Barry FitzGerald: Lithium spring could be near

Winter is about to pass and Garimpeiro reckons that so too is what could be called the lithium sector’s winter of discontent.

Lithium prices have stopped falling in a major way and there was a positive reaction during the week in reaction to more moves to slow the pace of new capacity additions and potentially close unprofitable operations.

That should bring forward the market’s return to supply/demand balance.

There have also been musings from industry forecasters that perhaps the bottom has been reached and that the current September quarter will mark a turnaround in the industry’s fortunes.

All reasonable stuff and enough to have caused lithium stocks to lift off their recent lows.

But what got Garimpeiro pumped up on the sector was the recent commentary from Rio Tinto boss Jakob Stausholm on the potential for the company to take advantage of the cyclical low in lithium to acquire additional assets in the sector.

Rio to Rincon

Rio already has a couple of lithium assets – its Rincon brine project in Argentina and the Jadar lithium-boron project in Serbia, with the latter facing long delays because of environmental opposition by some.

But it wants to get bigger, with Stausholm making the point that a more meaningful exposure would serve as a valuable diversification from Rio’s over reliance on iron ore.

He is not worried about current lithium pricing either, not because it serves Rio’s agenda of acquiring assets at knockdown prices, but because the current pricing pain will eventually pass.

Speaking at investor briefings after the release of Rio’s June half results, Stausholm said it doesn’t really matter what the lithium price is in the short term.

“We really have to think about what’s going to be the average price over the next 10, 15, 20 years. I think it’s fairly given that the world will need lithium because you do need lithium for at least high-performance batteries,” he said.

“And the world needs more batteries.”

All that was bullish enough to think yep, the lithium stocks are well worth a look again after spending the year out in the cold. If Rio has dusted off its acquisition asset list in the sector, then perhaps us lesser beings should dust off our ASX lithium watchlists.

Rerate potential?

While the longer term thematic of earlier and bigger supply shortages plays out, Garimpeiro reckons stocks with clear near-term rerating events on the horizon should be the initial focus.

ioneer (ASX:INR) is in that category, with the company expecting to receive the final permits for construction to start at its Rhyolite Ridge lithium-boron project in Nevada in October, just ahead of the US election.

It is a big project that has similarities to Rio’s Jadar project in that the plan is to produce both lithium and boron, with the boron co-product revenue making for lowest quartile production costs for the lithium.

Garimpeiro had a look at Ioneer in March last year when it was trading at 30c for a market cap of $630 million, itself down from 77c a share and a $1.6 billion market cap a year earlier.

Despite a lead role in meeting US ambitions to build its own lithium supply chain and the company’s fast closing permitting process, Ioneer has been beaten up along with the rest of the ASX-listed lithium stocks.

It was trading mid-week at 12.5c for a market cap of $288m. Assuming the final approvals come through as expected, Ioneer will have derisked the project in a major way as the approvals process in the US takes forever.

What delays there have been at Rhyolite Ridge centred on an endangered plant known as Tiehm’s buckwheat. The plants are now happily growing in a company greenhouse and the mine has been planned with avoidance in mind.

The US Department of Energy has got behind the project with $US700m in conditional loan support and South Africa’s $US2.3 billion Sibanye-Stillwater has its hand up as an eventual 50% partner in return for $US490m in equity support.