Battery metals poised for another big year in 2021

Hue Frame

Frame Funds Management

At the beginning of the year, we identified rare earth elements and battery metals as a key theme in our article “2020 Investment Themes & Opportunities”. The reasoning at the time was based on increased investor exuberance behind Tesla Inc. and the electric vehicle market generally, which would lead to demand increases further down the supply chain.

At the time of writing we said the theme required further evidence to suggest the demand turnaround and subsequent share price increases were sustainable. We provided an update on this theme in June “Rare earth elements update”, in which we noted the medium-term trend was turning and our theme was beginning to play out.

Update on Battery Material Companies

In the battery metal miner/producer space, Galaxy Resources (GXY), Syrah Resources (SYR) and Pilbara Minerals (PLS) are up 100%, 47% and 119% respectively year to date*. They have not only recaptured COVID-19 induced losses but by far exceeded them. However, this only tells part of the story, as it ignores the significant moves these companies have experienced in the second half of the year. Since the publication of our June update, they have gained 156%, 143%, 154% respectively.

In the rare earth element space, Lynas Corporation (LYC) is up 58% year to date and 74% from June. This aggressive price action can be attributed to a variety of factors, notably, a global economic policy push towards electric vehicles, increased global demand for the underlying commodities due to strong Chinese and European sales, investor short covering and geopolitical changes.

Governmental Support

There has been a continuation of the global push towards electric vehicles (EV) in recent months. British Prime Minister Boris Johnson has announced the UK will ban the sale of new internal combustion powered vehicles by 2030, with the EU reportedly considering a ban in 2025. These decisions have made Europe the world’s largest EV market, with European EV sales exceeding Chinese EV sales in the first half of 2020 (Bloomberg).

Joe Biden’s victory in the US Presidential Election is also a win for renewable energy and electric vehicles. He has promised $2 trillion in spending over the next decade to fight climate change, with a large portion of the investment focusing on the transition to electric transportation. These developments have been key contributors to the performance of the battery metal mining and producing companies over the last month.


Global Demand

As the above policies come into effect, it is expected there will be a demand driven increase in nickel, lithium and graphite prices. We have begun to see this already, with Nickel currently trading near 12-month highs.

PLS have stated that they believe the EV market will be dominated by lithium-ion batteries using high nickel cathodes and expect to see both nickel and lithium hydroxide demand increase commensurately. A global lithium demand surge is similarly being promised by GXY. SYR have touted the 69% year on year increase in EV sales as the key driver behind the uptick in natural graphite demand.

Short Covering

The covering of short interest has also contributed to the aggressive price increases in these companies. Year to date, GXY, SYR and PLS have seen their short interest decline markedly year to date.

As the battery metal turnaround theme developed throughout the year, investors have been forced to cover short positions to avoid further losses (as the price rises they must buy the stock on the market to cover their short positions). This forced buying has accelerated the price movements in these businesses (GXY, for example, has increased 45% month to date*).

Geopolitical Changes

Global tensions with China have escalated in 2020. Many countries including the United States and Europe have decided to decrease reliance on China for their critical mineral supply. To do this, they must look at sourcing these critical minerals elsewhere. Graphite, for example, has been declared a “strategic critical mineral” in the USA, EU and Japan, as the global anode supply chain is 100% reliant on China. A move away from China would see SYR (who have a graphite anode production plant in the USA) be a major beneficiary. LYC has signed a preliminary contract with the US Department of Defence to begin initial design work for a rare earth separation facility in Texas. They have also noted a strong appetite for separated heavy rare earth metals outside of China.

What to expect now?

With price rises as aggressive and significant as the ones we have seen this month, we would naturally expect to see a period of healthy consolidation. All companies that we are analysing are trading well above their 200, 100 and 60 period daily moving averages.

Their relative strength indicators (RSI) are all signaling that these companies are in an ‘extreme overbought’ state, so are overdue for a pull back.

Ideally, we would like to see prices stabilise and the 200 & 100 period daily moving averages ‘catch up’ over the next quarter. Our expectations are that this theme will be picked up as a major theme for 2021 by most global investment houses, which should provide a wider investor base to support this investment theme moving forward.

* As at 25/11/20

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This information is prepared by Frame Funds Management Pty Ltd (ACN 608 862 442) (Frame Funds, we or us) is a Corporate Authorised Representative (CAR No. 123 9068) of Primary Securities Limited (ACN 089 812 812 635) and is intended only for "wholesale clients" within the meaning of sections 761G and 761GA of the Corporations Act 2001 (Cth). This material is not intended to constitute advertising or advice (including legal, tax or investment advice) of any kind. These materials are not to be distributed to any person who does not qualify as a wholesale client and must not be copied, reproduced, published, disclosed or passed to any other person at any time without the prior written consent of Frame Funds. Primary Securities Ltd (ACN 089 812 635 635, AFSL 224 107) is the Trustee of, and issuer of units in, the Frame Futures Fund (Fund). In deciding whether to acquire, or to continue to hold, units in the Fund please read the current Information Memorandum available from Frame Funds. Past performance of the Fund is not a reliable indicator of future performance. The value of an investment in the Fund may rise or fall. Returns are not guaranteed by any person. Total returns are calculated before tax and after ongoing management costs. In preparing this information, we have not considered your investment objectives, financial situation or personal circumstances and therefore the Fund may not be suitable for you. Neither Frame Funds, Primary Securities Ltd, nor any of their respective related parties, directors or employees, make any representation or warranty as to the accuracy, completeness, reasonableness or reliability of the information contained in this publication or accept liability or responsibility for any losses, whether direct, indirect or consequential, relating to, or arising from, the use or reliance on any part of this material. Any rates of return, forecasts or estimates contained in this publication are not guaranteed. The content of this publication is current as at the date of its publication and is subject to change at any time. It does not reflect any events or changes in circumstances occurring after the date of publication.

Hue Frame
Founder & Portfolio Manager
Frame Funds Management

Hue Frame is the founder of Frame Funds Management and Portfolio Manager for the Frame Futures Fund and Co-Portfolio of the Frame Long Short Australian Equity Fund.

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