How to value battery metal stocks

Your checklist for success in the clean energy sector

PETER STRACHAN

Back the jockey

Management quality of companies takes a high priority when searching for value, especially in smaller resource stocks where often, backing the jockey is a key ingredient for success.

Value and rank minerals in the ground

Beyond the price to earnings ratio and dividend yield that are more commonly associated with ranking industrial stocks, resource companies can be ranked by their enterprise value (EV=market capitalisation minus net cash) per tonne of product. Producers attract a high EV multiple of Mineral Reserves, while explorers rank in value depending on geopolitical risk, access to infrastructure, cash in the bank and the size, grade, geometry, and depth of Mineral Resources.

Ranking EV per tonne or grade of contained lithia or graphite is a helpful tool.

Production costs of 6% Li2O concentrate have jumped from around US$440 per tonne in 2019 to around US$800 per tonne today, while contracted spodumene concentrate delivered to Asian markets sells for around US$3,000 and up to US$6,600 per tonne for spot parcels at auction, up from less than US$400 per tonne in 2019.

If the insitu value of recoverable metal per tonne of ore Reserves is higher than the estimated costs of mining, processing, and shipping, then the project has potential.

Grade and business plan

Most hard rock, pegmatite hosted lithium deposits globally have grades ranging from 0.9% to 1.4% of Li2O with the Greenbushes mine holding the outlier status at over 2% Li2O. Be wary of one, deep or wide, high-grade intercept of a target metal, especially if 80% of the contained valuable metal is found in a narrow, higher-grade portion of the intercept. Selective sampling of clearly mineralised rocks by eager geologists are not representative, so take care of loud noises about geochemical assays or rock-chip sampling that can misrepresent a target.

Be careful of companies claiming to apply unproven processing technology at any stage between mining to final product. In early days, pioneering efforts nearly sent one company broke trying to commission a lithium carbonate plant in China when it reached only 50% of nameplate capacity after 18 months of operation and still hadn’t secured significant market acceptance of its high-quality product.

Lanthanide elements

While rare earth elements are not strictly battery metals, roles played by terbium, neodymium, praseodymium, and dysprosium in making permanent magnets, provide an essential link for wind power generation and in electric motors. Additionally, low energy lighting solutions that make substantial contributions to decarbonizing the economy require small amounts of yttrium and europium rare earths.