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Five years ago, if you’d told someone lithium would replace gold as the ASX’s favourite hard rock commodity, you might have received an unbelieving look.
And yet, that is exactly the situation we find ourselves in today.
Driven largely by increasing global electric vehicle (EV) sales, lithium – the major component of lithium-ion batteries, on which most EVs rely – was the hottest commodity on the global market in 2022.
Despite a drop in inflationary-led prices through 2023, lithium stocks remain hugely popular.
Pilbara Minerals (ASX:PLS), Allkem (ASX:AKE), and Liontown Resources (ASX:LTR) are among the household names on the popular radar.
And if you want evidence that lithium has become ‘the new gold’, look no further than the 2023 iteration of Diggers & Dealers. For the first time in the conference’s history, a lithium miner won the annual award.
It’s clear that Australian investors and exploration company owners still have a hefty case of lithium fever, like the rest of the world.
There’s hard rock, and then there’s brine
There are two main types of lithium projects: hard rock projects and brine projects.
Brine lithium mining is most popular in South America, where the great tango of geological time has seen liquid lithium-bearing deposits collect underground across the continent to an extent not found anywhere else on earth.
At least, not yet. But in the meantime, South America’s golden ‘Lithium Triangle’ remains king brine.
There are also some brine projects in Australia, but South America wields the global crown.
Brine projects typically pump brine to the surface where the product is evaporated in large ponds using a varying list of methods, ultimately, depending upon evaporation.
Spodumene the hard rock breadwinner
Then there are hard rock projects, and if you’re dealing with hard rock lithium projects, investors look for one holy grail: spodumene.
Spodumene is a type of mineral that contains lithium. It is often found in a type of host rock called pegmatite. For this reason, exploration companies reporting pegmatite outcrops tend to attract a lot of attention.
Just look at any number of companies operating in Canada’s James Bay region, undeniably fertile for lithium, which has proven by far to be the hottest emerging tier-one lithium province for ASX companies in 2023.
But Canada doesn’t truly compare to Western Australia, home of Greenbushes, the world’s largest spodumene lithium mine.
Spodumene always contains some degree of lithium, but pegmatite does not always host spodumene. There are other types of lithium-bearing minerals, too. The most dominant is lepidolite, which is harder to refine downstream and is often perceived as less desirable than spodumene.
But that doesn’t stop everyone. Gold darlings De Grey (ASX:DEG) have lepidolite lithium ore they keep an eye on, and so does the ASX-listed Lepidico (ASX:LPD). You can probably guess what type of pegmatite the latter has.
There’s also the less common mineral petalite, but for all intents and purposes, let’s focus on spodumene, as that’s the flavour investors prefer.
Sales of spodumene rock sold off in auctions through 2022 brought Pilbara Minerals huge profits, with the price smashing month-on-month records for most of the year.
By Q4 of CY22, the company was still seeing prices climb at auctions, only easing in December on a weaker China outlook (remember when the world believed in a Chinese re-opening boom would save the markets in 2023?)
Geology as important as ever but basics remain
Let’s focus on hard-rock lithium for the remainder of this article.
The companies that tend to attract the most interest, as mentioned above, are those with outcropping pegmatite mineralisation on-site. A rock chip sampling run that turns over samples assaying at high grades of lithium tends to enjoy upside share price growth.
What exactly a high grade of lithium is can be hard to pin down. Generally, assay results of lithium oxide of more than 1.5 per cent per sample – whether that be in rock chips, aircore drill results, or diamond drill cores – is around where ‘high grade’ starts.
Of course, some lithium projects boast grades in the range of 3-4 per cent, which is definitely high-grade territory by anyone’s metric.
Worth considering is that lower grades can be equally desirable if there’s enough ore to go around.
That’s where questions of depth start to become important, per most hard rock mining operations for any mineral, whether it’s gold, copper, iron ore, uranium, or even more obscure materials like rare earth elements.
High-grade (or large mineralised systems) closer to the surface are always more desirable given that it takes less capital expenditure to get to the minerals in question, and it’s ultimately a more rapid pathway to extraction – and sales, which is where an explorer can turn itself from a loss-making operation to a profitable one.
That pathway follows a basic three-step route: a company starts as an explorer, enters mine development, and finally, becomes a producer. To examine this, let’s look at three different companies.
Exploration: Raiden Resources (ASX:RDN)
ASX and German DAX-listed Raiden Resources (ASX:RDN) is a lithium explorer with its Andover project located in the mineral-rich and state-making West Australian Pilbara region – once a former gold hotspot, and now a lithium neighbourhood, too.
