Pilbara Minerals Limited ( ASX: PLS) - Whats the Issue with Lithium?

Pilbara Minerals Limited ( ASX: PLS) - Whats the Issue with Lithium?

Pilbara Minerals Limited ( ASX: PLS) was the flag bearer of the lithium rush.  In 2018, this rush took a backward step and there are now many unhappy shareholders.  I remember in 2017, the market could not get enough of the commodity. Then the Cobalt hype came in, and that made the market super hot.  After all the commotion, there is a reason why the market has gone into hibernation, and I don’t think its got anything to do with a lack of demand.

I would describe the latest woes in lithium pricing as a hangover that had to happen. In the run-up to the end of 2017, it was all about the coming of the lithium revolution — the revelation to the market about the demand and the lack of supply. There was also the belief that there was a supply issue.

When all the dust settles, I believe that my thoughts and that of the market will be consistent.  I believe that this Lithium Hype will finalise at a lower price that is economical to users and buyers.  The high prices cannot be sustained and will come down to a level that will work for all participants.

Let’s work out what is what first.

Before we get into all the details, let’s try and distinguish the different sources of lithium.  The hard rock stuff is more accessible to mine and process but is generally more expensive.  When the brine guys sort themselves out, they will take over as the leading supplier of lithium.

Hard Rock Lithium

The primary and more commonly understood types are what is called the hard rock ore.  The hard rock lithium comes from pegmatites which are bodies of rock that contain very incompatible elements.  These elements are those that nobody wants on their team, so they are the last to form and concentrate within these rock units.  They are mainly found in and around granitic rocks as their chemistry is consistent of these rock types.

One of the significant characteristics of pegmatites is the vast crystal nature of the minerals.  As pegmatites are effective a large quartz vein but with more elements, when the fluids cool, the process of formation is allowed to cool slowly and form larger crystals.  See the photo fo a spodumene bearing pegmatite below.

What makes an excellent hard rock lithium source:
  • Distributed homogeneously throughout the Earth’s crust;
  • Lithium-Cesium-Tantalum pegmatites form in orogenic hinterlands as products of plate convergence;
  • First-order criteria are an orogenic hinterland setting, appropriate regional metamorphic grades, and the presence of evolved granites and common granitic pegmatites;
  • Neither lithium-cesium-tantalum pegmatites nor their parental granites are likely to cause serious environmental concerns;
  • Traditional mining through movement and crushing of ore;
  • Economic grades are between 1% and 2% LiO2;

 

Spodumene – bearing Pegmatite (source: ABN)
Lithium Brines

Lithium brines just salt lakes with a high proportion of the lithium element in the solution.  The mining process is a combination of concentration and evaporation.  There is no shortage of these lakes, but as usual, there are only a few that will have a geological and economic advantage.

The mining process is straightforward.  Brine, typically carrying 200 to 1,400 milligrams per litre (mg/l) Li, is pumped to the surface and concentrated by evaporation in a succession of artificial ponds, each one in the chain having a greater Li concentration. After a few months to about a year, depending on climate, a concentrate of 1 to 2 per cent Li is further processed in a chemical plant to yield various end products, such as lithium carbonate and lithium metal.

What makes a good Lithium Brine:
  • arid climate;
  • closed basin containing a playa or salar;
  • tectonically driven subsidence;
  • associated igneous or geothermal activity;
  • suitable lithium source-rocks;
  • one or more adequate aquifers; and
  • sufficient time to concentrate a brine, economically
  • 1 to 2 per cent LiO² achieved over time and evaporation, then considered economical for processing

(source: www.tsxmedia.com)

 

Argosy Minerals Limited evaporation ponds (source: ProactiveInvestors)
So what happened in 2018?

In 2018, it was all about the realisation that lithium is not a super commodity, it was not a commodity that is super-rare. It is like any other commodity. This “light-bulb” moment occurred for the cobalt and REE rush as well, and every other “super-commodity rush” that investors seem to think exists in the marketplace.  I am the last person to call myself a market expert, but it is strange that punters talk about reserves and resources when evaluating the stock while it runs from 2c to 55c or dollars?  How is that part of a value proposition?  Is it worth 2c or 55c a share or $2 per share :-)? When the stock comes back, they call it a miscarriage of justice and say management sucks.  How did the management go from Heros to Donkeys over the short space of time?

There is no doubt that there is more demand with the EV story but the hype will also back to something that makes economic sense. It cannot sustain the sky-high pricing.  If you look at the graphs below, one can see a trend of decreasing price over the 2018 period.

