IGO’s takeover tilt for nickel miner Western Areas further underscores the heat in this market.
And then there’s the chasing pack of minnows hoping to strike it big. Of the 41 upcoming listed on the ASX’s website, 19 are connected to the electrification theme in some way, through copper, nickel, lithium, other battery minerals or actual battery technology.
Like any good bull market – particularly one in the notoriously speculative world of resources – a supply and demand story lies at the heart of this electrification frenzy.
Projections for electric vehicle sales seemingly rise each month. Macquarie’s commodities strategy team sees EV sales hitting 5.3 million in 2021, up from 3.1 million in 2020 and 2.2 million in 2020.
Perhaps more notably, they see sales of light EVs accounting for 16 per cent of all light vehicles by 2025 (15.7 million vehicles), and approaching 38 per cent (38.4 million vehicles) by 2030.
Canaccord is one of the most prominent advisers in the battery minerals rush and will bring many of the floats scheduled for the next few months to market.
Spencer likens the transformation of the lithium sector to what happened in iron ore 15 years ago. Just as the tripling of China’s demand for steel drove structural change in iron ore – ending the market’s previous oligopoly, creating the robust spot market and sparking an extraordinarily period of capital investment – so too will the demand surge created by electrification transform lithium from what was a cottage industry three or four years ago.
ESG and the speculation driverBut there are other forces driving this frenzy.
Insiders say rock-bottom interest rates are playing a role, with return-starved investors eager to try and find the next five-bagger.
Some level of speculation is always present in resource investing, of course, but the consensus is that interest is much broader this time around.
That’s also likely to reflect the rising concern among investors about environmental, social, and governance risk.
Lithium, copper and other battery minerals provide a way for ESG-sensitive investors to keep a toe in commodity markets, and Spencer says these growing pools of capital have become increasingly prominent in the last 12 months.
“Three of four years ago I would have been talking to a small group of specialist fund managers about lithium, but now I am talking to a much bigger group of generalist investors,” he says.
Despite the clear fervour present in sectors linked to the electrification story, industry insiders are realistic: this is the commodities sector, and it will inevitably overshoot.
“As night follows day, high prices elicit a supply response,” Spencer says.
But that supply response won’t be immediate. Because the lithium price spent two years in the toilet, capital investment in new mines has been somewhat limited.
And while there is no shortage of lithium in the world, there is a shortage of the sort of high-quality lithium that battery makers and EV manufacturers need.
Spencer also says lithium processing plants are notoriously complex and expensive to build, and almost always late in starting up.
Putting signs of supply shortages to one side, Macquarie sees the balance between lithium supply and demand remaining tight from 2023 to 2025.
But as EV sales keep rising and sales of larger lithium batteries for energy storage also kick up, the lithium market will face serious deficits beyond that. It sees spodumene prices above $US900 a tonne right out to the 2026 financial year.
No shortage of riskHow much of this is priced into share price levels is a fascinating question. And given the relative infancy of the EV market, for example, it’s far from clear how industry dynamics might develop.
One question is, what role EV makers play in the mining and processing parts of the lithium sector? Until now, they’ve been happy to strike offtake agreements, but if serious lithium shortages emerge, could a car maker buy a miner to secure supply?
Consolidation is likely to be an ongoing theme among miners, too. One banker provides the analogy of the car industry in the US and the 1940s and ’50s, when hundreds of smaller car makers and tyre makers were eventually swallowed by the sector’s giants.
RELATEDSurging lithium demand sets stage for big dealsHowever this plays out, a few things look certain.
First, investors will need to tread cautiously, as picking the winners and losers in a nascent sector will involve no shortage of risk. This is still mining, with all the cyclicality that entails.
Second, Australia is well placed to have a big say in how the electrification story plays out. Not only is the nation blessed with an abundance of hard rock lithium, but our mining sector has the infrastructure and experience to build a real, vertically integrated industry.
And in a world of rising geopolitical risk, our stability could be another important advantage.
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