Overweight? … I don’t think so!

Opinion

Right now, it would be fair to say the leash has ‘been loosened’ on optimism towards lithium with a healthy dose of speculative promise built into stocks.

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Take a walk down St Georges Terrace in Perth, and you would struggle to be more than 10 metres from a trader bullish on the long-term lithium story.

180 specialists JPMorgan metals and mining team has recently underpinned the wave of positivity with its abrupt rethink on some big name ASX lithium companies under its mandate.

Their reconsideration reckons a 19 per cent a year increase in demand for lithium over the coming 10 years, on a compound annual growth rate basis, based on demand for electric vehicles and batteries.

Pilbara Minerals (ASX: PLS) is a critical player in the lithium industry and owns the largest hard-rock lithium operation in the world.

In other words, producers or explorers with a clear pathway to production may look super sexy despite any price-to-earnings shortcomings.

Lithium companies have been witnessing significant gains over the past year, and Pilbara’s stock has doubled over 52 weeks as global demand for lithium continues to run at record rates.

For the year, production increased by 34 per cent, revenue increased by 577 per cent and an operating profit of $561 million and EBITDA of $841 million, shipping over 51,000 tonnes of batteries at an average price of $2382.

Currently, Pilbara produces 580,000 per annum at its Pilgangoora operation, with the tier-1 asset holding a 26-year mine life.

The last financial year was a doozy generating over $1.18 billion in revenue and exporting around 361,000 dry metric tonnes.

Pilbara says its disciplined long-term strategies are paying off.

“What we see is really positive from all the indicators … starting with our customers, strong demand remains from all corners,” a spokesperson said.

“And if we could produce more, they would take more,” they impactfully added.

Lithium prices have generally increased over the past few years, and demand remains ahead of supply.

Meanwhile, producers globally have declared ramping demand fuelled by motivated governments in developed economies fearful of failing to meet climate change targets will soon outstrip supply.

Australia, abundant with hard rock lithium, most ideal for batteries, is in the spotlight as the number of electric cars sharply increases.

But as those on a waiting list for their new car will attest, this robust demand is currently held on a leash by the persisting COVID hangover.

Concerningly, when supply eventually returns to normal, aging cars combined with rising EV demand could easily see last year’s record 2 per cent move away from combustion engines rise to unimaginable levels in a concise amount of time.

Consumers will be keen to move over to electric, especially if energy prices remain high, which bodes well for companies such as Pilbara Minerals.

Adding to the local demand, demand for Australian lithium continues to come from multiple markets, the biggest one being China.

According to CPCA, or the Chinese Passenger Car Association, the overall sales volume is expected to be around 6 million in 2022. 

Sales should continue to be on a solid footing in 2023, as COVID lockdowns have hampered the economy subsided, and Chinese auto sales head back up.

As demand increases, Pilbara continues to push its mining operations towards greater production to meet the lack of supply.

It has increased the total capacity from 580,000 to 680,000 tonnes per annum during the latest quarter.

Considering processing remains around 11 per cent, combined with the run rate, total output could double in the next fiscal year.

Shipment and sales also continue to rise significantly for the quarter, with the average price potentially increasing by up to 20 per cent, in subsequent quarters, with significantly increased revenue likely.

Several other lithium miners are hopeful of one day joining the mega-producer space.

Voltaic Strategic Resources (ASX: VRS), Forrestenia Resources (ASX: FRS), Mt Monger Resources (ASX: MTM), and Kingsland Minerals (ASX: KNG) are hot on the tail of highly prospective areas for lithium from the southern reaches of Western Australia to the state’s rich Goldfields and far northern regions.

Voltaic Strategic Resources

Has been recently listed on the ASX holding a suite of battery and precious metals projects in the emerging Gascoyne critical metals province in Western Australia.

VRS will explore its promising Ti Tree lithium project which is contiguous to Arrow Minerals – Malinda Li Project (23m @ 0.98%, 2m @ 1.71%, & 1m @ 2.0% Li2O).

Forrestania Resources

The Forrestania Project is situated in the well-endowed southern Forrestania Greenstone Belt, with a tenement footprint spanning approximately 100km, north-to south of variously metamorphose mafic/ultramafic/volcano-sedimentary rocks host to the historic 1Moz Bounty gold deposit, emerging Kat Gap gold deposit, the operating Flying Fox and Spotted Quoll nickel mines, and the more recently discovered Earl Grey lithium deposit.

Highlights

• Lithium-focused drilling is to commence at the Forrestania Project early in the December quarter
• Priority lithium targets to be drill tested
• RC drill programs planned to test lithium targets at Bounty East and Gemcutter prospects

Mt Monger Resources

The Ravensthorpe project is prospective for a suite of battery metals, including lithium, graphite, nickel-copper-PGE, REE and gold mineralisation.

The region has numerous active mining operations, projects, and exploration projects, including the Mt Cattlin lithium mine (Allkem Ltd).

Ravensthorpe project areas.

Highlights:

• Three key tenement applications were granted, significantly expanding the
• Ravensthorpe project area to over 1,400km2
• Multi-element potential for clay-hosted REE, lithium-bearing pegmatites
• and sulphide nickel mineralisation

Most of these companies have seen their stocks rise in the double digits except for Forrestania Minerals, which is down slightly as lithium demand continues to head upwards.

Kingsland Minerals

Kingsland Minerals holds assets in the Northern Territory and Western Australia.

The NT has four project areas: Allamber, Woolgni, Shoobridge and Mt Davis.

In addition, Kingsland Minerals owns a nickel project at Lake Johnston in Western Australia. 

Kingsland focuses on exploring and developing prospective uranium prospects at Allamber and Shoobridge in the Northern Territory.

Highlights

• Drilling Underway at Allamber Uranium Project containing underexplored significant uranium mineralisation at Cleo Uranium Prospect
• AMWD Drilling contracted to undertake a 3,800m RC and 900m diamond drilling program at Cleo Uranium Prospect (NT)
• Assays are expected to be received in early October

It will be exciting to see these small cap explorers make their respective journeys at a time of qualitative change in the resources sector.

Meanwhile, Pilbara looks vital for the future, with a healthy balance sheet and cash position continuing to remain solid.

The company’s financials seem good value, considering revenue is heading much higher, and the mine lifecycle is expected to remain robust for at least a few decades.

Mining operations will partially fund capital expenditure will likely be partially funded through a strong cash position of around $874 million.

Considering the company has made several acquisitions, including Altura mining, renamed Ngungaju, Pilbara is likely to significantly improve its overall fortunes in the coming years.

Acquiring new mines will remain a strategy that is quite common as the company looks to continue to have a solid asset base, and the stock could indeed see multi-year gains.

Many analysts remain overweight on the stock, and management’s competent operational decisions will likely pay off increasingly soon.

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