Battery metals are at frenzy level and an overshoot could be ahead, warns expert
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Battery metals such as lithium and cobalt are reaching frenzy levels among investors, says expert Tim Weir, Executive Director of Precision Funds Management, in this Stockhead Q&A.
We’ve spoken previously about the rise of battery metals, how far has the market developed in the past couple of months?
The market has gone from the start of a bull market cycle and now we’re in a frenzy.
The best indicator is the amount of capital being raised by junior companies at the moment. As a fund we are getting offered deals every day in that space.
Earlier this week we saw a company go out looking for $10 million and they got $20 million – investors want to get their hands on whatever they can.
Cyclically, we always overshoot the market. We get carried away — and we are getting up there now. It will reach an inflection point where the sector has to settle out.
Are recent capital raisings based on merit or trend?
There is no two ways about it – companies are taking advantage of investor appetite. There have probably been examples of companies that haven’t necessarily needed capital but have gone to the market to raise it.
Share prices of the juniors have been in a bit of a frenzy status of late – and the producers are experiencing significant upwards revaluations.
That being said, this sector isn’t going away. You only have to look at Volkswagen spending $US40 billion this week to develop electric vehicles by 2022, Just two months ago they were talking about $US20 billion by 2030. All the big manufacturers are picking up the pace.
We are seeing a massive change in thought process by the big car makers and the ones that don’t move will get left behind.
Are the equity markets matching the commodity prices and how long can they run?
The underlying price of the commodities — whether that be cobalt, lithium or copper — those price escalations have been matching the frenzy status of the ASX.
We think we will see a bit of a bottleneck of processing of Chinese lithium producers but markets will remain robust into the second half of 2018 when new production will start coming on stream.
Are many juniors progressing past exploration?
On the production side of the equation you can count the stocks on one hand.
But at the juniors, the market is plentiful. We are seeing strong investment into projects that are only in their early stages or purely grassroots exploration for cobalt, lithium and graphite.
Many are just getting on the bandwagon of the current activity and of those, only a minority will turn into real production assets. The biggest proportion are just speculation.
How can investors identify battery metal stocks with real potential?
It all comes down to the usual fundamentals – good projects attract good people, and that attracts appropriate funding to develop assets that are real.
At the moment, it doesn’t seem to matter – we’re seeing significant upsides to new issues from day one regardless of their merits.
We are getting towards the more mature part of the cycle, where valuations do look stretched but we will see many brought back down to size.
A company like Kidman Resources (ASX:KDR) were at 67c at the end of August, then reached $1.60 in early November, now they’ve come back to $1.30. It has been a reality check for them, we think they are a project that will get to production at the right time of the cycle but they needed to be adjusted.
There are no great standouts at the moment that haven’t been picked up by the market and fully valued.
Which battery metal stocks should we watch?
You want to look for anyone that is on their way to production.
Mineral resources (ASX:MIN) and Galaxy (ASX:GXY) are two that are near-term production and will fully reap the benefit of the price cycle.
But on the smaller side, Altura (ASX:AJM) will be nearing production and take the premium prices.
Tim Weir is Executive Director of Precision Funds Management. Tim has 20 years of experience in investment and capital markets. He began his stockbroking career with Porter Western in 1993 and served as a partner of the business until it was acquired by Macquarie Bank in 1999. In August 2016 Tim and colleague Tony Kenny launched Precision Funds Management and successfully raised just under $25m.
Precision Opportunities Fund (POF) is a specialist investment manager with a focus on identifying opportunities and undervalued companies listed on the ASX. POF’s principals have significant diversified investment experience in the small and mid-cap sectors of the ASX, both from an investment and operational standpoint. Tim is also on the Board of newly established Corporate Advisory Firm Chieftain Securities.
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.