With first production now just seven months away, there remains a huge disconnect between the emerging lithium producer’s market cap and its impending cashflow – but how long can it last? Plus, Rumble Resources joins the red-hot zinc sector
Ken Brinsden is an unflappable sort of guy.
But there was a sense of exasperation from the Pilbara Minerals (ASX:PLS) chief executive earlier in the week on the subject of the apparent disconnect between the market’s treatment of ASX-listed lithium stocks this year and the “absolutely ballistic’’ growth in China’s lithium-ion battery market.
Brinsden is gobsmacked that a basket of ASX lithium stocks (including Pilbara) are down by 12 per cent in the year-to-date against an 18 per cent increase in the China domestic price for battery- grade material.
More than that has been the miserable performance of the ASX lithium stocks compared with the 130 per cent increase for China’s lithium convertors and the 39 per cent gains notched up by the global integrated majors (Albemarle, FMC and SQM).
“The ASX investor base has yet to catch up with what is happening in China, which is just unbelievable. For whatever reason, the ASX has not caught up. But my theory is that it will,’’ Brinsden said.
At the Melbourne leg of an eastern states roadshow put on by Resources Rising Stars, Brinsden offered up some possible reasons for the disconnect.
They went to misinformation in this market about the potential for the lithium-ion boom to be challenged by new battery technologies and the assumption that it will be brine producers of lithium as opposed to Australia’s hard-rock sources that will inherit the lion’s share of the phenomenal growth everybody agrees on.
As for the technology challenge, Brinsden said that it took 30 years for lithium-ion batteries to become the rechargeable battery of choice. Now that it is gaining incumbency, the potential for its dislodgement had to be viewed against the 100 years that lead-acid batteries ruled the roost.
On the competition from brines, Brinsden reckons there are some real porkies being told there on costs and quality. There might have been some truth there when it comes to the less demanding qualities of lithium in its historical applications. But when it comes to the 99.5% purity the battery makers want, it’s hard rock lithium that converts in the one pass to meet the quality demands.
Either way, forecasts of lithium demand having to grow by at least five times over the next 7 or 8 years alone will require a volume response from both brine and hard-rock sources the likes of which is unprecedented stuff in the world of commodities.
Printing cash at Pilgangoora
Now while Brinsden’s explanation of the poor treatment of the ASX-listed lithium stocks – Pilbara itself is down from 50c at the start of the year to 38c – was statesmanlike on behalf of the sector, it was his rundown on what is to come from the group’s Pilgangoora project in the Pilbara that convinced the Melbourne room that while the current disconnect was real, it will not last.
Pilgangoora is now only nine months away from first cash flow and it will land its spodumene concentrate in China – the centre of the world for lithium-ion batteries – for a projected $US208 a tonne, after some handy tantalum credits.
That compares to the $US850-$US900 a tonne it would be receiving today for the material. So it is not far off looking at roughly $US600 a tonne cash margins over 350,000 tonnes of annual spodumene concentrate tonnes in stage one of Pilgangoora.
“Let me tell you, that’s a big number,’’ Brinsden quipped. For a company with a current market capitalisation of $580m, the implied $US210m annual cash margin is indeed a big number. And given it hasn’t happened yet, the market could be forgiven for erring on the conservative side of things in its rating of Pilbara.
But as indicated above, what starts commissioning next March at Pilgangoora is very much a stage-one plan.
Because of the wall of demand Pilbara sees coming from China, and because of the quality and scale of the resource at Pilgangoora, the company is actively considering a stage two expansion to an annual production rate of more than 800,000 tonnes of spodumene concentrate for relatively modest capital expenditure.
“It’s a fantastic opportunity for our company and our shareholders,’’ Brinsden said. On that score, the market could well be forced to start pricing in some of the upside once Pilbara secures offtake deals around the stage two production potential.
Brinsden hinted that there was news to come around offtake positions for a stage two development in the pipeline.
Talking about things ballistic, zinc is now up close to 50% on last year’s average, making anything zinc hot-to-trot.
While the obvious names have been notching up big gains on zinc’s run to 10-year highs, a little thing called Rumble Resources (RTR) is gaining attention on the strength of its Braeside project in the east Pilbara, about 140km east of the appropriately hotter-than-hot Marble Bar.
Trading at 4c for a market cap of $11m, Rumble has taken a systematic approach to unlocking the broader potential of Braeside, an historic lead-silver-zinc producer from the small-scale Ragged Hills mine from 1901 to 1959.
The systematic approach – it will lead to drilling of priority targets by the end of the year – should be expected given the appointment in November last year to the board as technical director of Brett Keillor.
A seasoned geologist, Keillor was most recently chief geologist for Independence (ASX: IGO) from 2002 to 2015 and remains a consultant to the group.
Discoveries he has been involved in over the years include the Marymia gold deposit (1987), the Plutonic gold deposit (1994) and the Tropicana gold deposit for IGO. He has twice received AMEC’s “Prospector of the Year” award.
Apart from Ragged Hills, Braeside is home to multiple high-grade zinc, lead, copper and silver occurrences associated within a major fault zone within volcanic rocks over a strike length of some 60km.
It is devoid of the sort of modern day exploration techniques Keillor has brought to the hunt. The hope is that Rumble is on to a previously overlooked camp containing multiple volcanogenic massive sulphide deposits.
Perhaps there will be a re-rating of the stock as the company gets closer to production as well as once the cash flows start rolling in. It would be worth adding that his comments on the lithium brine producers could not go unchallenged - they will work to bring down their costs, improve productivity and margins. It is becoming a crowded market for investors whether it's Galaxy, Orocobre, MinRes, PLS or its next-door neighbour Altura and other aspirants. The same happened in iron ore !