Australia's mining resurgence and 4 companies the brokers like

It’s no secret that lithium is big news from an economic perspective (and an investment perspective). That speccy lithium miner you’ve never heard of today could be tomorrow’s equivalent of BHP if they’ve mapped their surveys right. The big names of mining are also extending their production to cover lithium, through selective acquisitions and joint ventures.

While lithium prices took a hit in the early parts of the year, the metal's run is far from over and once again, Australia is set to take part in a resources boom. How convenient that this should occur at a time when the globe is working to reduce dependence on coal.

The future is lithium

Lithium is a critical mineral in the green transition for battery technology. While there is some testing with varying success for sodium-ion batteries, at this stage, lithium batteries still stand as the most reliable and effective power sources and are likely to remain dominant for many years.

According to a recent report by McKinsey & Company, current global lithium demand is forecast to rise 20% annually by 2030 to a total 3.06 million metric tonnes of lithium carbonate equivalent (LCE). 

It anticipates demand for lithium hydroxide to significantly outstrip lithium carbonate (though there will still remain high demand for that too.

Lithium demand over the next 10 years. Source: McKinsey & Company

A quick side note on spodumene, lithium hydroxide and lithium carbonate

Lithium aficionados would be well aware of spodumene’s role but for the uninitiated, spodumene is the base material for lithium.

Lithium carbonate is prepared by a reaction between sulphuric acid and spodumene, before adding sodium carbonate. It is then dried to prepare lithium carbonate. It is lower cost to produce.

Lithium hydroxide is prepared by a reaction between lithium carbonate with calcium hydroxide. It can also be made by “roasting” spodumene and calcium hydroxide. It’s a more expensive process.

While both are well-known for use in batteries, lithium hydroxide is preferred by many battery manufacturers because it decomposes at a lower temperature compared to lithium carbonate and increases the performance of the battery.

It’s worth noting though that lithium carbonate still has uses beyond battery technology so is unlikely to become obsolete in favour of lithium hydroxide. Lithium carbonate is used in medications, such as for bipolar medication, and for industrial purposes such as in ceramic glazes and cement densifier.

And where does the Australian economy come into this?

Australia holds the second largest lithium ore reserves in the world. That’s right, being resource-rich once again has come in handy for us. Australia is also the largest producer of spodumene.

In the same report mentioned earlier, McKinsey and Company suggested that the lithium hydroxide market alone could generate up to US$10 billion per year in additional revenue for market participants by 2030. 

It doesn’t take much to see what this could mean not only for the Australian economy but also for those mining companies racing to take part.

Australia has only just started to dip its toes into lithium hydroxide refining, with two large global miners operating in Australia investing in refineries through joint ventures. These include Tianqi (SZ: 002466) with IGO Limited (ASX: IGO), and Albemarle (NASDAQ: ALB) with Mineral Resources (ASX: MIN). That said, McKinsey and Company suggest that Australian refineries could be responsible for refining 234 kilotons of LCE of lithium hydroxide annually by 2030. Aside from the prices companies would receive for this, it’s also worth pointing to the added benefits to the Australian economy in terms of construction for additional refineries, along with employment in the refineries.

Where the brokers are looking

Given the market potential, it’s hardly a surprise that vocal green transition advocate and investor Macquarie have outperform ratings on all bar one of the 20 lithium and rare earths companies it covers. But, the investment bank doesn’t view the opportunities equally and has preferences depending on where a company’s lithium focus relates to.

Its preferred lithium producer is Pilbara Minerals (ASX: PLS) while it nominates Patriot Battery Metals (ASX: PMT) as the explorer offering the greatest near-term upside.

Pilbara Minerals

One year prices for Pilbara Minerals. Source: Market Index, 31 July 2023.

Pilbara Minerals is an emerging lithium and tantalum producer focused on its project in the Pilbara region of Western Australia. It recently posted stronger than expected production, shipments and operating costs for the June 2023 quarter, despite the challenges from falling lithium prices. It is up 75.09% on a one-year basis, while trading on a low P/E of 8.71 as at 31 July 2023. Market Index’s broker consensus tool ranks the company as a buy averaged across 21 brokers.

Goldman Sachs also holds an OUTPERFORM rating on Pilbara Minerals, while Citi has a BUY.

Patriot Battery Metals

One year prices for Patriot Battery Metals. Source: Market Index, 31 July 2023

Patriot Battery Metals is a mineral exploration company focused on acquisition and development of projects for battery, base and precious metals located in Canada and the USA. It recently posted highly positive drill program results at its Corvette CV5, with initial resource set to be released in coming weeks. Market Index’s broker consensus tool ranks the company as a strong buy averaged across 11 broker reports.

Macquarie also views Allkem (ASX: AKE) and Liontown (ASX: LTR) as good value options.

Allkem

One year prices for Allkem. Source: Market Index, 31 July 2023

Allkem is a lithium carbonate supplier and producer of boron. It is in the process of merging with US-based Livent Corp (NASDAQ: LTHM) in an effort to create the world’s third-largest lithium producer by 2027. Market Index’s broker consensus tool ranks the company as a BUY across 25 broker reports.

Goldman Sachs holds a BUY rating on Allkem, as does Bell Potter.

Liontown Resources

One year prices for Liontown Resources. Source: Market Index, 31 July 2023

Liontown Resources is an exploration company and tier-one battery minerals producer focused on development and supply with two major lithium deposits in Western Australia. It recently entered into an option agreement with Mila Resources and Trans Pacific Energy to explore for lithium at the Kathleen Valley project in Western Australia. Under the agreement, Liontown has the option to buy up to 80% of the lithium rights from Mila Resources and Trans Pacific Energy. Liontown has also fended off three takeover offers from Albemarle (NYSE: ALB) this year.

Market Index’s broker consensus tool ranks the company as a buy across 14 broker reports.

Liontown is also rated a SPECULATIVE BUY at Bell Potter.

This article was first published for Livewire Markets on Monday, 31 July 2023.