Minefield: Revved up lithium and reborn stocks

Australia's lithium mining industry is tiny compared to commodity leaders such as iron ore, gold, coal and copper, but it is a sector that got an important vote of confidence this week.

Sociedad Quimica y Minera de Chile, better known (thankfully) by its initials SQM, is the world's biggest producer of the mineral which is being driven higher by demand for electric batteries used in cars, households and certain industries.

Why SQM would invest in a joint venture with a small ASX-listed exploration company is a question that is almost as important as the deal itself. After all, there is plenty of lithium in Chile to keep SQM busy for decades, if not centuries.

The problem for the big Chilean company is that it has hit a brick wall because of a dispute with the government's Economic Development Agency. This body controls Chile's lithium reserves, as they are legally listed as a strategic asset, and it has refused to raise the quota allocated to SQM.

Blocked locally, SQM has found a different growth route by investing in Australian lithium which uses traditional mining, crushing and processing techniques that are quite different to the way lithium is extracted from brine in ancient salt lakes high in the Andes Mountains.

Technically, Chile's salt-lake lithium is cheaper to produce than Australia's hard-rock lithium, but there's more to mining than simply shifting dirt. Government obstacles are often a problem. In any case, SQM putting a corporate toe into the Australian lithium industry will send a shockwave through the lithium world.

In effect, Australia has become the “go-to” destination for lithium investment – even SQM recognises that through its deal with the first of the two companies mentioned in this latest edition of Minefield.

Kidman Resources (KDR)

An accidental player in lithium, Kidman was looking for gold on its Mt Holland tenements located about 200 kilometres south-west of WA's mining capital, Kalgoorlie, when it stumbled across a lithium deposit it named Earl Grey.

Until recently, the size and value of the Earl Grey structure was underappreciated with Kidman's share price a lowly 8c as recently as April last year, just before it took off with a run up to a peak in October of 82c – a “10-bagger” for some lucky speculators.

Success in the field triggered a legal dispute with rival explorer, Marindi Minerals, which claimed it had a deal to acquire control of Earl Grey, with uncertainty over ownership a factor in Kidman's share price sliding back to as low as 35c in April this year.

Everything changed last week when a ruling in the WA Supreme Court gave Kidman clear title to the lithium discovery, a verdict which was followed four days later by Kidman striking a joint venture development deal with SQM.

The terms of the JV will see SQM inject US$110 million into Earl Grey for a 50 per cent stake. The bulk of the funds will be used to develop the resource for quick export to catch the high lithium price and start work on a local refinery. This refinery could produce a value-added lithium carbonate (LCE), the preferred material of Asian battery makers.

The nature of the Earl Grey discovery is highly attractive. The mineralised structure is flat lying and averages 70 metres thick, which makes for easy open pit mining. The grade is high at 1.44 per cent lithium oxide, and while the resource currently stands at 128 million tonnes of ore for 4.54 million tonnes of lithium, there are encouraging indications that it will get bigger.

SQM appears to agree that Earl Grey is a world class discovery, good enough for it to take its first step into Australian lithium.

On the market, Kidman shares have performed well since the strength of its legal case became clear, rising from 53c in late June to a recent high of 71c after securing its Supreme Court win, but slipping back recently to around 62.5c which values the business at $208 million.

Altura Mining (AJM)

Two sales deals with Chinese customers have breathed new life in Altura Mining which is developing a big lithium deposit in the Pilbara region of WA.

The binding offtake agreements entail a total of 200,000 tonnes a year of lithium ore (spodumene), concentrated up to a uniform grade of 6 per cent lithium, to account for the lion's share of Altura's Pilgangoora project.

Located adjacent to another lithium mine of the same name being developed by Pilbara Minerals, the new Altura mine is expected to generate strong profits over its initial 13-year life.

According to company presentations, its Pilgangoora deposit will yield 6 per cent concentrate at a cash cost of $A316 a tonne. Macquarie Bank this week tipped it will be sold for between $US550/t and $US950/t – with the lower of those estimates more than double the cost of production, and the upper price forecast almost four-times the cost.

The financial estimates underline the high profit margins currently available to lithium producers as battery makers rush to secure supplies of an essential raw material.

With sales in place for the first stage, Altura is expected to quickly finalise funding for the first stage of the mine which will cost $140 million. The company's board has also approved an expansion phase which will more than double output to an estimated 450,000t a year.

On the market, Altura shares have bounced from a low of 12.5c earlier this month to around 16c after reporting the sales agreements, a price which values the company at $246 million.

Stavely Minerals (SVY)

Nowhere in Australia is more difficult for miners than Victoria. The government approvals process and other potential complications often outweigh an attractive geology that was once home to an historic gold rush.

Overcoming a political aversion to mining will be a challenge for Stavely Minerals which appears to have discovered what could become a significant copper and gold mine near the town of Glenthompson on the Glenelg Highway about 250km north-west of Melbourne.

Recent drilling by Stavely returned eye-catching assays which included 24m at 0.64 per cent copper, plus 1.2 grams of gold a tonne from a location named Thursday's Gossan.

Other assays were as high as 4.14 per cent copper and 0.36g/t gold, but from a thinner intersection of three metres.

More work is required but Stavely's highly regarded management team has described the discovery as having strong “porphyry-style copper-gold mineralisation” with a porphyry-style orebody often very large and keenly sought by explorers.

On the market, Stavely has enjoyed a price-bounce from around 8c before the drill results were announced to 14.5c, which values the company at $17.7 million.

Spitfire Materials (SPI)

Once a company exploring for manganese, Spitfire has been reborn as a gold stock, complete with new management and a package of exploration targets that include the Mulwarrie gold project 150km north of Kalgoorlie in WA.

Early drilling has sparked interest in the stock which was limping along at 3.5c a year ago but is now trading at around 12c.

Best assays include 30m at 16.87g/t, with a core in that intersection of 4m at 118g/t.

Success would have been expected at Mulwarrie because it was the site of a successful 1990s open pit mine with Spitfire's work focussing initially on seeking extensions to the old workings, which it appears to have done.

Apart from putting its corporate foot on a known gold deposit which could be amenable to fresh development, Spitfire has another interesting attraction – a new management team. The company is now being led by John Young and Neil Biddle, two former executives of lithium star Pilbara Minerals, and both with deep geological knowledge.