Don't mine the periodic table

Summary: There's little doubt speculation is driving the share prices of some of the companies mining battery metals. Many are yet to report a profit and have relatively small, yet growing, markets. 

Key take-out: Investors should put commercial assessment far ahead of speculation especially when it comes to buying exotic, or tech-metal, stocks. That includes lithium. Supply and demand, the ease of substitution and competitive sources must be well-considered to avoid a situation like magnesium in the 1990s.

Membership of the billion-dollar club, an exclusive group of stocks valued at more than $1 billion, has never been easier – an unmistakable sign that some sections of the market have entered an unsustainable boom.

Mining companies which have surged higher, thanks to the promise of demand for batteries in electric vehicles, are the outstanding examples of stocks riding a wave of speculative enthusiasm.

Lithium, a key ingredient in batteries, has seen Pilbara Minerals rush from penny dreadful status with a price of less than 5 cents two years ago to a market capitalisation of $1.26 billion and a share price which is 1500 per cent higher at 80c.

Rare earths, which have widespread use in advanced technologies and electric cars, have helped Lynas Corporation return from a near-death experience to be valued at $1.1 billion, with a share price up 600 per cent from 3c to 22c over the past two years.

Graphite, another important battery component, is behind the $1.1 billion market value of Syrah Resources, which has been on a rollercoaster ride over the past three years, moving in and out of the $1 billion club, but recently returning thanks to an almost 50 per cent share price rise from $2.50 to $3.71 over the past two months.

Cobalt, another battery metal, is the driving force behind Clean TeQ Holdings knocking on the door of the $1 billion club, with a share price that has risen by 300 per cent over the past 12 months to value the company at $821 million.

Gold explorers hunting for nuggets in the iron ore country of WA's Pilbara region are almost as hot as battery metals with the best example being Canadian-listed Novo Resources, which has risen by 750 per cent over the past three months to be valued on the Toronto stock exchange at $C1 billion ($A1.01 billion).

Beyond conventional analysis

There are several themes running through the stocks mentioned. Many are yet to report a profit. It's a speculative feeding frenzy for exotic metals and nugget gold which is beyond conventional investment analysis.

Leaving gold as a separate case, it is interesting to consider the investment appeal of the companies exposed to exotic minerals that are largely consumed in relatively new industries.

The first, and perhaps most important point, is that exotic, or tech-metals, have relatively small but growing markets. And that's where the greatest risk lies, especially for latecomers to the tech-metals revolution – or tech-metals bubble, depending on your point of view.

No one is doubting that lithium, graphite, cobalt and rare earths have a promising future, but as with all new and fast-growing industries there is both a first-mover advantage followed by the challenge of turning potential into profit.

Another challenge for the current crop of tech-metal darlings is the fact that none of the material they're mining, or proposing to mine, is either (a) rare or (b) has a big market, yet.

In other words, one reason why prices for lithium, graphite and cobalt have risen sharply is that supply has been restricted by historically low demand and low prices. The incentive to find and develop new sources of tech-metals has not been strong. That's changing as new industries evolve, led by a rush to replace conventional petroleum-powered cars with electric vehicles.

Cobalt, it can be argued, will do better than most of the tech-metals in the next phase of the boom/bubble because more than 50 per cent of production occurs in the notoriously risky Democratic Republic of Congo (DRC).

New sources of cobalt outside the DRC are being developed, and several Australian nickel mines are being kept alive thanks to their cobalt by-product, but sources big enough to rival the DRC have not yet been identified.

That's certainly not the case with lithium, which is abundantly available in South American brine lakes and hard-rock mines in Australia.

Until recently, no one looked seriously for lithium because the demand just was not there. Now, with battery demand rapidly rising, the lithium price is rising. The incentive to explore for more is high – and being met with success.

Commerce over speculation

There are two lessons from the past which investors should note, because they are applicable in the current stampede into the specialised world of exotic metals.

Firstly, there is a comment made some 20 years ago by Leigh Clifford, a former chief executive of Rio Tinto (then known as CRA), when he was asked whether he would invest in magnesium, a hot metal in the 1990s.

Clifford's answer was along the lines of not seeing any attraction in “trying to mine the periodic table” – a reference to there being a myriad of metals in nature, but not many with commercial value.

Magnesium turned out to be an example of burning brightly and briefly, only to flare out when carmakers decided that it was easier to continue using steel and aluminium rather than switching to a new metal which meant re-tooling their production lines.

The second lesson dates back to the 1980s when a big French chemical company, Rhone Poulenc, invested $50 million in building a plant to extract gallium from the liquor stream at the Pinjarra alumina processing plant of Alcoa in WA's south-west.

The plant operated for a few months before closing permanently because the market for gallium, which can be found under aluminium on the periodic table, collapsed after its potential use as a successor to silicon in computer chips failed to develop as promised.

Clifford's comment about not trying to mine the periodic table is as true today as it was decades ago. Investors must critically consider the commercial side of a mining proposal, including supply and demand, price today versus likely price tomorrow, competitive sources, and the ease of substituting one mineral for another if the price gets too high.

Lithium, for example, is the battery leader today because lithium-ion batteries store more electricity than other products – whether that's the case in the future is an interesting point, because zinc is also a good way of storing electricity and common salt could one day be a low-cost rival.

Other metals which have blossomed as potential stars of the future include hafnium, for its ultra-high melting point but a market measured in grams, and rhenium, as an alloy in the metal used to make gas turbines.

Every element on the periodic table has a use, or a potential use, but that doesn't mean it has commercial value.

Today's tech-metals are highly attractive to speculators but their appeal is diminished for investors looking for long-term business cases.