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Experts
The growth in the rate of adoption for electric vehicles and the increase in battery production has led to a significant increase in demand for battery metals such as nickel, cobalt, graphite, and lithium.
That trend has accelerated a little more quickly than what most people would have expected, with VP Capital co-founder, John So, comparing the electric vehicle (EV) transition to the phasing out of old-school mobile phones for the much-preferred Android or Apple smartphone.
“When it happens, it happens very quickly and the question is, in five years’ time is the average consumer going to be buying a petrol-powered car or an EV?
“Two years ago most people would have said a petrol vehicle car, but nowadays a lot more people will say they are considering buying an electric vehicle.”
While the trend is partly consumer driven, car manufacturers themselves are now trying to get ahead of the curve by phasing out petrol models and the truth is before we know it, we won’t have a choice.
“In five years’ time some of the models of cars, whether it’s manufactured at the cheaper end or the more expensive cars, they will soon all be EVs,” So said.
“What that means is, given electric vehicles is the single largest item that is using lithium because of the lithium battery, demand is going to accelerate and it’s not going to stop.”
FAVOURITE METALS: Lithium and nickel
So says it comes down to a process of elimination when choosing his favourite battery metals.
“Cobalt is heavily manufactured in Congo and it’s usually a by-product when larger companies mine nickel, copper and zinc.
“Then you’ve got graphite and not all graphite is produced equally – it depends on flake sizes, among other things, and processing costs vary significantly.
“Also not as many ASX companies have experience with it compared to nickel or lithium, so for me it’s not as obvious on the priority list in terms of how I get upstream commodity exposure to electric vehicles.”
STOCK PICKS: Firefinch (ASX:FFX), Allkem (ASX:AKE), and IGO Ltd (ASX:IGO)
“FFX is one of my favourite picks in the near term. It is trading at a discount because the assets are in Mali, but I think given how advanced the project, it is the next ASX listed lithium player that is positioned to start construction after Core Lithium, and I think there will be a re-rating that will happen as a result.”
Next on So’s list is AKE.
“The production assets more than justifies its market capitalisation of around $8 billion.
“Some of the emerging producers that are midway through construction with a single asset are trading at more than a third of its valuation,” he said.
“AKE has two sizeable assets, one in South America and one in Australia, and has several very prospective and large already proven up predevelopment assets, not even counting the exploration assets in North and South America as well.”
The other stock on So’s watch-list is $10 billion market cap company IGO, which has assets in both lithium and nickel.
“IGO has a 25% interest in Greenbushes, a major lithium asset in Australia which hasn’t been producing for a little while but now that the lithium price has recovered and gone beyond previous highs, it will be very profitable once it gets back to full production.
“The other 50% of the company is nickel-driven, at the Nova Bollinger mine, which many investors are familiar with and you’ll find that IGO trades at high single digits to low double digits cash flow multiples, so I think this is a solid pick.”
FAVOURITE METALS: Lithium and nickel
“Nickel and lithium are the major components of a lithium-ion battery and sometimes you have to go with the leaders in the group,” Dawes said.
“A few years ago everyone was like ‘battery technology is great but does it have legs’ and now that rhetoric has fallen away and it’s all about the production of lithium and getting those metals out of the ground.”
STOCK PICKS: IGO Ltd (ASX:IGO), Mineral Resources (ASX:MIN), and Allkem (ASX:AKE)
On the top of Dawes list is IGO.
“We are comfortable with them as a pure battery metal play – they’ve flagged a couple acquisitions they are looking at and one of them is Western Areas, which still going to go ahead.
“They did reach all time highs so investors should be careful but the stock might come back up after hitting $13.85 due to surging nickel prices in London last week.”
Next up is MIN, a company with ‘old world’ and ‘new world’ exposure, Dawes said.
“Old world meaning iron ore and new world being lithium – they have a very large deposit and joint venture with one of the world’s largest lithium producers, Jiangxi Ganfeng Lithium Co – you could say it has its feet in each can.”
Another one of Dawes’ stock picks is AKE. “They are going through a merger at the moment with Galaxy Resources and Orocobre and are having some issues with it but they will get the synergy right,” he said.
FAVOURITE METALS: Lithium and nickel
Spencer says lithium is the obvious favourite because every battery has lithium.
“If you have a look at lithium prices in China today you’re looking at over $70,000/tonne, so we see the greatest opportunity in the lithium sector.
“The next metal we consider interesting is nickel – especially with the geopolitical instability globally which has highlighted concentration of supply in Europe. It is also expected to be a beneficiary with what is happening with electric vehicles.”
However, car companies are beginning to back away from battery chemistries containing nickel and are shifting towards the much cheaper lithium-iron phosphate (LFP) mix.
“There just isn’t enough nickel or cobalt to go around and what material there is, is expensive,” he said.
“So we see the move towards LFPs as being a big trend and it’s hard to quantify what that means for nickel demand in the short term, but it is influencing a strong thematic in the EV market today.”
STOCK PICKS: Allkem (ASX:AKE), Pilbara Minerals (ASX:PLS), Firefinch (ASX:FFX), Galan Lithium (ASX:GLN)
Spencer says AKE has the most diversified asset base out of all its peer group.
“It’s got the greatest growth outlook such that by 2025/26 we see the company has the potential to be a global, top five lithium chemical producer and there are not many other companies that we know of looking to achieve that.
“If you look at their large North American listed peers that are producing 80–100,000 tonnes of lithium chemicals capped at $15-20 billion, that gives you an idea of the market opportunity over the next five years.”
In Australia it is hard to go past spodumene, which is a key raw material directly linked to the production of lithium chemicals that go into batteries for EVs.
“PLS have done an amazing job, they’ve got some growth over the next couple of years as they expand production and we need to include them because they have what we would say is the best price realisation out of most lithium companies anywhere.
“What we mean by that is they get the best price relative to what market prices or spot prices might be.
“On that basis you would look at spodumene or Pilbara Minerals as providing the most obvious and immediate leverage to an increase in the underlying commodity price – plus you’ve got lower geopolitical risk being in Australia and the company is well capitalised.”
Firefinch is another one of Spencer’s favourite picks, which he says is “one of the most undervalued lithium opportunities in the market.”
“If you have a look at the implied value of that lithium asset – Goulamina in southern Mali, it is a fraction of what their peer group are trading at.
“Goulamina has the potential to produce 800,000 tonnes per year of spodumene, it’s arguably fully funded and has a joint venture with one of the world’s best lithium companies PLUS the market today is valuing it at around $1 billion.
“Peer companies and other spodumene names like Liontown Resources and Core Lithium are trading at multiples of that,” Spencer said.
FFX has also formalised its JV with China’s Ganfeng, setting the stage for the demerger of its 50% share in Goulamina into Leo Lithium.
“We see that demerger as quite an important valuation catalyst and de-risking event, and we see a lot of valuation and upside in that name.”
Through 2021, almost all advanced lithium brine developers in Argentina were acquired by a Chinese company, Spencer says, making GLN an attractive investment.
“It is one of the few independent lithium brine developers left in Argentina and while its Hombre Muerto Project is not the only brine project we like, what they offer in terms of valuation upside is what makes it attractive.
“Lake Resources also has a lithium brine project in Argentina but they are capped at $2 billion whereas Galan is capped at $500 million. When you look at market cap relative to peers, it looks to me there is significant M+ A appeal there.”
The views, information, or opinions expressed in the interviews in this article are solely those of the interviewee and do not represent the views of Stockhead.
Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.
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