Minefield: The battery-power revolution

Battery metal stocks have been under pressure since the start of the year thanks to concern about over-supply and sluggish demand, but over time the battery-power revolution will remain a powerful investment theme.

In this edition of Minefield, a column which looks for bright ideas among smaller stocks, there is an emerging graphite producer, a lithium discovery story and a company without battery qualifications, a small titanium minerals producer.

As with every edition of Minefield, this article is not providing investment advice. For all of InvestSMART's stock recommendations, click here.

Talga Resources (ASX:TLG)

Location is the key to successful property investment, so it shouldn’t be a surprise to learn that the same rule applies in mining when access to customers can be as important as producing a high-quality product.

Talga Resources has both a high-quality asset in the form of the world’s highest-grade graphite deposit and a location in northern Sweden which puts it close to the manufacturing centres of Europe, especially Germany’s giant car makers.

Despite operating far from its home base in Australia, Talga has been able to carve out a large slice of Swedish mining country, close to established infrastructure servicing projects that include Kiruna, the world’s biggest underground iron ore mine. Port access is available through Lulea on the Baltic or Narvik in neighbouring Norway.

Talga’s plan is to start a small conventional open-cut mine based on the Vittangi graphite deposit, concentrate the ore at site, and then send it to a coastal refinery producing a modest 2500 tonnes of finished product a year for shipping to European customers.

With an estimated capital cost of just $US27 million, Talgas’s first step into graphite production should be easily achievable and in stark contrast to the much bigger developments by graphite rivals such as Syrah Resources which is struggling to digest the cost of its massive Balama project in Mozambique.

Apart from taking baby steps into the relatively new business of marketing graphite to battery makers who use it in the anode section of their batteries, Talga has the advantage of an ore body which averages 23.5 per cent total graphitic carbon (TGC) compared with Syrah’s 9 per cent TGC.

Two years have been earmarked as the time Talga expects to take in learning how to mine, transport and process its graphite before taking the next step which is to invest another US$147 million to lift the project to an annual production target of 19,000 tonnes of a finished graphite product to be marketed as Talnode-C.

The forecast financial performance of the Vittangi project looks appealing, especially after the construction of the second stage when annual revenue is forecast to be running at $US210 million with Talnode-C being produced a cash cost of US$1852/t and sold for US$11,250/t.

In a pre-feasibility study released last week, Talga said stage two of Vittangi would achieve a payback on the capital cost in 1.5 years while the overall project had an initial 22-year life expectancy, but almost certainly longer as exploration continues to find more high-grade graphite deposits.

Talga chief executive, Mark Thompson, said the aim of the Vittangi project was to produce fully value-added graphite products for lithium-ion batteries.

“This is the most immediate path to significant revenue for Talga and aligns our vertically integrated business that sets us apart from our peers,” Thompson said.

On the stock market, Talga has been moving after a slow start to the year when it dropped to 32c before moving up to 72c in April and to now be trading around 57c which values the company at $125 million.

Liontown Resources (ASX:LTR)

Not many investors were paying attention when Liontown reported in January that it had outlined in a scoping study enough lithium in its Kathleen Valley project in central WA to start early mine planning.

Measuring 21.2 million tonnes at 1.4 per cent lithium the deposit ranked as one of the bigger prospects in Australia’s booming hard-rock lithium sector, with an exploration target that could lift it to rival better known projects such as the Mount Marion mine of Mineral Resources and China’s Ganfeng Lithium.

The lack of a positive stock-market reaction to the Kathleen Valley scoping study, and the first reports from investment banks that the lithium market was in danger of becoming over-supplied, forced Liontown into the background as other lithium stocks, such as Kidman Resources, snatched the headlines.

What investors saw in Kidman was a company with its foot on a big resource, a development partner in Chile’s SQM Group, which led to a generous takeover offer from Wesfarmers which has botched its attempted move into rare earths with an overly complex bid for Lynas Corporation.

Another problem for Liontown, and a factor in holding its share price down to between 2c and 3c from January to early last month was a lack of understanding about the company actually having two promising lithium discoveries with the Buldania prospect also starting to look like a future mine.

A relatively small company with a stock-market value of $150 million Liontown appears to have two tigers by their tails with a period of solid news flow scheduled for the rest of 2019, starting with a fresh mineral resource statement for Kathleen Valley and a scoping study for Buldania.

It’s the potential size of Kathleen Valley, which has revealed its highest grades and thickest zones below the current mine plan, that has ignited interest in the stock which over the past three weeks has effectively doubled from 5c to 9.8c with the prospect of more to come.

Image Resources (ASX:IMA)

Titanium minerals are back in the news as the Chinese building cycle shifts from its steel and cement phase into plumbing and painting which is why copper and mineral sands stocks are performing well.

Iluka Resources, the Australian “sands” leader has been one of the markets best performers this year with a 33 per cent share price rise from $7.16 to last sales at $9.53 and with forecasts that $11 is on the horizon.

Other, less well-known sands miners are chiming in with their own upward moves, including Image which has more than doubled from 11c to 24c since the start of the year.

What’s driving Image is its small but high-grade Boonanarring project north of Perth in WA’s coastal “sands” belt that runs up to Carnarvon.

While most titanium and zircon projects struggle to deliver an average grade of more than 3 per cent the grade at Boonanarring is 8 per cent. The Coburn project of Strandline, near Carnarvon, compensates for its lowly 1.11 per cent total heavy mineral sands with a whopping volume of more than 500 million tonnes of material.

Another advantage enjoyed by Image is that it has already made the leap from explorer and developer to producer having just completed its first full quarter with a stellar performance that was above budget in terms of tonnes mined, material sold, and cash generated – and with costs below expectations.

One of the keys to the mine’s outperformance in its first few months is the extraction of a high-grade core which was missed in early exploration.

Not a big mine with only 19.1 million tonnes of ore and a life expectancy of 5.5 years Image will need to find more material to extend the life of its operations, though to help with the search, and pay for future mine developments, it should be able to build a substantial amount of cash from Boonanarring.