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By Daniel Shane
Accelerating demand for lithium-ion batteries used in electric vehicles like those made by Tesla Motors (ticker: TSLA ) have helped drive a 50% increase in the price of the metal in the last year. That's put Australia-listed miners in the fast-lane, with some of these stocks revving up by as much as 1,500% over the past 12 months. But the rally could be a car-crash waiting to happen.
One cautious voice is that of Macquarie, which reckons the recent run-up in lithium prices is down to lack of supply in the short-term. That's a dynamic that will keep those currently producing happy for now. But while the investment bank thinks the market will remain tight for the next 18 months based on demand from Tesla and China, there could be a surge in output from new lithium projects by 2018.
David Talbot, an analyst at Dundee Capital Markets, agrees there's risk from investor hype. He says forecasts for lithium prices "seem to be all over the map." The Canadian broker has upped its price estimates for both lithium carbonate and hydroxide twice this year, but suspects it's "already low-balling again." That's partly down to how lithium is priced: It's not traded on liquid exchanges like other commodities but priced based on individual contracts, which means less than transparent price reporting. "Speculative investors are currently driving the markets," Talbot warns, and "new companies are literally popping up overnight," many with little experience of the industry.
Others are more sanguine on the rally, but underscore the importance of stock selection. "A lot of the exploration companies are overvalued and will never produce," Ben Cleary, a portfolio manager at Sydney's Tribeca Investment Partners, tells Barron's Asia. Cleary's fund is long lithium miners including Australia's Orocobre ( ORE.AU ) and Galaxy Resources ( GXY.AU ). He's more bullish on long-term demand for lithium and sees shortages for the next three to five years.
One sensible way to catch the rally is to buy lithium miners with projects that are already producing. One that meets the criteria is Brisbane's Orocobre, whose stock price has almost doubled since Barron's Asia last wrote about the business in early March. The company extracts lithium from salt lakes at its Salar de Olaroz project in northern Argentina, which it jointly owns. Orocobre is ramping up production here and could eventually produce more than 17,000 tonnes of lithium carbonate yearly. This output came online just as lithium prices have started their steep climb.
However, the stock's recent rally has fueled concerns Orocobre's price is overcooked. That led analysts at Citi to downgrade the company to a Sell. Others see a bit more upside, though. Dundee's Talbot just upgraded the stock to a Buy, with a price target of AUD5.10 a share. "Orocobre receives a premium valuation from investors and deservedly so," he says, given it's the first junior miner to successfully start lithium production in the last 20 years. Orocobre could also benefit from lower costs as Argentina's new reform-minded government eases up on import restrictions. Talbot thinks the shares could re-rate on a plan to make lithium hydroxide directly from brine pools. Both lithium carbonate and hydroxide can be used in electric vehicle batteries, but the process for doing so with lithium hydroxide can be quicker and more efficient. If Orocobre goes down this route, it could solidify its position as the "go-to lithium producer stock for investors," believes Talbot.
Another option is Perth's Neometals ( NMT.AU ), whose stock is up a giddy 500% in the last year. The company is a minority partner in the Mt Marion hard-rock lithium mine near the town of Coolgardie in Western Australia. That mine should eventually produce about 20,000 tonnes every year of lithium concentrate, which could go some way to making up the present shortfall in supply in the lithium carbonate market. The project already has one major buyer in Jiangxi Ganfeng Lithium (002460.CN), China's biggest maker of battery-grade lithium, which is also a shareholder in Mt Marion.
Macquarie has an Outperform rating on Neometals with a price target of AUD0.55 a share. Analyst Ben Crowley describes Mt Marion as "the largest and lowest risk new addition to hard-rock lithium supply."
Macquarie is bearish on some of these miners, though. Stocks it thinks you should give a wide berth to include Perth's Galaxy Resources, which has stakes in hard-rock and salt lake lithium assets in Australia, Argentina and Canada. The firm's share price has multiplied by an jaw-dropping 25 times from AUD0.02 to a recent AUD0.50 a share. Macquarie's upbeat on Galaxy's Mt Cattlin project in Western Australia, which should start production by the end of this year. Like Neometals, the company has already signed up Chinese buyers for a couple of hefty shipments. But Macquarie's Crowley doesn't think there's enough demand for lithium to support development of Galaxy's Sal de Vida project, so he doesn't think the stock will move much higher. He's got an Underperform rating on the shares with a price target of AUD0.42, or about 20% downside.
Other bearish calls are Pilbara Minerals ( PLS.AU ) and Altura Mining ( AJM.AU ). Pilbara is developing a hard-rock lithium project in Pilgangoora, one of the biggest confirmed new lithium deposits in the world, which the Perth miner owns outright. By the time that mine starts producing, it could be too late for Pilbara however. "The window for new entrants in the hard-rock lithium market will be short-lived," says Macquarie's Crowley, who thinks Pilbara could eventually enter the space at a time when lithium is over-supplied and prices are declining. His price target is AUD0.64, or a couple of cents below the stock's recent price. Pilbara's stock has already slipped from a recent high of AUD0.87.
Macquarie colleague Andrew Hodge harbors similar feelings for Altura, which wants to beat Pilbara at its own game. Altura is also developing a hard-rock lithium project at Pilgangoora, which it wants to do quicker and cheaper than Pilbara. Hodge doesn't think it will "meet its aggressive timelines, nor do we believe that it is a superior project." Shares in Altura have come down from a recent peak of AUD0.28 to about AUD0.20. Hodge also values them at AUD0.20.
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(END) Dow Jones Newswires
June 30, 2016 01:07 ET (05:07 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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