Short term pain, long term gain for the battery metals market

Tim Boreham

Independent Investment Research

This week’s unfounded rumours of a Tesla takeover of listed battery group Novonix aside, the market for the so-called battery metals of graphite, lithium and cobalt needs a decent jump start.

“Everyone’s in the toilet at the moment,” says industry veteran Mark Thompson, the CEO of graphite hopeful Talga Resources (TLG).

Take lithium, which has been affected by oversupply emanating from Australian hard rock miners.

Cobalt, another key component of lithium ion batteries, halved in value last year amid stockpiling shenanigans.

Then there’s Talga’s metal of choice, graphite. The first of the battery commodities to pop, the value of the carboniferous material has been impacted by the ramping up of production by industry big daddy Syrah Resources (SYR), at its massive Balama project in Mozambique.

Balama was successfully commissioned, which is great, but it then flooded the market for the industrial-grade material. Citing the uncertainty created by the coronavirus, Syrah suspended Balama production in late March.

Thompson says the price declines have led to the perception that demand from the battery users – notably the electric vehicle (EV) industry – has stalled like a Beetle on an incline.

“The direction for battery demand is firmly on the up,” he says. “A lot of these commodities were coming off speculative bubbles, which was quite distorting.”

When it comes to graphite, it’s not a case of a “one size fits all” material like, say Hamersley iron ore.

Talga’s line is that while Syrah churns out larger flake industrial material, the battery makers require finely ground anodes -- and it’s not just a matter of crushing it more finely.

Talga is in the process of developing its Vittangi mine in northern Sweden, acquired from Canadian giant Teck Resources in 2012 as part of a parcel of Swedish tenements for under $1 million.

By all accounts, it’s a nice resource: one wag at the time suggested that Talga didn’t just lap up the crumbs from the big boys, but the whole loaf.

But the greater Talga story lies in a nearby processing plant to produce the material to the specs demanded by the battery makers and – increasingly – the car makers themselves.

The EV market is more a case of idling at the COVID-19 red light rather than stalling. Driven by government emissions laws and consumer choice, Europe is the world’s fastest growing EV market outside of China.

“It doesn’t matter that your personal opinion is that (climate change) is all bulldust. Enough governments are legislating it that it must happen,” Thompson says.

Batteries account for half of the emissions of building an EV. Thus, the added eco appeal for the car makers lie with the ability of Talga to deliver the finished material at their doorstep rather than from Chinese suppliers who use oil in the refinement process.

Talga increasingly is dealing directly with the car makers, who are tough negotiators but make for stable long term customers.

“They have demanding processes and demanding prices. If you want to go automotive you need to go bigger lower price and bigger volume.’

Costed at $US180 million over two stages, Talga’s project is predicated on output of 19,000 tonnes of anode a year, enough to create 19 gigawatts a year of battery power.

As a rule of thumb, 1GW of battery capacity needs 1000 tonnes of graphite

The company estimates Europe will need 400GW of battery power – and 400,000 tonnes of anode – by 2028.

Jervois Resources (JRV)

Jervois chief Bryce Crocker observes that the amount of time resource juniors devote to talking up the potential of their favorite commodity is usually inversely proportionate to the quality of their asset.

As with Talga’s Thompson and graphite, he’s not going to give a “warm fuzzy” message about the short-term outlook for cobalt (another crucial battery material).

“I have never seen a physical supply environment like this where you have essentially seen a collapse in demand on an unprecedented scale,” he says.

Demand from Chinese auto makers plunged 80 per cent in the March quarter, while western world demand has roughly halved.

“There a massive disconnection in physical commodity markets which is nothing short of profound.”

But the biggest influence on the cobalt market is the reality that 75 per cent of supply emanates from the Democratic Republic of Congo (DRC) - which is not so democratic and altogether unpleasant.

The output is also controlled by Chinese intermediaries.

The unstable dynamics of the DRC means that western countries – especially the US – are keen on diversifying supply of the metal, which is used not just in batteries but in alloys for jet-engine turbines and oil and gas and petrochemical purposes.

As luck would have it, Jervois is developing its self-descriptive Idaho Cobalt Operations in the potato growing state, a four hour drive from the capital of Boise.

At 5 million tonnes the resource is small by the standards of the 50-150mt DRC monster deposits, but the grades are good and the project is fully permitted and well served by infrastructure.

Crocker says Jervois is benefiting from the $US100 million invested by the former owner, including $US15-20m on environmental management systems.

He’s coy about reports he’s been hobnobbing with heavies of the US Administration in view of streamlining the project and creating much-needed jobs.

“We operate differently to many other juniors, when we sit down with presidents we don’t take photos and put them on Twitter.”

Aw come on, just one Selfie …

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Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.

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Tim Boreham
Tim Boreham
Editor of New Criterion
Independent Investment Research

Many readers will remember Boreham as author of the Criterion column in The Australian newspaper, for well over a decade. He also has more than three decades’ experience of business reporting across three major publications.

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