Lithium 5 Year Chart
Cobalt 6 year Chart
Nickel 5 Year Chart

If you look at the price chart for Lithium, Cobalt and Nickel, you can see that they all share the same trend. More apparent for Lithium and Cobalt.  I am a Nickel and Copper bull so I am a bit surprised with Nickel coming back.  As much as I follow the commodities, I was very surprised to see cobalt come back the way it did.  Interestingly, I was not that surprised with lithium coming back.

What happened to the stocks?

When you look at the major players in the industry, they are all in the same place.  I like to put the lithium companies into three categories,

  1. Producers
  2. Resource
  3. Explorer

In my opinion, there is no need to look at the explorers anymore as they are too late.  In reality, anything that has not been discovered or re-marketed is probably not worth looking at as the ship has well and truly sailed.  At this stage, the hard rock resources that are not developed or are near development may find themselves a steep hill too hard to climb.  For those resources, I do think that if the brine resources come into play, they are going to struggle to make money.

Looking at the charts below, one can see the consistent run to a high and all at the same time came back over the year.  In my opinion, I think there is only a need to look a the top players in the sector.  There is no need to discuss the lower level companies. The market is now maturing so it is all about supply now.  Competitors are coming up, and the sooner the company deliver their product, the better.

Altura Mining Limited 5 Year Chart
Pilbara Minerals Limited 5 Year Chart
Orcobre Limited 5 Year Chart
Neo Metals Limited 5 Year Chart
Mineral Resources Limited 5 Year Chart
Galaxy ResourcesLimited 5 Year Chart
Pilbara Minerals Limited (ASX: PLS) – The first and most well known.

Market Capitalisation:  1.23B

Outstanding Shares: 1.744B (06/2018)

Top 20 Shareholders: 48.1%

 

Pilbara Minerals Limited 5 Year Chart

When you look at the chart above, isn’t that just a very good looking chart?  Lately, when it reached the 60c mark, I was telling people that this has to be a good buy.  However, as I looked at all the participants in the lithium sector, they all had the same trend.  You could be forgiven to have felt all your Christmases had come at the same time.

To me, PLS is the one that everyone compares to and they are the first to have made Western Australia a lithium region.  I know that Greenbushes and Wogina are big players too but they were really a Tantalum play.  Their unique geology is very good.  I think they produced up to 60% of the world’s tantalum and now they are a big lithium supplier as well.   I have not looked at the geology throughly but I am sure their grades are good too.

 

Pilbara Minerals Limited_Cross Section 7670700mN (source: Announcement 29th May 2018)

There is not much to write about PLS that is not known in the public space. I just wanted to highlight the intersection to highlight why as a miner.  I don’t think there is a problem with the mine, its all about the market and how the market is repositioning itself.   You cant help to find comparisons in the industry.  The last one is the iron ore price going down to $40 and then it ran up to $100+ in six months.  Now, we are seeing the decoupling of the iron ore pricing with premium ore getting a higher pricing.

In my opinion, once you have a good supply, such as the likes of PLS, all you have to wait for is the market to recalibrate.

 

What is the future for the Lithium sector?

I think the price of lithium will come back in 2019 and 2020.  It probably won’t be as high as before, and if the brine players are successful, it will be lower.  The slow down in China is making a dent in the hopes of bulls but I think with patience, these bulls will be proven correct.  Fortunately, this slowdown in China has been happening for a few years and it will not have a dramatic end.

The Caixin China General manufacturing PMI fell short of expectations in November and may have spooked the markets in general but as you can see the depressing commodity pricing (in the charts above) has been showing this slow down for a long time.  The figure below also highlights that there has been a slow and steady decline all 2018 in manufacturing.

The dark horse on the market will be the shadow banking issue that is happening in China.  This shadow banking issue has got to be the most crucial aspect of the world market as if this was in any other country other than China, the financial market would have felt its wrath a few years ago.  As it is a China issue, the Chinese government is orchestrating a soft landing which is probably a good thing for everyone.

Xi Jinping

How is this done? Why was Xi Jinping able to get his way? Well, my opinion the answer to the two questions comes from the doings of the past government.  What I mean is that the last government was too busy pocketing money to care about the consequence.  Hence when Xi Jinping came into power and “fixed it’, he was able to curtail any objections by using the “country first’ card and anyone that had not been asked to stay at home indefinitely, would not be speaking loudly.   Hence, wielding a big stick, Xi Jinping was able to control the masses and he inevitably created the path for a soft landing.

In regards to the Lithium pricing, it is these happenings that give me comfort in saying that lithium will rebound with the continued improvement in the Chinese market.

