Is Reality Settling into the Lithium Story?
- Noel Ong
- Feb 11, 2024
- 8 min read
As we welcome 2024, one of the most anticipated settling of dust conversation is what is happening with the lithium sector. Is there going to be a resurgence like that of 2019? Is this the end of the lithium rush? Is this the beginning of the process of the balancing of demand and supply?
The past four years can be referred to as the Lithium Years, as there was a significant focus on lithium as a commodity. Investors on the ASX were heavily investing in stocks and taking advantage of the volatility, often without sufficient knowledge. Those who failed to question the technical aspects may have missed out on potential profits.
As the lithium sector began to slow down, an article highlighted that many investors had overlooked the fundamental geological aspects of projects during the lithium bull run. The writer mentioned numerous examples of geology that would not have sustained long-term success, but these concerns were largely ignored.
Consequently, there has been a lot of negative commentary about companies and doubts about the sector's validity. The writer suggests that this is a common occurrence after a period of intense market speculation, similar to the previous three years.
Figure 1: Pilbara Minerals Limited (ASX: PLS) price chart over the last 5 years.
Pilbara Minerals Limited (ASX: PLS) is industry standard if one wants to see the valuation of a lithium mining company. As usual, when one looks at a price chart of a producing business, the chart looks positive. However, when you look at Figure 2, which is a chart of both a hard rock and a brine lithium story, which is largely based on the hype, which has no relevancy to the geology and the factual data of a long term sustainable story, it's a different view.
Figure 2: A common price chart of lithium explorers over the last 5 years. The top chart is one of a brine story and the bottom relates to a hard rock proposition.
As I have been, and am currently involved in ASX companies and am well aware of the promote, I am not pointing fingers at anyone. My point is that there is a need to first understand the geology and then look at the potential of the story. Not all stories will work and not all stories make the first hurdle of discovery.
What I think about the Future for Lithium
During this time of year, it is common to hear predictions that demand will increase after Chinese New Year. While there is some truth to this, the bottleneck and high pricing in the lithium sector are not helping its prospects. In my opinion, the optimistic outlook that was prevalent in the early stages of the lithium journey has significantly diminished for the medium to long term. However, it is worth noting that a future focused on China is likely to have great potential.
My belief in a reduced blue sky perspective stems from the current narrative that the market will witness the emergence of sodium and vanadium batteries in the near future. Although it may take time for the timing and market acceptance to align, there is enough information available to suggest that these power storage solutions will meet the demand. It is undeniable that these new players will have a place in the market.
Figure 3: Illustration of the various electrode structures in sodium-ion batteries (Source: By Jang-Yeon Hwang, Seung-Taek Myung, Yang-Kook Sun, CC BY 3.0, https://commons.wikimedia.org/w/index.php?curid=61410788).
The truth is that the lithium story, like any other story, has taken many years to unfold. It may seem like an overnight success, but it has actually been a long time in the making. Therefore, it is reasonable to assume that the new players in the battery storage market, such as sodium and vanadium variants, will also face a similar reality. However, if lithium prices remain high or rise again, alternative and replacement options will emerge more quickly.
The ultimate factor that will determine the success of these battery storage alternatives is time. However, history has shown that betting against a market driven by China has been a poor choice in the past.
Final Thoughts
The lithium market is a crucial component of our daily lives, much like hydrocarbons. While there is a growing movement to reduce the use of hydrocarbons and plastics, it is important to recognise that completely eliminating them would have severe consequences for our world.
The continuous growth of the electric vehicle (EV) industry serves as a strong indicator that the lithium market is here to stay. However, this growth also means that there will be a consolidation in the industry, leading to the removal of underperforming projects by various ASX companies. As a result, early players with exploration projects in their early stages may face challenges.
Decreasing Lithium Price
The decrease in pricing is likely a result of an excess supply due to concerns about reduced Chinese subsidies, rather than a breakdown in the lithium industry. This is commonly referred to as "destocking" in technical terms, and I believe it holds true in this case. It is important to remember that lithium itself is not rare, but finding economically viable deposits is what is truly rare in all commodities.
The demand for lithium is driven more by the desire to meet unrealistic timelines and the bottleneck in the downstream process. There is a significant disconnect between investors' rush for profits and the actual understanding of the commercial aspects, as evidenced by the stark contrast between how companies present their downstream processes and the reality of the Chinese process.
There is a good interview by Kitco Mining entitled "Lthium supply disappearing - Rodney Hooper on why $1,200 per tonne is a key level of support" with Rodney Hooper. It goes through with great detail the status of the lithium pricing issues.
What Does This All Mean for Investors?
For those investors who may have missed out on the recent surge in the lithium market or have experienced losses along the way, now is a favourable time to reassess certain stocks and position yourself for the next five to ten years.
It is widely acknowledged by credible investors in the media that investing is a marathon, not a sprint, so I won't dwell on that topic. However, I can confidently say that 2024 presents a second opportunity for investment. There are numerous stocks that offer great potential for positioning.
Among the small-cap companies, there are a few that I personally find intriguing and believe are worth considering. Please note that this is not a recommendation to purchase these stocks, but rather an illustration of compelling stories that have already proven their worth or have the potential for success.
👉🏻 Delta Lithium Limited (ASX: DLI)
Delta is one of those stories that have a lot of promise but in a falling market interest, they are going to be facing cash reserve issues. They have a big operation so if they are going to go into a cash-saving mode, it will be interesting.
The share price has taken a battering and I fear it may still have more to go. The project has had some issues and they have been working through it the last couple of years, but with the low pricing, you would have to be cautious on the entry price. For this reason, I think there may be more downsides to come.
What I like is that if there is a resurgence of the price, this will be one of the stories that will reap rewards. In my opinion, this is one of the more promising stories on the market. DYOR is a must and keep them on your watch screen.
👉🏻 St George Mining Limited (ASX: SGQ)
This is a pure greenfield play and as much as I am not bullish on lithium exploration plays, they have a good corporate partner, Shanghai Jayson New Energy Co. Ltd. Shanghai Jayson New Energy is the largest shareholder in the company and I am sure they are looking to consolidate in this space. That means they should have no further funding issues.
This does not mean that they are guaranteed to find an economic lithium resource. However, it may mean that they will have sufficient resources to give their exploration program a better chance of finding the elusive prize.
Their portfolio looks substantial but balancing their funds on the spread of projects will be interesting.
Samso Concluding Comments
I haven't closely followed this sector due to its rapid and intense fluctuations. I felt that there was little time for a proper understanding of projects or technical assessment. Everything was new, including the methods of exploring lithium.
However, I am now interested because the market has re-valued these stocks, making it easier to identify technically attractive options without the distractions of an excessively heated market. I believe that the sector will regain balance, and rational discussions will prevail.
The transition to a decarbonised and electrified world is inevitable. Renewable energy and mining will play a crucial role in shaping our future. The importance of lithium and its associated metals cannot be denied.
I have chosen Delta Lithium and St George as examples because they represent opposite ends of the lithium spectrum in terms of mineral exploration stories. Delta is at the forefront, having made a discovery and now focusing on developing a downstream process. On the other hand, St George is just beginning its exploration journey but is well-funded, which is a significant advantage.
Take your time, make wise choices, and now is a good opportunity to DYOR and enter this space with confidence, knowing that the previously overheated valuations are in the past.
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