Who's who in the $2 billion lithium boom

The marketing pizazz of the electric car is boosting prices, but is it just a flash in the pan for Australian investors?

Summary: The announcement of Elon Musk’s Tesla 3 orders has spurred on the share prices of a number of lithium miners and explorers over the past two weeks, as demand for lithium batteries looks to be driven by the future of electric cars and new battery storage device. However, with some big miners setting their sights on exploration, the ongoing success of these stocks is dependent on demand not exceeding supply in the mid to long term.

Key take out: It could be that lithium’s long term journey upward has just begun, though matching the production to demand will be the key to maintaining price increases going forward.

Key beneficiaries: General investors. Category: Commoditioes.

Australian investors have enjoyed a $1 billion bonanza over the past two weeks courtesy of one man, his car, and the “fuel” it uses.

Elon Musk is the man. Tesla is the car. Lithium is the fuel. The combination (please forgive the pun) is electric.

While most of what’s happening with Musk and his drive to dominate the world of battery-powered cars has occurred in the US, the flow-on effect in Australia’s mining industry has been remarkable.

A group of ASX-listed companies with exposure to lithium, a lightweight metal which has excellent electrical storage properties and has been hailed as “the new petrol”, have seen their share prices rise sharply, since Musk unveiled plans for his version of a “people’s car”, the relatively low-priced Tesla 3.

Two facts best explain the lithium boom.

• Tesla cars, and electric vehicles produced by every major car manufacturer from Toyota to BMW, use between 20-and-50 kilograms of lithium in their lithium-ion batteries. The Tesla 3, long before it hits the road, has achieved 276,000 orders worldwide.

• When Musk announced on April 3 that exceptionally high level of early orders for a $US36,000 electric car which is still 18-months from first deliveries, it triggered a stampede into lithium production and exploration stocks because current output of lithium will not meet demand.

Pilbara Minerals, a penny dreadful trading at 3.9c a year ago, last week vaulted to an all-time high of 68c, with the final 20c coming in the days after Musk made his Tesla 3 order statement.

Better than a simple share price rise Pilbara, which has a big but undeveloped lithium resource in the north-west of WA called Pilgangoora, was able to successfully complete a $100m fund raising to accelerate mine planning and development.

And better still, from an investor’s perspective, the fund raising was priced at 38c which means institutional investors who took a placement at that price and shareholders who are participating in a share purchase plan at the same price are already 22c (57 per cent) ahead even after Pilbara’s slip back to a share price of around 60c.

At its latest price Pilbara’s market value has risen above $500m, on its way to matching the ASX’s lithium leader, South American-focussed Orocobre, which has also enjoyed the Tesla 3 effect, rising from $2.79 before Musk’s announcement to $3.20 and a market value of $663m.

At least twenty other ASX-listed stocks are active in the lithium business, including the “born again” Galaxy Resources which collapsed two years ago when lithium was not as hot as today.

Over the past two weeks Galaxy has risen by 10c (44 per cent) to 33.5c, while General Mining, its co-owner of the Mt Cattlin mine in the south of WA, has risen by 18c (47 per cent) to 56c.

Galaxy, which was close to collapse a year ago, is now valued on the market at $450m. General Mining is worth $171m.

Other lithium stocks into the $100m-plus club include Altura Mining, which has a project adjacent to Pilbara’s proposed Pilgangoora mine, is valued at $223m thanks to its shares more than doubling from 10c to 22.5 since early March.

Neometals, which is co-owner with Mineral Resources and a Chinese partner, of a lithium prospect near Kalgoorlie is valued at $232m after a 140 per cent share price rise from 18c to 44.5c over the past two months.

Other lithium hopefuls include Dakota Minerals, European Metals, Ardiden, Zenith Minerals, and the aptly-named Lithium Australia.

Collectively the family of lithium-exposed explorers and the handful of producers (led by Orocobre and Galaxy) are valued today at $2.5bn, a number unthinkable a year ago and largely attributable to the rise of electric car sales and the marketing pizzazz of Musk.

Can it continue or is lithium, the lightest of all metals, which in its pure form has a curious habit of catching fire when exposed to water, just another flash in the Australian mining pan?

That’s a question which divides investors because while the metal looks set to enjoy a meteoric rise in demand there might not be a long-term shortage and existing producers of the metal are gearing up to meet demand from car makers and other industries, which need a long-life electricity storage solution such as the solar power industry.

Rio Tinto, for example, is one of the world’s mining majors considering an entry into lithium production via its Jadar project in Serbia.

Australia’s biggest existing producer of lithium is the US-based Albemarle Corporation, which owns the century-old Greenbushes mine in the south-west of WA. Once a tin mine, then a tantalum mine, Greenbushes today is a world-class lithium producer thanks to the mix of metals in its orebody.

Albemarle is not standing still. In a presentation to a Goldman Sachs investment conference in Houston last month it singled out Greenbushes for special mention as its best source of “hard rock” lithium with reserve life estimated at 50 years.

The mention of hard rock is important because lithium is produced in a number of ways: Either as a conventional mined ore (called spodumene), or extracted from lake beds as a brine (salt) solution, which is how Orocobre’s lithium is produced at its Salar de Olaroz project in Argentina.

Chinese battery makers prefer their lithium in its spodumene form for conversion to lithium carbonate. Other battery makers prefer their lithium from a brine source.

Whatever the fine-tuning of production and processing techniques, the end result is electricity storage which is enjoying boom conditions thanks to tougher environmental controls on coal and other forms of fossil fuel, along with the rise of household and commercial solar power which needs a viable night-time electricity storage solution.

While cautious investors will see the current stampede into lithium stocks is an event bearing the hallmarks of past booms in metals such a magnesium, nickel and rare earths, there is undoubtedly a global drive to make lithium, in its lithium-ion form, the go-to battery.

Albemarle sees annual lithium growth in the traditional consumer electronic market (mobile phones and computers) at between eight per cent and 10 per cent compound per year while transportation growth (Tesla et al) is forecast to be 20 per cent to 30 per cent compound annually, household and commercial power storage at more than 30 per cent compound annually and a new generation of consumer devices (tools) at more than 15 per cent compound annually.

Matching production with demand is the challenge for the lithium industry today but working in its favour is a dramatic decline in the cost of lithium-ion batteries which Albemarle estimates have been falling in price at a rate of 14 per cent a year for the past 15 years.

Cars and household storage (such as the Tesla powerwall) will dominate lithium developments over the next few years, providing news flow to maintain interest in the lithium mining sector.

After the Tesla 3 there is a traffic jam of new electric vehicles with Mercedes scheduled to release 12 new electric models next year, BMW working on its Tesla killer the i3, Audi and Volkswagen planning to enter the market next year and Chinese car makers said to be working on electric cars with a $US20,000 price tag from next year.

Potentially, the lithium-powered journey has just started.