A few weeks ago we covered a key holding in the TAMIM Global Mobility portfolio, a fully integrated lithium company called Albemarle (ALB.NYSE) that is poised to benefit from increased production of electric vehicles. This week we revisit lithium and take a look at three heavyweight ASX stocks that are shaping up as market leaders.
Author: Adam Wolf
The lithium space has received a lot of attention recently with investors sending any companies with lithium exposure to sky high prices, similar to what we have seen with uranium. Lithium is the primary component of lithium-ion batteries (LIB), which are rapidly gaining traction due to their wide applicability in energy storage. In particular, solar and wind energy projects and the increasing demand from the electric vehicle (EV) sector. With the push for green energy and rise of electric vehicle production, everyone can see the upside in lithium. While the easy money may have been made, these lithium companies still pose an interesting proposition to investors looking to gain exposure to the broader electric vehicle thematic.
Data from Benchmark’s Lithium Forecast shows a projected annual lithium supply deficit of up to 225,000 tonnes in North America and 500,000 tonnes in Europe by 2030. To incentivise the right amount of investment in new mines there is going to have to be a sustained period of elevated prices.
Bringing deposits into production is a time consuming process and it can take years to complete the necessary feasibility studies and actually construct a mine. In order to understand the merits of a lithium deposit we first need to understand the difference between brine and hard rock deposits. Lithium deposits can either be produced from brine or spodumene rock production. Brine production is typically cheaper and significantly more environmentally friendly. Brine deposits are typically found in South American countries like Chile and Argentina. However, there is a catch with producing carbonate from brines. Although lithium carbonate can be converted into lithium hydroxide (what is used to make the batteries for EVs), it comes at an additional cost. This is causing brines to look less attractive to battery producers, leading to industry players scaling up or increasing their hard rock mine assets. Although brine deposits are cheaper to extract they require more processing and are typically used in lower density batteries, the batteries that enable electric vehicles to drive for long distances require higher density lithium which is found in hard rock and is therefore better suited. The lithium explorers in Australia are looking for hard rock lithium.
Mineral Resources (MIN.ASX)
Mineral Resources Limited is a mining services company with a portfolio of mining operations across both lithium and iron ore. Their mining services segment comprises of crushing/processing, mine construction as well other services. The mining services/engineering sector has typically attracted very little attention from investors and historically trades on very low multiples as a result of cyclicality and the nature of their revenues, which are contracted. More recently we have seen higher labour costs due to labour shortages which have impacted margins. MIN offers more upside than your usual mining services company through their iron ore and lithium operations yet they are still trading on low multiples alongside other mining services companies.
MIN is a top five global exporter of lithium, they have interests in two lithium mines and a lithium hydroxide plant in Perth. In 2019, MIN sold 60% of its ownership in the Wodgina lithium hard rock mine, a Tier 1 asset, to US based Albemarle (a holding in our Global Mobility portfolio, as mentioned). The Wodgina mine is currently under care and maintenance, the mine would be a 750,000 t/yr operations. The JV is also building a processing operation and the 50,000 t/yr Kemerton lithium hydroxide plant, under development southwest of Perth. Through its shareholdings in Mt Marion and Wodgina, Mineral Resources has access to significant amounts of spodumene, which can be used as feedstock for much higher margin lithium hydroxide production.
Mineral Resources recorded an EBITDA of $1.9bn in FY21. Yes, this was inflated by sky high iron ore prices but if you look at a more normalised environment with lower iron ore prices, a cheaper labour market and accounting for the production that the Wodgina Project will bring once brought back online, a sustainable EBITDA of $1bn is certainly not out of the question. This would see MIN trading on an EV/EBITDA of less than 8x. MIN also have 5.5% stake in fellow lithium producer Pilbara Minerals.
Pilbara Minerals (PLS.ASX)
Pilbara Minerals is an emerging lithium company producing spodumene concentrate with operations in the Pilbara region in Western Australia. PLS has 100% ownership of the world-class Pilgangoora Lithium-Tantalum Project (“Pilgangoora Project”), the largest independent hard-rock lithium operation in the world. PLS is looking to become a fully integrated lithium raw materials and chemicals supplier. The significant scale and quality of the operation has attracted a consortium of high quality, global partners including Ganfeng Lithium, General Lithium, Great Wall Motor Company, POSCO, CATL and Yibin Tianyi. PLS is one of Australia’s largest lithium focused companies and with good reason. They have made several strategic moves that have separated them from the other lithium producers, some of which we will delve into.
