Have the next crop of battery metals producers been oversold?
Link copied to
Right now, COVID-19 is freezing the embryonic battery supply chain. But for the next crop of battery metals producers — impacted by the broader share market rout — ‘deals and discussions’ are very much continuing behind the scenes.
The short-term outlook for the lithium-ion supply chain, like everything else, is uncertain. Could a large global recession as a result of the COVID-19 crisis alter the consensus long term outlook for battery raw materials like lithium, cobalt, graphite, nickel and copper?
No, says CRU Group senior analyst George Heppel. Irrespective of temporary recessions or market downturns, electrification of the global automotive sector remains “inevitable” in the long run.
“Investment in e-mobility reduces CO2 emissions, improves air quality and will eventually make a huge amount of financial sense to the average consumer as battery costs decline and manufacturing scale ramps up,” he says.
The future remains bright for high quality battery facing stocks, especially those placed to take advantage of the next upsurge in demand in 2022/2023.
In the short-term, Heppel says the automotive sector – and EVs by extension – are experiencing a reduction in demand due to quarantine.
“Many consumers in key markets can’t leave their house for non-essential reasons right now, let alone buy cars,” he says.
“We have heard reports that 85 per cent of automotive manufacturing capacity in Germany is currently idle as a result of the pandemic.
“However, in theory this should create ‘pent up demand’ which is released when quarantines are relaxed.”
Ongoing economic uncertainty will also hinder attempts to push new battery metals projects into production in the short-term, Benchmark Mineral Intelligence analyst Andrew Miller says.
“As a result, the potential for a supply crunch over the coming years will increase – money needs to go into new expansions today to fuel the growth in EV production in 2022/23 onwards,” he says.
Battery focused nickel sulphide play Blackstone Minerals (ASX:BSX) agrees that supply will tighten due to the reduced funding into new projects going forward “which will reduce the supply of nickel (particularly from laterites) and only increase the gap between supply and demand”.
“Tread carefully, but I believe now is the time to be buying those mining stocks you’ve been watching for months,” Blackstone managing director Scott Williamson told Stockhead.
“I can’t see the junior battery metals miners getting any cheaper than they are today.”
As the “backbone of the EV market to date”, China’s apparent early economic recovery from COVID-19 will help support the battery supply chain, Miller says.
“What was meant to be the year battery demand diversified outside China may now see China play a more important role than ever before,” he says.
“There are also expectations that EVs will be included in the country’s stimulus efforts which could bolster the long-term outlook.”
China moving to insulate domestic #EV market as the country’s supply chain ramps back up following Q1 slowdown. More of these types of policies likely to follow over coming months: https://t.co/XUea3iteT5
— Andrew Miller (@amiller_bmi) March 31, 2020
Advanced explorer AVZ Minerals (ASX:AVZ) is driving the mammoth Manono project in the DRC toward a development decision.
As part of that process, it is aiming to lock in a lithium offtake and strategic investment deal with Chinese firm Yibin Tianyi.
Yibin Tianyi is set to become a key cog in the supply chain of Contemporary Amperex Technology (CATL), the world’s biggest lithium-ion battery maker.
In late March, Yibin Tianyi signed a new five-year, 75,000-tonne-per-annum (tpa) offtake agreement with WA producer Pilbara Minerals (ASX:PLS).
AVZ managing director Nigel Ferguson told Stockhead the company had seen “increased and faster responses” out of the companies they were talking to in China over the last few weeks.
“They appear to be re-awakening after the significant lock downs there,” he says.
“OEM/car manufacturers are committed to their EV plans, and while the current events are certainly causing disruptions, I have not heard of any OEM changing its long-term EV growth plans.
“For AVZ, with our significant long-life, high-quality resource underpinned by the EV thematic, the future is very bright. Current share price values certainly do not represent that.”
In general, the biggest impact of the coronavirus on the supply chain has been a downgraded outlook for the expansion of EV uptake outside China, Miller says.
2020 was expected to be a year of significant growth in Europe’s EV supply chain; that growth will likely now fall back into 2021 onwards. But the cogs are still turning.
Infinity has entered into a MoU for a multi-staged investment & assistance package with EU groups EIT InnoEnergy & European Battery Alliance.
💥WE keep moving forward. Even in these unprecedented times, people & businesses work hard and dont stand still. From @EIB lending €0.5Bn to LGChem, UK companies investing €12Bn in switch to EVs, to @InfinityLithium securing EU funding from @InnoEnergyEU, Europe keeps moving 🚀 pic.twitter.com/CC64JdTt86
— Vincent Ledoux pedailles (@LedouxPedailles) March 30, 2020
Talga (ASX:TLG), which plans to be the first and largest battery anode producer in Europe, also has customer and financing discussions well underway.
Talga’s vertically-integrated low-cost Vittangi anode project in Sweden has the potential to make big profits over its initial 22-year life,.
Managing director Mark Thompson says Europe’s legislated emission targets have not changed – to meet them within the outlined timeframes the EV transformation “must press on.”
“This is reflected in the bullish demand curve remaining unchanged and can be seen in recent announcements by major OEM’s looking to release multiple new EV models this year and next, along with continued capacity buildouts from battery manufacturers,” he told Stockhead.
Once again, this outlook is not reflected in the share prices of near-term producers like Talga.
“Investors are understandably cautious and after having seen a few false starts they may miss the bottom whilst waiting for the herd,” Thompson says.
“Some of the sophisticated players on the other hand are moving now. “
While other activities have slowed down due to COVID-19, deals and discussions are very much continuing behind the scenes, Thompson says.
“Large industry players are also making moves, such as BMW declaring they are developing their own lithium and cobalt supply to push towards their battery makers,” he says.
“In addition, recent supply constraints have reminded industry of the importance of a local supply chain.
“In Europe for example, where 100 per cent of battery materials are imported, the focus on localisation alongside sustainability is more heavily guiding new investment decisions.”