MoneyTalks: Argonaut’s David Franklyn has his eye on lithium producers who can scale up to meet demand
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MoneyTalks is Stockhead’s regular drill down into what stocks investors are looking at right now. We’ll tap our extensive list of experts to hear what’s hot, their top picks, and what they’re looking out for.
Today we hear from Argonaut Funds Management chief investment officer David Franklyn.
Franklyn says that Argonaut is closely watching the lithium sector for emerging opportunities.
“The major lithium stocks have fallen between 15% and 30% over the past month as markets have retreated on the back of rising interest rates, the war in Ukraine and a slowdown in China – triggered by COVID shutdowns across major cities,” he said.
“Lithium is a key beneficiary from energy transition – the move away from fossil fuels to greener sources – given its use in lithium ion batteries.
“Demand for lithium is expected to more than double by 2026, and then continue to grow strongly as electrification of the transport sector takes off.
“We believe that in the medium term that lithium supply will struggle to keep up with lithium demand which will support prices at elevated levels.
“As such, those groups that can move into production, or increase current production are best placed to benefit.”
There are many ‘moving parts’ that need to be considered in valuing the lithium stocks.
“Firstly, we need to consider the rate of penetration of electric vehicles, being a key driver of lithium demand – current expectations are for EV numbers to increase from around 6.6m today to 40m by 2030,” Franklyn said.
“Second, we need to pin down a realistic price to plug into long term cashflow models.
“We note that in September 2020 the spodumene price (hard rock 6% lithium concentrate) was US$300t.”
Franklyn also flagged that today the contract price is somewhere around US$2,500 per tonne and rising and the spot price has reached over US$5,000.
“Most market analysts have a long term price of around US$1,000 – US$1,500 after a spike to around US$2,500 in 2022-2023,” he said.
“Finally, we need to assess the rate at which supply can come on-stream and operating and capital costs in an inflationary environment.
“Small changes to any of these key inputs has a material impact on valuations, the result being a wide range of estimates in the market.”
“We are targeting the major Australian hard rock spodumene producers that have the scope to lift production from current levels and benefit from increasing spot prices,” Franklyn said.
The company’s Pilgan Plant is in production with a nameplate capacity of ~330,000tpa – with ramp up plans under to increase production capacity by a further ~ 30-50,000tpa (10-15% increase) for installed capacity of ~ 360-380,000tpa.
Plus, a staged restart from June is planned for the recently acquired Ngungaju Plant, targeting ~180-200,000tpa in production capacity from the September Quarter.
And on the pricing front, PLS achieved a record price for its latest Battery Materials Exchange (BMX) auction of US$5,650/dry metric tonne (dmt) last month.
That more than doubles the $US2,350/t fetched in the previous auction held last October.
For context, the average price for SC6% cargoes in late 2020 was just ~$US380/t.
And outgoing PLS boss Ken Brinsden says that with an accelerating price and strong demand there’s going to be a “material step up in price received” for the June quarter.
“I’m sure that if we could produce more spodumene we would easily be selling more spodumene for a very healthy price,” he said in an earnings call.
“We haven’t been definitive about our expectations around price received during the June quarter, but broadly speaking, there is going to be another material step up in price received.”
The average spodumene price reference for sales in the March Quarter was US$2,650/dmt – and Brinsden flagged that the SC6% price could easily hit $4,000/tonne+ in the June quarter.
MIN recently announced plans to expand spodumene concentrate capacity at Mt Marion lithium project to 900,000 tpa of mixed grade product by end of 2022.
The company’s Wodgina JV operation with Albemarle is also making a comeback, recently producing the maiden concentrate from the first of its three 250,000tpa processing trains.
Another train is due to resume production in July while the JV’s Kemerton refinery is also nearing the end of its construction phase.
“Lithium is the most critical mineral to support decarbonisation and MinRes has established a world-class lithium business with Tier 1 partners within the world’s lowest-risk lithium jurisdictions,” MinRes’ chief executive of lithium Paul Brown said.
“This positions us well to increase output in line with market demands.”
Then there’s IGO, which has a stake in the Greenbushes lithium mine with JV partner Tianqi Lithium Corporation.
In the March quarter, Greenbushes benefited from higher spodumene sales pricing and marginally higher spodumene concentrate production with first contribution from the Tailings Retreatment Plant.
The company also flagged a materially higher spodumene revenue price delivered significantly higher QoQ sales revenue of $546M (a 146% increase vs 2Q 22).
The operation currently has a 1.55Mt installed capacity across four processing facilities, with an additional 1.04Mtpa of installed capacity expected to be built by 2027 and construction of the Chemical Grade Plant 3 to be completed in early 2025.
IGO MD and CEO Peter Bradford said that the company has continued commissioning of Train 1 at its Kwinana refinery during the quarter.
“Although, we have not successfully produced battery grade lithium hydroxide yet, the debugging process and understanding of what we need to do to deliver quality product and consistent operations is being progressed,” he said.
The aim is to recommence construction of Train 2 during 1H23 – with an $18M early works budget already committed.
Franklyn flagged that Argonaut also has its eye on Liontown (ASX:LTR) which is still in the development stage but has a global scale resource in Western Australia and is fully funded.
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