Material Matters: Lithium, Gold And Potash

This story features PILBARA MINERALS LIMITED, and other companies. For more info SHARE ANALYSIS: PLS

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.

The broker finds good value in Newcrest Mining ((NCM)), Northern Star Resources ((NST)), Regis Resources ((RRL)) and St Barbara ((SBM)). Evolution Mining ((EVN)) is the exception. Morgan Stanley does not have a price/value history for those recently initiated, such as Silver Lake Resources ((SLR)) or Ramelius Resources ((RMS)), although assesses these are showing reasonable value on this metric.

Potash

Shaw and Partners has a positive view on potash in Australia believing that as arable land per capita reduces over time, further investment will be required in this sector. Potash is a potassium-carrying fertiliser that is required for crop growth and there are no substitutes.

Sulphate of potash is a premium type of potash used for higher-value fruit and vegetable crops as it does not contain chlorine but rather the nutrient sulphur as well as potassium. Sulphate of potash offers a price premium versus muriate of potash, which accounts for 89% of global potash production and cannot be used on chloride-sensitive crops.

Primary sulphate of potash from brine is expected to account for a large share of supply as new projects come on line in the current decade. Brine is a lower cost than other sources of supply, Shaw notes.

The broker notes interest in the sector has increased significantly over recent years and the are now several ASX-listed companies with projects that are close to production. Australian Potash ((APC)) is preparing to start up its Lake Wells project in Western Australia. A 30-year operation is planned for a 170tpa sulphate of potash operation for a capital outlay of $300m. Shaw and Partners has a Buy rating with a $0.32 target for the stock.

Meanwhile, Agrimin ((AMN)), not covered, is developing the Mackay sulphate of potash project on the Northern Territory/WA border that is larger in scale and using a trenching network. Lake Mackay is the largest sulphate-of-potash salt lake in Australia.

This project has of capital expenditure requirement of $600m for a mine life of more than 40 years. The other stock of note is BCI Minerals ((BCI)), also not covered, which is developing the Mardie salt and potash project from seawater, located in the West Pilbara.

There has not been a new large salt project in Australia in the last 20 years and the company believes the project has potential to generate strong cash flow over a long life. BCI Mineral also receives a royalty from its Iron Valley iron ore mine, operated by Mineral Resources ((MIN)).

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms