The secret to the success of any bulk mining business is the profit margin, not tonnes shifted or total revenue.

That’s a fact that can be measured in the remarkable revival of Fortescue Metals, an iron ore miner, and a less well-known lithium producer, Alliance Mineral Assets.

Fortescue, a company heavily discounted until six months ago because it produces a relatively low-grade ore, has enjoyed a spectacular 70% share price rise, up from $3.53 in September to latest sales at $6.04 because investors have started to “follow the money”.

Alliance, which kept its name after merging late last year with its partner in the Bald Hill lithium mine in WA, has also started to wake after a 50% price fall from 33c when it listed on the Australian Stock Exchange in early December, to 16c less than two weeks ago.

But, over the past few days, as a handful of professional investors who follow the stock have reconsidered its business, Alliance has moved up to 19c, a gain of 18%. And what makes that interesting is that it’s for the same reason as Fortescue’s rise – the k’ching of cash in the bank.

When is a slide not a slide?

Fortescue’s cash boost has come in duplicate. An unexpected rise in the iron ore price thanks to a switch by Chinese steel mills from high-grade to low-grade ore as a cost-saving measure, and the dam collapses in Brazil which have knocked some of that country’s mines offline.

Alliance’s cash boost is coming from improved operations at the Bald Hill mine and a handsome profit margin on sales even as the overall lithium market has been sliding lower – a price decline which is causing less pain than might be expected because it is from a very high, boom-time, level.

Until last week Alliance, which is has the unusual listing code of A40, was seen as a business under pressure with production in the December quarter down 20% from the previous three-month period, and with cash costs that were high at $US824 a tonne for lithium concentrate – a level believed to be close to break even.

One quarter does not a business make because since early December an improvement has been taking hold, even as investors kept selling Alliance stock.

Alliance managing director, Mark Calderwood, described the January production report as an excellent start to the year.

“The quantity of lithium concentrate shipped over the past week was also a record for Alliance,” Calderwood said last Thursday (February 7).

“A number of requests for lithium concentrate are currently being reviewed and we expect to ship, or have ready for shipment, an additional 30,000t of premium quality lithium concentrate during the quarter.”

Om nom nom

Last week, the better results started to show with January a record month for Bald Hill which produced 13,160t of lithium concentrate, up 28% on the previous month, with January output equivalent to 60% of the entire December quarter production, according to analysts at the stockbroking firm Canaccord Genuity.

Alliance, because its January performance was only for a month, did not provide a cash cost estimate or a sales revenue estimate. The sales revenue estimate was left to Canaccord which reckoned the latest shipment from Bald Hill mine received an average price of $US805/t.

If correct, the Canaccord calculation highlights a point that investors might be missing about the entire lithium sector which is new, and therefore not easy to follow, but which appears to be generating extremely attractive profit margins – much like Fortescue in iron ore.

On the January result and with what’s expected over the rest of the March quarter, Canaccord said it expected a 120% quarter-on-quarter increase in sales which:

“Assuming a weighted average price of $US760/t for the March quarter results in cash inflow from spodumene (concentrate) sales exceeding $A50 million.”

If the March quarter is replicated (and Canaccord’s estimate is correct) then Alliance could be looking at annual cash flow approaching A$200 million. And while cash flow is definitely not profit, a number that size sits interestingly alongside the stock’s market value of $240 million.

In other words, Bald Hill is a cash cow despite the lithium price slipping lower, a situation which almost certainly exists in other lithium stocks which have also been sold off because of the commodity price decline with investors not looking at the ongoing profit margin.

“Recent production issues which effected the December quarter output have been addressed,” Canaccord said of Alliance after its January production update.

“With lower cash costs (lower strip ratio) and increased product sales expected to deliver a much-improved cash flow performance in the March quarter.”

The bottom line

In other words, Alliance is starting to deliver on its promise at the time of merging with Tawana to create a single investment point for the Bald Hill project.

Perhaps most significantly from an investment perspective Canaccord reckons Alliance has a price target over the next 12-months to 45c – 136% higher than the last sales at 19c.