Battery Materials Exchange
Pilbara Minerals executed an agreement with GLX Digital Limited (a private company) for the launch of a new sales and trading software platform for the Pilgangoora Project, providing flexibility to transact by auction, tender process or bilateral sale. This battery metal exchange serves as an auction house to bid for Pilbara’s offtake from the Pilgangoora project. So far the exchange has yielded prices far above the spot price of lithium.
The excessive prices PLS has fetched so far is a testament to how limited the supply of quality hard rock lithium really is. The battery metal exchange is a huge competitive advantage for PLS and provides them with greater flexibility in terms of selling their product that has so far maximised their margins. This is yet another well executed strategic move by the PLS team, the next auction is on October 26 so all eyes will be on whether PLS continues to achieve such premiums on the exchange.
Altura Project Acquisition
In late 2020, PLS announced the acquisition of the Altura Project for a consideration of $175m USD. The Altura Project is located on an adjoining tenement package immediately to the west of Pilbara Minerals’ Pilgangoora Project. The operation is part of the same mineralised system that underpins the Pilgangoora Project and uses similar open-pit mining methods, processing flowsheets and mining equipment The acquisition of the Altura Project should provide Pilbara Minerals with a unique opportunity to realise tangible operational synergies by consolidating the two neighbouring projects into a single integrated operation. Of particular interest to the PLS is the opportunity to mine that section of the Altura orebody that is otherwise sterilised without access being granted to Pilbara Minerals’ ground to undertake mining activities.
PLS entered into an agreement with POSCO (005490.KRX) where PLS will have ownership of up to 30% in a downstream JV for a lithium chemical conversion facility in South Korea. This joint venture will give Pilbara Minerals significant exposure to one of the world’s most dynamic and fastest growing markets for lithium chemicals. This downstream opportunity would shift PLS up the value chain which could see them get higher margins and earnings from their offtake. The project is still subject to a final investment decision and approvals but the proposed facility will have the capacity to to produce approximately 40k tonnes of lithium hydroxide p.a., enough to produce the batteries of one million electric vehicles.
PLS produced 280kdmt (thousand dry metric tonnes) of lithium in FY21. PLS expects to be producing 580kt p.a. by mid-2022, this is more than doubling their production and it’s all at a measured capex. Simply put, PLS ticks all the boxes. They are operating in a world class mining jurisdiction, they have long mine life of more than twenty years, it is open pit (cheaper and easier to mine), they have cost advantages over the brine operators in South America (who are producing an inferior product) and they have significant synergies to be realised through their acquisition of the neighbouring Altura lithium. PLS are expanding their capabilities through both midstream and downstream operations which should add significant value to their final product, increase their margins and give them even more flexibility with their offtake.
Vulcan Energy Resources (VUL.ASX)
VUL has been one of the market’s biggest winners over the past year (up 1000%+). Vulcan is developing the world's first and only zero-carbon lithium process and plans to produce battery-grade lithium hydroxide from geothermal brines pumped from wells with a renewable geothermal energy by-product. VUL are currently conducting a definitive feasibility study for their lithium project; this is the final step before commencing construction on the operation. Everything Vulcan touches seems to turn to gold. Recently, we saw their spinoff KNI reach multiples of its offer price after listing. To understand why VUL has been one of, if not the hottest stock on the ASX we first need to make sense of how geothermal energy works.
Geothermal lithium offers a more sustainable and less impactful way of extracting lithium. Geothermal lithium mining has nearly zero environmental impacts and leaves a marginal ground or water footprint. While traditional lithium brines rely on evaporation processes to collect the precious metal, in geothermal plants lithium-rich brine is pumped to the surface from geothermal reservoirs. The heat carried by the brine is used to produce renewable energy and the brine is re-injected in the reservoir. A geothermal plant can not only produce lithium but also produce renewable energy, giving Vulcan two different streams of revenue.
The onset of ESG-focus has changed the way investors allocate capital and has led to the rise of a green premium for lithium amid heightened demand for more environmentally friendly resources. Given VUL’s zero-carbon process they have received a huge premium from the market.
