Introducing the Graphite Kid

The Electric Vehicle (EV) metal theme has performed particularly well over the last four months in spite of the prevailing mood of doom and gloom in this bear market. Here we review the performance of our Magnificent Seven Electric Vehicle metals basket.

We also point out one obvious omission on our part - the graphite market.

An update seems in order.

We rebalance our model portfolio back to equal weight, to capture an anticipated reversion to value, and highlight one stock for the watchlist to cover graphite.

That stock is Syrah Resources a.k.a. The Graphite Kid.

Alongside the Magnificent Seven, our EV Metals Posse is now complete.

Enter the (Un)Hateful Eight...

The Opportunity

Previously, we selected a basket of seven profitable ASX-listed companies producing electric vehicle metals:

• Lithium (Li)
• Nickel (Ni)
• Cobalt (Co)
• Manganese (Mn)
• Rare Earth Metals (REE)

These figure prominently in the battery systems and drive trains of electric vehicles. They also appear in key national lists of critical metals due to the risk of future supply disruption.

The recommended basket of stocks comprised:

• South32 S32.AX (Ni, Co, Mn)
• Nickel Industries NIC.AX (Ni)
• IGO IGO.AX (Li, Ni, Co)
• Allkem AKE.AX (Li)
• Pilbara Minerals PLS.AX (Li)
• Lynas LYC.AX (REE)
• Iluka Resources ILU.AX (REE, Zr, Ti)

In our original note, dated 5-Jul-2022, we excluded consideration of graphite. In this follow-up, we give the portfolio total return of the original model.

Model Portfolio Performance

Our initial research note reported the background to the electric vehicle usage of critical minerals, and some of the key government policy initiatives that are designed to accelerate the development of minerals processing for an integrated supply chain. We came up with a list of around 50 ASX-listed companies. The total return of the top 20 is shown in Exhibit 1, with the “Magnificent Seven” selections marked in orange. Evidently, Pilbara Minerals topped the list with a return of 127.9% over the period to date.

However, it is noteworthy that most of the positive price action was concentrated in those stocks that have major positions in lithium. Nickel stocks such as Nickel Industries did poorly over this period, as did rare earth majors Lynas Rare Earths and Iluka Resources. In contrast, Syrah Resources performed very well in a growing interest in graphite. Overall, the performance was better in small-cap names.

On an equal weight basis, the model portfolio of seven electric vehicle metal stocks returned 29.95% versus the S&P/ASX 200 benchmark at 5.92% and the S&P/ASX 300 resources benchmark at 9.20%. The outperformance was +24.03% versus the larger capitalisation market index, and +20.75% versus the top 300 resources index. On an equal weight basis, the top 20 stocks in our universe returned 37.60%.

Evidently, the market has been favouring smaller capitalisation names. Furthermore, since we chose to focus on the larger profitable names, the market moves gave preference to speculative early-stage companies. This is in keeping with the hot state of the lithium market, with commodity prices have continued to set new records. The Pilbara Minerals earnings result was a blow-out, which helps explain why the lithium sector has had such a great run.

Rebalancing the Model Portfolio

The tables are shown in Exhibit 3 and Exhibit 4 update the full universe of stocks with current data, as of the close of business on 4-Nov-2022. We note that our original seven selections remain among the more profitable larger capitalisation firms and are still on modest forward earnings multiples. We see no reason to modify the selections but note that the lithium stocks have run much harder than others.

Since the global market remains uncertain, it seems wise to take some profits in those stocks which have run the hardest and rebalance into the laggards.

Specifically, we recommend moving all selections back to an equal weight basis. This involves taking some profit from Pilbara Minerals Ltd, IGO Ltd and Allkem Ltd, to take them back to equal weight. The net buys are Nickel Industries Ltd, Lynas Rare Earths Ltd, South32 Ltd and Iluka Resources Ltd. Our expectation is for some reversion of the run-up as investors return to bargain hunting once the fear factor on China subsides. Down the track, we think it makes sense to add graphite exposure, but the recent run in Syrah Resources Ltd has been sharp, and we prefer to wait for a possible correction.

Nonetheless, demand for graphite to provide anode materials for EV batteries looks set to explode. We will research this market in greater detail on our next outing.

In the meantime, Syrah Resources Ltd has made a bid to join our EV Posse.

All hail the sharp-shooting Graphite Kid!

The full report is available for download at the button below.

Image Credit: Val Kilmer as Doc Holliday in Tombstone.

Late addition: Do have a look at the excellent piece by Barry FitzGerald on the resurgence of graphite pricing in his Friday article: Rising graphite prices could be the start of a strong recovery. It is both keenly observed and timely in respect of our mention of Syrah Resources.

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