More and more junior mining companies are jumping into the lithium space. Here’s what all of the excitement is about, and what investors need to know.
There’s no doubt about it: lithium is booming. Lithium carbonate prices and lithium hydroxide prices are on the rise, and growing demand for lithium-ion batteries is set to boost prices even higher.
In light of that, more and more junior mining companies are jumping into the lithium space, staking claims in Nevada, Quebec and Ontario in a move to get a piece of the action.
That can make things a bit confusing for investors. As Chris Berry of House Mountain Partners and the Disruptive Discoveries Journal said in our lithium outlook 2016, “Like moths to a flame, too many juniors in the space can cloud the true potential of the commodity and confuse investors.”
Moreover, higher lithium prices or not, companies who eventually succeed at developing their projects will need to have a low cost of production in order to be competitive with existing players. Most of the world’s top lithium producers currently operate in Australia, South America and China.
Here’s a look at what’s driving the rush of junior mining companies to the lithium space, and at what investors should keep in mind before entering the space.
Lithium market overview
Lithium, unlike gold or silver, is not a publicly traded commodity, so it can be difficult to get accurate pricing information for lithium products. That said, almost all analysts and market watchers are in agreement that lithium demand is growing faster than lithium supply, and that this trend is pushing prices upward.
As mentioned above, most of that demand growth is coming from the lithium battery sector. “Lithium consumption for batteries has increased significantly in recent years because rechargeable lithium batteries are used extensively in the growing market for portable electronic devices and increasingly are used in electric tools, electric vehicles, and grid storage applications,” states the United States Geological Survey (USGS) in its 2016 report on lithium.
At the same time, there isn’t a ton of new supply coming online. Galaxy Resources (ASX:GXY) recently restarted mining activities at its Mt Cattlin mine in Australia, but Jon Hykawy of Stormcrow Capital argued at this year’s PDAC that a fair few lithium producers and developers will need to succeed in order to keep up with demand.
“That’s a precarious position, having to depend on everyone to get everything right in terms of timing and production and not having any problems occurring year in, year out,” he said. “It hasn’t happened so far, and you can disagree, but it’s probably not going to happen here.”
What does higher demand and a lack of sufficient supply mean for pricing? Joe Lowry of Global Lithium stated in a lithium market update published on March 13, “I am not ready to say a $20/kg price is going to be the long term global “new normal” but I am willing to say the average global price in 2020 will NOT be in single digits in any scenario absent a complete collapse of lithium demand which seems highly unlikely.”
Tough times for mining
While the lithium market has been on a tear, the same can’t be said for the rest of the mining space. 2015 saw the continuation of a long commodities price rout for many metals, with gold prices losing 11 percent and copper prices falling 26 percent to finish the year just above $2 per pound.
The mining sector has started to come back a bit since the start of 2016. Gold prices and copper prices are up 16.62 percent and 6.38 percent respectively, and James West of MidasLetter pointed out last week that plenty of mining stocks are on a tear.
Still, some market watchers, such as Goldman Sachs (NYSE:GS), are hesitant regarding a lasting recovery, and with all of the excitement being generated around lithium by Tesla Motors’ (NASDAQ:TSLA), the lithium market is still looking much more positive than the markets for precious metals or base metals.
Switching to lithium
It’s with that backdrop that a number of mining companies have been shifting towards the lithium sector. This certainly isn’t the first time junior miners and investors have rushed toward a specific commodity, and it won’t be the last. Still, it’s interesting to see the change in action.
In the last week alone, no less than three junior miners have announced their foray into the lithium sector (Benton Capital (TSXV:BTC), Beaufield Resources (TSXV:BFD) and Noram Ventures (TSXV:NRM)), with more flowing into the space in recent months.
In Australia, Tess Ingram of the Sydney Morning Herald points out that “[a]s many as 35 ASX-listed companies have lithium exploration or development plans, with at least a third moving into lithium in the past five months.”
More generally, shares of lithium focused companies are on the rise. Ingram noted that Australia’s Dakota Minerals (ASX:DKO) saw its share price gain 200 percent in December after it announced that it would move away from copper and gold to focus on lithium instead.
Here’s a small sample of other lithium companies that have gained year-to-date:
- Nemaska Lithium (TSXV:NMX); up 163 percent to $1.16
- Pure Energy Minerals (TSXV:PE) up 64.29 percent to $0.92
- Lithium X (TSXV:LIX) up 380 percent to $2.16
- Pilbara Minerals (ASX:PLS) up 95.31 percent to $0.625
Most of these companies have been around for much longer than the current bout of excitement around lithium, but Lithium X was only launched last November.
A lithium bubble?
Certainly, those gains are exciting, but for investors, it’s important to remember to do one’s research and to choose companies with the best chance of truly succeeding. There’s no doubt that lithium demand is increasing. However, not all lithium projects need to be developed and mined in order for that demand to be met.
“I look at lithium the same way I look at the iron ore, graphite or rare earths boom – there are a lot of players that will get involved in it but only a handful of players will get into development or production,” PAC Partners senior analyst Andrew Shearer told the Herald.
For Chris Berry, the lithium market isn’t a bubble, but the focus on higher lithium prices is still misplaced. “While higher prices may harm battery manufacturers (marginally), we don’t see the higher prices providing leverage to miner share prices,” he stated in a note on the market published last Fall. “What matters most is cost of production – especially when competing with an oligopoly.”
With that in mind, here are a few other points to think about:
- It’s not all about Tesla; While Tesla has stoked plenty of excitement around lithium, it’s far from the only end user in the space. There are a number of other lithium-ion battery megafactories going up in the US and in China.
- China is taking up market share; Joe Lowry writes about this extensively. Australian producers supply spodumene concentrate to China based companies, which produce end products such as lithium carbonate and lithium hydroxide. Australian juniors are signing off-take agreements with Chinese producers left-right and center, the latest being Altura Mining (ASX:AJM), which signed a binding offtake with China’s Lionergy this week.
- Mining projects take time to develop; Luke Kissam, CEO of Albemarle (NYSE:ALB) pointed out in an interview with James West of MidasLetter that it took Argentina focused Orocobre (ASX:ORL) nearly ten years from discovering its reserve to ramping up production. Amidst all the excitement, it’s worth remembering that investment in an early stage lithium mining company comes with the same risks as investing in any early stage mining company.
- There are plenty of options; Not all lithium companies have only staked claims in the space. There are plenty that have conducted drill programs, have completed technical reports, or who even have the permits for their mine in hand.
Stay tuned for a list of lithium juniors and developers who have resource estimates for their projects.
Don’t forget to follow us @INN_Resource for real-time news updates!
Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: Galaxy Resources, Nemaska Lithium and Pilbara Minerals are clients of the Investing News Network. This article is not paid for content.