Material Matters: Lithium, Gold And Potash

Commodities | Jun 04 2021

A glance through the latest expert views and predictions about commodities: lithium; gold; and potash

-Lithium outlook bright, front and centre of new battery technology
-Morgan Stanley favours gold stocks which can increase long-term production
-Potash projects increasingly important as arable land availability declines

By Eva Brocklehurst

Lithium

Wilsons expects electric vehicle technology will be one of the most disruptive over the next decade. Lithium is at the centre of this technology, being one of the lightest and most electro-conductive elements.

Today batteries account for around 35% of total lithium demand and by 2030 this is expected to be 85%. Moreover, grid-based storage will become increasingly important by 2030.

The broker notes almost all automotive manufacturers have committed to switching to electric vehicle sales as soon as possible. This has been predicated on tough emissions legislation, particularly in the EU.

Wilsons points out demand for lithium is expected to increase more than tenfold to 2030 against committed new supply growth of around 2.5x, which opens up a large potential deficit in supply/demand economics.

Hence upside to prices is likely over the medium term. Wilsons believes investors must by into the view of surging demand and constrained mine supply in order to go long on lithium yet notes miners and technologists could find new ways of feeding demand and this may create volatility over the longer term for lithium prices.

All four main Australian producers are in the front line of efforts to contribute to global supply. Battery-grade lithium is hard to extract and Australia is expected to be the largest supplier of "hard rock" lithium, suited to high-grade batteries.

In contrast, South American lithium is produced by brining and is less suited to batteries. The third extraction method, clay extraction, despite its relative abundance, is very expensive, Wilsons points out.

Yet the broker looks for better tactical entry points to Australian lithium producers and would prefer greater upside or margin of safety before considering putting the stocks in its Australian equity focus list.

Near-term earnings multiples are elevated and Wilsons notes both Pilbara Minerals ((PLS)) and Orocobre ((ORE))/Galaxy Resources ((GXY)) are at relatively early stages in their mining lives, with low levels of profitability and consuming capital. Nevertheless, for those willing to go long the broker believes these two pure lithium stocks remain the most prospective.

Gold

Morgan Stanley assesses the recent rally in the gold price was of benefit to those gold miners that have short-term earnings growth expectations. On the other hand, the broker expects headwinds for gold in the second half and anticipates a price of US$1670/oz in the fourth quarter compared with spot prices of US$1900/oz.

The broker has found that valuations of gold stocks are following their leveraged exposure to the gold price and, given a negative gold bias, favours those stocks that can increase long-term production.


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