Critical minerals stocks are now worth more than gold
Peter Ker and Vesna Poljak
Jun 13, 2023 – 8.00pm
Tony Rovira was about to board a plane from Perth to Melbourne when laboratory tests of eight lithium drill holes sent shares in his company, Azure Minerals, soaring more than 40 per cent.
“I will definitely have a glass of champagne on the plane to celebrate the great work of our exploration teams,” he told The Australian Financial Review from Perth Airport on Tuesday.
Tony Rovira’s Azure Minerals soared by more than 40 per cent on Tuesday. Ross Swanborough.
They can afford the expensive champagne in Perth these days; the city is at the epicentre of a boom that has lifted the value of major, ASX-listed critical minerals companies to $86.2 billion from $8.6 billion in the past decade.
That basket of 33 major ASX-listed, critical mineral stocks is now more valuable than the 25 companies that comprise the S&P/ASX All Ordinaries Gold Index, which was worth $86.1 billion on Tuesday.
Minerals such as lithium, rare earths, graphite and nickel have surged into focus for investors in the past 10 years as governments declared them “critical” to decarbonisation efforts and national security.
The speed and agility of Australia’s junior mining sector has made the nation a global leader on “critical minerals”, and Australian miners are now the world’s biggest producer of raw lithium, and one of the biggest producers of rare earths outside China.
The ASX is home to 88 lithium producers or explorers, meaning almost 4 per cent of the local bourse is dedicated to finding the lightest metal on the periodic table to feed the manufacturers of modern batteries and electric vehicles.
The list of 33 major critical minerals stocks – selected by The Australian Financial Review – includes fairytale stories like Pilbara Minerals′ rise from a $1 million microcap to a $14 billion lithium giant that is forecast to report a $2.4 billion net profit in August.
There are stories of redemption, such as Amanda Lacaze’s rebuild of Lynas from a $111 million struggler in mid-2015 to a $7 billion company that is globally recognised as the most strategically important rare earths producer outside China.
The list also includes some of Australia’s most successful, recent initial public offerings, such as WA1 Resources, which raised $4.5 million at last year’s float but is now worth more than $250 million, buoyed by niobium and rare earths drill results near the Northern Territory-Western Australia border.
Tuesday’s surge in Azure shares to 85¢ is a far cry from June 2020 when a strategy of exploring for copper in Mexico had the stock floundering at just 7¢.
“The market was sending us a signal that they didn’t want us to be in Mexico, so we listened to that signal, we exited and since we have come back to WA it has been a very successful road we have been on,” Mr Rovira said.
The rally in Azure shares also validates the faith shown by Chilean lithium giant Sociedad Quimica Y Minera, which bought 19.9 per cent of Azure in January at less than 26¢ a share.
‘This is not a peak’
Despite the extraordinary amount of wealth created by the critical minerals sector, Tribeca Investment Partners portfolio manager Todd Warren said many of the stocks had come back to earth this year as electric vehicle sales had been slightly softer in China than expected.
“It is not a frothy peak in my view, not at all,” he said. “Some lithium valuations got a bit stretchy last year but a lot of that froth and bubble came out when Chinese lithium prices rolled over.
“With regard to the other [critical minerals] commodities, I would argue this is not a peak.
“You have seen the trials and tribulations that some of the rare earths or graphite players have been struggling with in terms of getting funding for their projects. Names like Hastings and Arafura come to mind.”
The list of 33 companies is far from exhaustive; it does not include big diversified miners like BHP and Rio Tinto, which collectively produce minerals on the US “critical” list such as nickel, zircon, scandium and aluminium.
Nor does the list include copper miners like Sandfire Resources, 29Metals and Aeris Resources; the energy transition is expected to stoke greater demand for copper, but the red metal is not listed as “critical” by governments in Australia or the US.
The trend has pushed investors to consider commodities that are less well understood and more technically challenging than the familiar, traditional mainstays of gold and iron ore.
Commodities like rare earths are opaquely priced and require complex processing to extract the saleable product, and veteran geologist Ian Chalmers said investors and governments would find it hard to separate the contenders from the pretenders.
“It may be tempting given all the hype to try and quickly hit a winner, investors need to first fully understand the ground they are playing on,” he said.
Mr Chalmers is the technical director of gold explorer Alkane Resources and co-chairman of Toronto-based industry association the Critical Minerals Institute.
He said investors should be particularly cautious about the “volley of breathless announcements” that had recently hit the ASX about rare earths found in ionic clays.
Established rare earths miners like Lynas extract their products from hard rock that is expensive to blast and process, while proponents of rare earths in ionic clays say the saleable products will be cheaper to extract from their projects.
Mr Chalmers said that promise would prove true for some ionic clay projects, but at many others the rare earth elements would be trapped in mineral structures very difficult to break down, and therefore expensive to produce.
‘There is definitely a chemistry challenge’
“Companies need to do a lot of work studying and testing their deposit to clearly understand how much of its ionic, colloid or mineral before investors should get too excited by announcements about the size of a deposit a company says it has found,” he warned.
Mr Warren agreed, saying the recent surge in companies claiming to have found rare earths in “ionic clays” mirrored the rise in companies promising to extract lithium from groundwater using absorbent resins – known as direct lithium extraction – rather than the more common evaporation method.
“There is definitely a chemistry challenge that I think the mining companies are still trying to wrap their heads around, let alone the market,” he said. “The other side to this is the opacity of pricing. If I want to know what the oil price is, the TV news tells me what it is, and the same for gold.
“In lithium, more recently, we have got a better view of what the price is but still you are relying on data coming out of China which is not real-time and there are all sorts of different grades and chemical make-ups which make it complex.
“In rare earths you are reliant on a price coming out of China, while in graphite, goodness knows what the price is.
“So that creates its own challenges where there isn’t a simple way for the market to gain a real-time temperature on prices”.
The ASX made clear on Tuesday that it was determined to ensure this boom was characterised by regulatory rigour.
The ASX pounced on Mr Rovira’s claim in the market filing that a batch of drill holes yet to undergo scientific analysis had contained “visible” lithium-bearing minerals like spodumene.
“I got a query from disallowed this morning because I said we had observed spodumene in there,” he said
“They didn’t like that.
“So we put a clarifying statement saying ‘here are the detailed logs of the drill cores that have got visible spodumene’.”
The clarification did not hurt Azure shares; the stock rose a further 6 per cent after the clarification was released in afternoon trading.
Peter Ker covers resource companies for The Australian Financial Review, based in Melbourne. Connect with Peter on Twitter. Email Peter at pker@copyright link
Vesna Poljak is the Companies editor. She was previously the Markets editor with a special interest in the investment industry, hedge funds and accounting. She is based in the Sydney newsroom. Connect with Vesna on Twitter. Email Vesna at vpoljak@copyright link
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