Is it too late to buy battery metal stocks?

David Thornton

Livewire Markets

What do you get when you mix an energy crisis, underinvestment in old energy, and global net-zero targets? 

Answer: demand for battery metals and the stocks that ride it. In market parlance, we're talking a 20% compound annual growth rate that is tipped to last until 2030. 

These stocks can be as volatile as they are exciting. They went gangbusters early in the year, but have been swept up in the market sell off since. But don't let that dissuade you - just about every stock mentioned below is in the green over a 12 month period. Further still, they make up a long-term term trend towards electrification that is here to stay. 

Last week James Gerrish from Market Matters hosted a webinar with Peter O’Connor and Michael Clark, two leading analysts in the space from Shaw & Partners, where they discussed all the nuances surrounding battery metals and how to make money from them via ASX listed stocks. 

Read on for the key takeaways on:

  • the outlook for battery metals, 
  • a checklist for picking battery metal stocks; and
  • the big and small cap stocks that look the goods. 

An industry in transition

The current energy crisis is partly due to the mismatch between the future and the past. There is a global focus on achieving net-zero, but this has come at the expense of the legacy power sources the global energy grid is built on. 

"We're in an energy crisis because there's been underinvestment in old energy for the past ten years" says Clark. 

"Energy is about 15% as a cost to GDP, and it's usually 5-6%. That's the highest it has ever been"

Indeed the fragility of the global power grid is playing out in front of our eyes in Europe. 

"Europe has been importing 60% of its gas, and a third of its gas imports are from Russia. And now they're trying to work out how to wean off Russian supply."

It's going to be hard to invest in old energy, while new energy is going to be incentivised into the market sooner.

"At the moment about 22% of energy systems are electric, and all net-zero scenarios you see about 40% of energy systems being electrified."

Of course batteries are at the centre of an electric future. And when people think batteries, they think lithium. But the ecosystem around electrification is much broader than this.

"Lithium and graphite have been the stars of the last 5-7 years, but battery chemistry requires other metals as well - nickel, cobalt, manganese, zinc," says O'Connor.

Electric motors which require rare earth elements, while high capacity distribution grids require aluminium and copper. 

This cycle isn't over

The metals and mining space is a cyclical industry, but it can be a hard read at the best of times.

"Within the last 7 years, we've seen the big run in graphite stocks. And we've seen the lithium cycle twofold - 2015 to late 2017 and late 2020 to a month ago," says O'Connor. 

We're in a broad upward channel in terms of the demand growth for these commodities, but O'Connor believes that equities will continue to print fresh new highs and higher lows. 

"Think about it as cycles within cycles. This cycle is not over."

These markets have opaque pricing, to say the least. 

"Lithium, graphite and rare earths markets we're talking about today aren't commodity markets, they're product markets," says O'Connor.  

"They're very niche and there's not a specific price print, so understanding where we are in the cycle is quite difficult."

Ultimately, pricing over the long term will be based on demand, and higher prices will incentivise demand.   

A 5-point checklist for picking battery metals stocks

O'Connor likes to apply a 5-point rule of thumb when picking battery metal stocks he thinks are worth more detailed research. 

They must have:

  1. found land with something to mine;
  2. access to markets with a willing buyer;
  3. a favourable regulatory backdrop;
  4. financing or the ability to get it; and
  5. trustworthy management. 

O'Connor points to Pilbara Minerals (ASX: PLS) as a stock that ticks all these boxes.

"It has a product in the ground, it has access to a market and the infrastructure to get there, and it has the people to do it," he says. 

"And they're trading at a deeper discount to their valuation than they have in almost two years."

The 'deal of the decade' and surging small caps

At the bigger end of the market, O'Connor likes Iluka Resources (ASX: ILU), IGO Limited (ASX: IGO), Pilbara Minerals (PLS), Allkem (ASX: ALK), Mineral Resources (ASX: MIN), and  Lynus (ASX: LYC) - all companies related to this transition.

While these stocks have surged over the past 12 months, there is still significant value to be had. 

"IGO signed the deal of the decade December 2020 - they announced they were getting into lithium at the bottom of the price cycle almost to the day," says O'Connor. 

"They're now a future-facing green energy company. They've shown a track record in terms of acquiring and investing. It's now closest to fair value that it's been for two years."

"We think IGO is a buy at these levels," adds Gerrish. 

ASX behemoth Rio Tinto (ASX: RIO), meanwhile, may be the battery-powered gorilla in the space. 

"The market needs Rio Tinto to make this market balance," says O'Connor. 

They have two opportunities - the Jadar lithium mine in western Serbia, and a mine in Argentina's so-called "lithium triangle" which it just acquired from Rincon Mining for $1.1 billion. 

Still, it's the smaller end of town that has seen the most prolific price jumps.  

Here, Clark puts Global Lithium Resources (ASX: GL1) and Liontown Resources (ASX: LTR) on the table, two potential hard rock lithium producers in Western Australia.

Then there are the binary boom or bust plays that will have investors jumping for joy or wallowing with heads in hands. 

"Another company we cover is Lepidico (ASX: LPD), who generates lithium from micro minerals, and we have a 6-cent price target on them. They're looking to make a final investment decision on a project in Abu Dhabi, and if it works it will be a new low-cost source of lithium." 

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1 contributor mentioned

David Thornton
Content Editor
Livewire Markets

David is a content editor at Livewire Markets. He currently hosts The Rules of Investing, a half our podcast where he sits down with leading experts across equities, fixed income and macro.

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