 

Historical China Manufacturing PMI (source: www.tradingeconomics.com)
Solid State Batteries

This battery will stabilise the lithium market as this new form of cells use less of the other component, nickel and cobalt and uses more lithium.  The solid-state battery replaces the liquid or polymer electrolyte found in current lithium batteries with a solid.  Saying that this is not proven technology as yet.  There are lots of research making this happen it is very likely that this will happen.  There is a lot of money being spent in this area and that will probably mean that the technology will make it happen.

Benefits of solid-state batteries,

  1. smaller
  2. higher capacity and allow faster charging
  3. cheaper
  4. non-flammable – which is very important for car makers and the electric aeroplane sector.

A US company, Saki3, has announced that they can make a solid state battery that has twice as much density and at one-fifth the cost.  Currently, Panasonic makes Tesla’s battery at %500 a kilowatt-hour.  Sakti3 claim it can get the cost of 4100 a kilowatt-hour by the end of the decade. Interestingly.

This private company was bought by the Dyson group who is on the path to building its own electric vehicles.

Magnis Energy Technology Limited (ASX: MNS)

Currently, there is one company in Australia that I found which seems to be in this space.   Magnis Energy Technology (ASX: MNS) is the company that has jumped on this sector.  I don’t know this company too much, but I remember them as a graphite story related company.  I stumbled onto their story while researching for this blog.  The chart fits the lithium story I guess.

  • Market Capitalisation: 180M
  • Outstanding Shares: 572.9M (06/2018)
  • Top 20 shareholders: 39.8%
Magnis Energy Technology 5 year Chart (source; www.commsec.com.au)
What is the Big Issue with Solid State Batteries?

As mentioned earlier, in 2015, Dyson (vacuum cleaner Dyson) invested 90M for the US start-up Sakti3 to secure their solid-state battery technology.  Recently, Dyson spent an additional 200M pound in August 2018 to set up six test driving tracks for their yet to be built electric vehicles.  There are already 400 employees in this automotive team which is in a site that is 17km in length.

What is interesting is that nearly a billion pounds of investment went into this battery sector alone.  So this industry is not going anywhere.  What does this mean?  Well, companies such as Pilbara Minerals is suddenly looking cheap as they are the only one, apart from Galaxy Resources looking to be a real lithium supplier.  Mineral Resources is also another heavyweight slowly moving in with the Mount Marion project.  By the way, they also own 8% of Pilbara Minerals.

Looking at the investments that are going into this product, it seems to me that the lithium sector is endorsing this path for the future of EV vehicles or EV products.  The traditional lithium batteries are also a big hindrance in the electric aircraft sector. The fact that the current Li-battery has a habit of power surging, it is a big issue for those working in the electric aeroplane space.

 

Conclusion

I think this is such a well know topic that there is nothing new that anyone could come up with at this stage.  What I tried to highlight is that the Lithium market is down now but I feel very comfortable in saying that the upside is not too far away.  I remember a wise man told me once that in any price surge, you should never chase but let it come back to a level where the market is trying to figure things out. Once that happens, the market will take a direction depending on its assessment of the product.

I feel that we are at that point.  I think since the rush on the lithium market, there have only been one or two shipments of concentrates from Australia. Galaxy Resources Limited (ASX: GXY) was an early player and I do not include them in that list.  I remember working for them in 2008 and the lithium rush was nothing compared to what we have experienced in the last 2-3 years.

I am not a shareholder in any of the companies listed but for those who have invested in the “blue” lithium stocks, I think there are good times ahead.  There will be alternatives ( Hydrogen Cell, Tungsten and Vanadium) as I have written before, but there are no arguments that the lithium battery has the head start and looks like the volume may keep the competitors behind the pack.

 

 

 

 

Disclaimer:

The information contained herein is the writer’s personal opinion and is provided to you for information only and is not intended to or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not take into consideration, nor have any regard to your specific investment objectives, financial situation, risk profile, tax position and particular, or unique needs and constraints.

Accordingly, no warranty whatsoever is given, and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before committing to purchase or invest in the investment product(s) mentioned herein.

If you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.

 

One Comment
  1. Disclaimer:The information contained herein is the writer’s personal opinion and is provided to you for information only and is not intended to or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not take into consideration, nor have any regard to your specific investment objectives, financial situation, risk profile, tax position and particular, or unique needs and constraints.Accordingly, no warranty whatsoever is given, and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before committing to purchase or invest in the investment product(s) mentioned herein.If you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.
  2. Great article… it took out all the noise about the sector and help me in my research

Leave a reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.