Aussie lithium miners get battery-charged boost

The rapidly growing demand for lithium-ion batteries could fuel demand for ASX-listed miners of lithium, graphite, and cobalt, which are all core component of lithium-ion batteries.

The demand for these materials is coming from rising use in batteries for consumer electronics, smartphones, and electric vehicles.

The batteries are smaller, lighter, and more powerful than traditional batteries, explaining their growing popularity. Batteries accounted for 35 per cent of all lithium use in 2015, up from 25 per cent in 2007.

Given this demand, Morningstar recently increased its 2017 lithium price forecast to US$10,250 per metric ton from US$9,000 per metric ton based on strong export pricing out of Chile and predictions the market could become undersupplied.

Australia has major deposits of lithium, graphite, and cobalt, "and is well placed to capitalise on the opportunities that increased battery demand is creating," according to the Critical Battery Commodities report published by the Department of Industry, Innovation, and Science.

"Huge advances in battery technology will have a great payoff for our economy and our standard of living."

Australia is the world's biggest producer of lithium, as the chart below shows.

World lithium production

USGS (2016) Commodity Summaries

However, Morningstar head of equities research Peter Warnes says while Australia may have most of the world's lithium, most of it is hard rock and extraction costs are high.

That compares to much lower costs in extracting the mineral from lithium-rich brine found in salars (salt-encrusted flats), particularly in South America (Bolivia, Chile, and Argentina).

"Already we have seen the list of lithium hopefuls expand significantly on both the Australian and Canadian share markets. This should trigger flashing amber lights--approach with caution," says Warnes.

"There are plenty of disrupters out there, especially in South America, who potentially will be able to extract lithium for much lower costs than hard rock producers, potentially below US$2,000/tonne," says Warnes.

Lithium miners on the ASX who recently reported results include Galaxy Resources (ASX: GXY) and Orocobre (ASX: ORE).

Among other producers, Minerals Resources (ASX: MIN) owns the Wodgina mine in the Pilbara region (the world's largest known hard rock lithium resource) and a stake in the Mount Marion lithium mine in Western Australia. Another WA lithium mine is being developed by Pilbara Minerals (ASX: PLS).

While it's still early days in testing the ongoing profitability of these miners, Orocobre recently announced a maiden full-year net profit after tax of US$19.4 million after its first full financial year in commercial production at its Olaroz lithium facility in Argentina.

"Global market fundamentals for lithium remain intact with strong demand growth, tight supply, and attractive pricing," said Orocobre managing director and CEO Richard Seville.

"In 2017, Orocobre came to the fore as a mainstream, profitable, low-cost producer of lithium carbonate. We continued to develop and expand our customer base as we produced 11,682 tonnes of lithium carbonate (equivalent to 5 to 6 per cent of global supply)."

Orocobre says it has gross operating margins of 62 per cent with lithium production costs at US$3,710/tonne.

Fellow lithium miner Galaxy Resources recently announced half-year revenue of $15 million and a net loss after tax of $6.5 million, down from a profit of $70.4 million a year earlier.

While the company's shares are well down from a year high of $2.37, its shares rallied after it reported improving cash flows and progress in its development activities at its Mt Cattlin mine in Western Australia.

Galaxy's shares closed at $1.89 on 31 August, up from a 52-week low of 29 cents. The eight analysts offering 12-month price targets for Galaxy had a median target of $2.57, with a high estimate of $4.07 and a low estimate of $1.95. The consensus forecast was Galaxy would outperform.

As for Mineral Resources, which is primarily an iron ore producer, its shares closed at $14.76, close to a year high of $15.28. Analysts too expect it to outperform, according to Thomson Reuters data.

But Morningstar's Warnes says investors should be cautious, "particularly in hard rock plays. History has a great tendency to repeat. Recent history shows the fallout of the iron ore hopefuls of last year, as some with market caps over a billion dollars teetered on the edge of oblivion or have already vanished".

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Nicki Bourlioufas is a Morningstar contributor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.

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