Generally, a lithium explorer will go through the following steps on its way to development:
- Listing on the ASX
- Acquisition of a tenement
- Early-stage on-site field mapping and rock chip sampling
- Geomagnetic surveys
- Exploratory drilling
This process can take anywhere from 12 months to four years. It depends on how much money the company has, how many projects the company is managing, and, where each company is at in its journey through compliance.
For instance, Raiden Resources is currently advancing heritage surveys attached to its Andover project.
The company has already confirmed that lithium is present on-site at its Andover acreage, with early-stage field sampling confirming lithium pegmatites back in August. This is part of the reason why the stock has returned over 573 per cent to its investors since January 1, 2023.
While a microcap stock’s gains will always look more impressive, it’s still a testament to the market’s interest in pegmatite outcrops.
In mid-September, the company confirmed high-grade lithium is present on site in rock chips with a lead result grading at 2.42 per cent lithium oxide in situ.
“The results from the ongoing mapping and sampling exercise continue to build confidence for the company that the Andover South project represents a high-value investment, with drill targets being defined on an ongoing basis,” RDN Managing Director Dusko Ljubojevic said at the time.
Clearly, Raiden is not quite yet at the stage of its JORC resource, pushing it over to the next stage: development.
Raiden is a perfect example of the kind of microcap explorer that investors love: its shares are cheap but perform well; the company has what could potentially be lithium-hosting rocks sticking out of the ground all over site, and the company is set to move ahead with drilling.
Development: Azure Minerals (ASX:AZS)
Azure Minerals (ASX:AZS) is located right near Raiden’s Andover project, with a project of its own called Andover.
The company is easily at the development stage of its mining story. Azure’s Andover project is a jointly held project with mining legend Mark Creasy holding the smaller 40 per cent share.
Typically, a mine developer will undertake the following steps on its way to production:
- Publication of JORC resource
- Scoping study
- Pre-feasibility study
- Definitive feasibility study
- Annexure studies as required (heritage; environmental, JORC upgrades)
- Offtake agreement(s) or memorandum of understanding
- Final investment decision
This stage tends to take at least twelve months and typically closer to two years. It’s possible that a company could remain in the development stage for a good deal of time, due to countless variables. But let’s look at what Azure Minerals’ geotechnical team has already confirmed.
Azure knows that it has lithium on-site, and it’s currently at the early stages of updating its existing JORC resource. The company has published an Exploration Target of between 100 – 240 million tonnes of ore with an average grade of 1.0 – 1.5 per cent lithium oxide.
While exploration targets are conceptual in nature, Azure does expect to post its maiden mineral resource in Q1 of CY24.
The big thing to note about mineral resources is that they are ultimately bankable documents – miners with one find it easier to receive institutional loans, given that they now have a document outlining empirically the miner’s value proposition.
It is in this stage a company’s share price begins to transition from ultimately speculative to more based.
And once a company enters the production stage, analysts can begin to compare revenue and earnings to share price values, starting to truly deliver the kind of investment recommendations that inform the professional financial advisory sector.
Production: Pilbara Minerals (ASX:PLS)
For an example of a hard rock lithium producer, look no further than 2022 market darling Pilbara Minerals (ASX:PLS).
The company’s hard rock spodumene auctions were closely watched throughout 2022, with feedstock coming from the company’s flagship WA-based Pilgangoora Project 120 kilometres from Port Hedland.
Like all successful producers, location is everything. To realise its vision, PLS had to establish itself near sealed or drivable roads with relatively straightforward routes to major deepwater port infrastructure at Port Hedland.
A producer also needs its own downstream refining assets, or, stable agreements with providers who own such assets.
Pilbara Minerals owns two downstream plants key to its production: the Pilgan Processing plant, and, a spodumene concentrate plant called Ngungaju to the south.
Pilbara Minerals overall boasts a 2 million tonne per annum mining and processing operation able to produce 380,000tpa of spodumene concentrate – key to its spodumene auctions on international markets.
Like all producers, growth is the name of the game. Work is underway to expand production by 100,000 dry metric tonnes per annum at the Pilgan downstream plant, which will boost its nameplate capacity to an upper estimate of 680,000 tonnes per annum of spodumene concentrate.
What investors should be looking for at this stage is how crowded the trade is, the composition of the company’s top 20 shareholders, and average daily sales volumes.
How many shares are traded on either side of the buy or sell register each day is referred to as turnover, and the higher a company’s turnover is, the more liquid that stock is considered.
Illiquid stocks are notoriously dangerous if share prices suddenly drop; a shareholder looking to move those shares off quickly to stop losses has far more risk of being ‘left with the bag’ – in other words, being left with devalued shares and little opportunity to recover losses, lest the stock upswing again at some point in the future.
