Lithium prices and current state of the market

The main demand driver for battery metals is what happens in the EV industry, which had a stellar year in 2021 — sales of EVs doubled last year, with most of the increase coming from Europe and China.

“2021 was the year when EVs finally took off; they became an important player in the market,” Felipe Munoz of JATO told the Investing News Network (INN) in an interview.

“In 2022, in Europe, electric cars are going to outsell diesel ones,” Munoz said. “In 2021, global pure electric car sales reached around 4.6 million — in 2022, that number could be easily doubled.”

Given those numbers, it is clear why interest in lithium keeps rising — analysts agree that demand for the raw material could triple by 2025. In the nearer term, Benchmark Mineral Intelligence is forecasting that the lithium market might be in deficit this year, which could impact output from the EV industry.

“We expect growth in supply to be outpaced by demand growth in 2022, which should provide beneficial pricing to the majority of current lithium producers,” the firm's George Miller told INN.

While sector analysts keep forecasting rising future demand for EVs, as well as other battery end uses, the disconnect between lithium prices and lithium junior valuations continues to exacerbate ― and "it is hard to justify," Paola Rojas of Synergy Resource Capital told INN.

“But then, it’s times like these when you find gems,” she said. “To me, it’s still a great time to find high-quality exploration opportunities at a discount.”

Last year, many lithium stocks saw share price jumps due to favorable market conditions, with companies listed in Canada, the US and Australia gaining. But market uncertainty has been escalating, hitting stocks in every sector.

“We believe lithium equities will follow lithium prices,” Rodney Hooper of RK Equity said about the situation. “We've seen lithium spot prices double in the past two months, while lithium equities have fallen 20 to 30 percent on broader global political and economic issues.”

Moreover, Russia's recent invasion of Ukraine has also shaken the markets, increasing volatility and making it more difficult to forecast when a correction could take place.

“Even if volatility increases in the short term, we’ll continue to see opportunity in years to come,” Rojas said. She has believed in lithium since it first came on her radar in 2008, and today she is even more bullish on the sector.

“A lot of prerequisites for the sector to ‘take the lift,’ as we say in sailing, have already come and become mainstream,” she said. “The question is no longer, ‘Will this happen?’ but ‘How big will this be?’ ― and I’m convinced the answer is ‘world-changing.’”

Lithium supply is forecast to increase to 636,000 tonnes of lithium carbonate equivalent in 2022, up from an estimated 497,000 tonnes in 2021, but demand will overshadow that number, reaching 641,000 tonnes from an estimated 504,000 tonnes, according to data from S&P Global Market Intelligence.

As original equipment manufacturers and other downstream customers have not secured sufficient upstream battery-grade supply to meet EV sales targets, RK Equity expects a lot of merger and acquisition activity in 2022.

“Junior miners that can be in production between 2023 and 2025 that are fairly priced will be targets,” Hooper said. “Investors can still find selective value in those juniors.”

Strategies for investing in lithium stocks

With positive momentum behind it, the lithium market is attracting new investors with questions about evaluating stocks. Despite the price rebound seen in the two past years, Rojas said her strategy when looking at lithium projects hasn’t changed much in recent years.

“(I) invest in promising early stage opportunities in jurisdictions that make sense for the commodity, and that I personally understand,” Rojas said.

She also periodically monitors and then holds "winners" for at least five to seven years to allow them to realize their potential, a strategy Rojas said is not ideal for day or swing traders.

“As our conviction names mature, I keep an eye on other players and make some opportunistic additions in lithium, but also in complementary (sectors like) copper, cobalt, zinc, as well as other links in the value chain, such as solar, and ‘adjacents,’ like semiconductors,” she added.

Looking back at where the lithium market was just a couple of years ago, Hooper said that in early 2020, “everything and anything” was cheap. What's changed since then for the RK Equity partner is that investors can't just buy anything and would be wise to avoid companies priced to perfection.

“Today some shares sit at higher, perhaps demanding valuations,” he said. “My preference is for conventional flow sheet projects that are likely to be permitted, built and in production by 2025 that still trade at levels that imply a low long-term lithium chemical or spodumene price.”

A key factor that remains true for lithium juniors (and for any resource junior) is knowing and supporting the people behind the project — the management team.

“Do you 'back the jockey'?” Hooper asked. “Junior mining companies are cash hungry, and you need credible people at the helm that will inspire investors to fund project development.”

Red flags and cutting through the noise in lithium

When looking at companies, Rojas shared with INN what she calls her "is this a lifestyle company?" check.

“A lifestyle company to me is a small-/micro-cap publicly listed entity that creates very little wealth to the bulk of their investors, aside from insiders employed in the operation,” she said. “And while doing that, it destroys the confidence of retail investors and gives the sector a bad reputation.”

She added that most have market caps under $10 million, but some go as high as $25 million to $35 million.

Some of the points Rojas considers red flags for lifestyle companies include if the company has entered and exited more than two countries over the last five years.

"(If the company) exclusively buys projects on three to five year option agreements with large payouts at the end, with no meaningful generative exploration efforts to add 100 percent owned assets to their portfolio, this means they retain zero value if/when they exit," she explained.

It can also be problematic if a company is constantly raising capital to drill. “(If) they usually have decent access to capital, seemingly rushing exploration efforts — instead of being more strategic and combining other exploration methods — and diluting investors more than what is sensible," Rojas noted.

The reason she calls these entities “lifestyle companies” is because these are the types of companies that do it all over again once a "cycle" is over, “most typically with the same name and always with the same team.”

Finally, if the company has had no discoveries, progress or real growth — measured by enterprise value — in the last five to 10 years, that is another factor she considers a red flag.

Evaluating lithium projects and gauging potential

Aside from selecting companies with the right management team and paying attention to other key factors, having an understanding of the assets they hold and intend to develop is essential.

When asked about how she chooses lithium projects, Rojas said she prefers brine projects due to her experience, but she is also interested in hard-rock assets.

Aside from deposit type, Rojas looks at grades above 500 milligrams per liter in brine with low impurities, and 1 percent in spodumene (ore), ideally with known deposits in the vicinity.

“Going a step further, even when early, it is important to understand what management’s preliminary plans for extraction are,” Rojas said. “Although evaporation ponds have been a workhorse and are commonly used, I’m excited to see what direct lithium extraction can bring.”

There are some deal breakers for Rojas when assessing lithium projects.

“I prefer to stay away from low grades — although new technologies will close the gap soon, I believe, and there are alternatives such as resins and direct lithium extraction variants, which potentially can make a big difference there, so I’m keeping an eye,” she said.

In terms of jurisdiction, she avoids anything outside of Australia, Argentina, Chile, Brazil, the US and Canada.

Meanwhile, for Hooper, key factors to stay away from in lithium projects are unrealistic timelines and production volumes from unproven flowsheets.

Lithium companies to watch

Commenting on the stocks she is currently following closely, Rojas said that most of the opportunities she sees now are within relatively newer players.

“Most of the firms established in 2015 to 2017 have gains already priced in, and must be evaluated with different eyes and valued a couple of steps up the ladder — and less risk, of course,” she said.

Some of the firms she's following are Lake Resources (ASX:LKE,OTCQB:LLKKF), Millennial Lithium — recently acquired by Lithium Americas (NYSE:LAC,TSX:LAC) — and Galan Lithium (ASX:GLN).