Gec-Co Global Engineering is a consultancy company focused on deep geothermal projects at surface. Gec-Co has a highly credentialed scientific team with 100+ years of combined world-leading expertise in developing geothermal projects, from exploration to production. Motivations are fully aligned: to decarbonize heat and power in Europe with geothermal development in the Upper Rhine Valley in Germany. The acquisition is part of Vulcan’s plans to rapidly grow its development team in Germany and accelerate its Zero Carbon Lithium project towards production
In line with other producers like PLS, VUL will be developing their own processing hub which will add value to their lithium end product. The Central Lithium Plant is intended as a processing hub, processing lithium chloride from multiple combined geothermal and lithium sorption plants into lithium hydroxide. VUL secured a site just outside of Frankfurt with the location allowing for low carbon transport options from their nearby project areas, as well as renewable energy to power the proposed plant, which underpins Vulcan’s commitment to minimising their carbon footprint at each step of their process.
VUL’s Zero Carbon Lithium project is located in Germany, the company owns Europe’s largest JORC-compliant lithium resource. The project is located in what Vulcan describes as the heart of the European lithium-ion battery industry, VUL are looking to address Europe's decarbonisation needs. Europe is the largest growing lithium market in the world and hosts many of the biggest car manufacturers yet they don’t have any local supply of Lithium hydroxide.
Note 2: Based on electric vehicle sales and lithium-ion battery production growth
Source: VUL company filings
VUL is planning to produce 40k tonnes of lithium hydroxide p.a. as well as produce 74MW of renewable electricity. This week VUL signed yet another offtake deal for its hydroxide with Umicore, a leader in cathode materials production used in lithium-ion batteries for electrified transportation. We expect that VUL’s final product will command a premium over market prices due to the environment-conscious nature of the project.
Vulcan’s Zero Carbon Lithium project is arguably the most interesting lithium production plan in the world. Not only will they provide lithium hydroxide for electric vehicles but they will also produce renewable electricity, you can’t get a more net positive mining operation than that, can you?
Their project is also in a convenient location. Being in the heart of Europe gives them the opportunity to benefit from the EU’s growing environmental mandates. VUL is also well funded following their recent cap raise with $331m in cash. This gives them more than enough cash to expand via the acquisition of other projects. They are planning to have operations underway in 2024. Their energy and lithium projects have a post tax NPV of over €2.6bn.
The share price was under $1 in 2020 and is now over $13.50. It is easy to say that the market has priced in the upside for VUL but, given the significance of this project and the rapidly growing thematics they are targeting, at a market cap of $1.6bn who knows where this will be in a few years when they actually start producing lithium hydroxide and renewable energy. VUL also announced they will be dual listing on the Frankfurt exchange, giving them access to European investors; we expect to see a lot of news flow over the next few months. When VUL releases the results of their definitive feasibility study the market will know in more detail the true economics of the project. In the current environment, the market is rewarding companies for sustainable operations and Vulcan’s commitment to minimising their carbon footprint is attracting lots of interest from investors and offtake partners. If they execute their Zero Carbon Lithium operations, they could be a global pioneer in lithium.
Through its applications in electric vehicle batteries and green energy storage, there is no doubt that lithium will be an essential component of the decarbonisation process. The rapid rise in carbon mandates and electric vehicle production has seen demand for the metal rise significantly, sending supply for lithium into a deficit and prices flying as a result. When looking for exposure to lithium, investors have a plethora of opportunities and a lot of junior miners are pivoting their focus to look for lithium deposits. The companies mentioned in this article each have their own merits but most of all they have the resources to become the BHP-equivalent in the lithium production industry alongside our Global Mobility holding and largest lithium producer in the world Albemarle. All the stocks mentioned in the article are developing their mid and downstream capabilities which will enable them to deliver a higher value product. While MIN may not be as enterprising as PLS and VUL, they offer a cheaper entry into lithium exposure hiding behind their not-so-sexy mining services business. As for PLS and VUL, they are both making strategic moves in the industry and have considerable competitive advantages over other players.
Disclaimer: Albemarle (ALB.NYSE) is held as a long position in TAMIM's Global Mobility portfolio. The TAMIM Global Mobility strategy seeks to to capitalise on the ongoing $7 trillion autonomous and electric vehicle revolution.
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