Lithium market ‘desperately short’ and more margin is going to miners, says bullish Brinsden
Pilbara Minerals chief eyes another spot sale as he ramps up second plant. Plus, Sunstone soars on ‘major’ gold-copper find and St Barbara spurned in offer for neighbour Kin.
7th October 2021
The lithium stocks have been trading well off their highs in recent weeks.
The broader equity market weakness in response to fears over the global economic impact of shortages and rising costs for good old-fashioned carbon sources of energy have been cited for the hit.
It kind of works if the EV buildout was coming to a screeching halt, which it is not. If anything, governments can be expected to insulate the booming battery space from the energy shortages/rising costs, as looks to be the case in China.
Given the reality that the boom in demand and pricing for lithium is not over by a long shot, does the sell-off in lithium stocks represent an opportunity?
Do those who missed out on the lithium equities surge earlier this year need to start thinking about catching the second bus before the year rolls by?
Pilbara (PLS) CEO Ken Brinsden does not make calls on equity valuations. But he was happy to share his view this week on the lithium market.
“This phase of the cycle is with us for quite some time yet because the market is so desperately short of lithia units,” Brinsden said.
“It means that more of the margin is going to be passed upstream to the miners as the end-users set about securing supply.”
As a producer of spodumene concentrates to the convertors who process the material into lithium hydroxide and carbonate for use in batteries, it is the spodumene price that matters for the company.
It can be said that concentrate pricing under long-term contracts remains at pretty extreme levels of around $US1,500/t, with the smaller but developing spot market at about $US2,400/t. It also seems apparent that end-users are being pragmatic about resetting contract prices to reflect the super tight market conditions.
“Given that we were only getting $US360/t 12 months or so ago, it is pretty amazing,” Brinsden said.
Pilbara is looking to grow the spot market through its BMX trading platform. It is the initiative that set the market alight in recent months when bids for its first two sales were massively ahead of the ruling prices.
Brinsden said that all things going well, the winning bid for a third parcel of spodumene could be announced by the end of the month.
His mention of all things going well is a reference to progress in the recommissioning of the 200,000tpa Ngungaju plant by Pilbara.
It sits adjacent to Pilbara’s 380,000tpa Pilgan plant and was acquired by Pilbara for the knockdown price of $A240m when the previous owner Altura fell victim to the tough times in the business during 2018-2020.
Ngungaju’s output will give the BMX more material to sell, delivering welcome transparency in the lithium market for all to see.
Pilbara got as high as $2.53 a share a couple of months ago. Confirmation of the restart of Ngungaju – and the continuing extremely tight supply of spodumene – saw the stock pout on 12.5c or 6.6% to $1.99 on Thursday.
Brinsden’s take on where things are at in the lithium market, and how Pilbara expects to benefit, will be the focus of his headline presentation at the RRS-MiningNews.net “The Boom in a Room” conference in Perth next Thursday and Friday.
The copper producers have been under the pump for no good reason other than the price of red metal has come off all-time highs on those Chinese power concerns.
Given there are some big new mines to come on-line in the next couple of years, there is also caution around the producers on the supply-side impact on the copper price.
But it has to be remembered that the current price of $US4.12/lb is still a fantastic price and that incentive pricing for copper has to become a permanent feature if the world has any hope of closing the supply deficit set to merge around 2025.
That longer time frame is what the copper explorers are working to. And it has to be said that the market’s reaction to decent copper exploration results is as strong as ever regardless of the share price hits taken by the copper producers.
That came through this week with Sunstone (STM) putting on 82% to 4c in response to the latest exploration results from its El Palmar prospect in Ecuador. The results point to what its managing director Malcolm Norris said was a “major” gold-copper porphyry discovery.
Norris would know too, having been closely associated with the Tier 1 Tujuh Bukit porphyry deposit in Indonesia and the monster Cascabel porphyry in Ecuador, the latter owned by London’s SolGold which has Newcrest and BHP as substantial shareholders.
Sunstone was mentioned here last week when it was at 2.2c on the basis of a diary entry that noted the first assay results from El Palmar were about due. The results came through this week and did not disappoint.
Assays included 163.5m grading at 0.71g/t gold and 0.2% copper (1.05g/t gold equivalent) from a relatively shallow depth of 52.35m (the 2.6 billion tonne Cascabel deposit starts from 500m or so).
More assays results are in the pipeline from another three holes, all of which have been mineralised based on visual inspection.
It is early days but industry chatter was that El Palmar had the makings of a 500Mt deposit which would make for a lot of gold and copper, as is the wont of low-grade but bulk-tonnage porphyry systems.
Newcrest’s most profitable operation, Cadia near Orange in NSW, is the example of what porphyries can do. It is a 3 billion tonne resource grading all of 0.36g/t gold and 0.26% copper. It’s mining higher grades at the moment, but its profitability and scale is all about bulk-tonnage mining.
It is also early days for Coda (COD) at its Emmie Bluff Deeps project in South Australia. Latest drilling has substantially expanded the mineralised footprint. No assays yet from the latest drilling but Coda is confident it is on to an IOCG system with a copper rich core.
Coda last traded at 9.3c after running higher in the first pass response to the Emmie Bluff update. There is likely to be a flow of high-grade hits to be reported as the assay results come in, with Coda itself saying that the project has been taken to an entirely new level based on visual inspection alone.
It was mentioned here back on July 15 that St Barbara’s (SBM) acquisition of 19.8% stake in junior gold explorer Kin Mining (KIN) was likely to kick off the long-awaited rationalisation of the Leonora region.
It has proved to be the case, with St Barbara making an approach to Kin with a 16c offer this week.
And before that, a combo of former Saracen boss Raleigh Finlayson, former Fortescue boss Neville Power, and Northern Star, cornerstoned a $20.8 million equity raising by Genesis (GMD) at 6c.
The common theme was the moves were targeted at companies with big and growing resources bases (1.28m ounces for Kin and 1.6m ounces for Genesis).
St Barbara, with its hungry Gwalia mill, should have wrapped both into fold a long time ago. But it didn’t, and the question now is, has it left its run too late?
Kin has rejected St Barbara’s 16c takeover approach because its biggest shareholders have said they would not be accepting, and Finlayson’s crew has got under St Barbara’s guard at Genesis.
So St Barbara’s task of keeping its mill full and perhaps growing its Leonora output has got all that much harder because it has been asleep at the wheel. It could come back at Kin though.
Kin’s share price ahead of it breaking cover on the St Barbara approach was 10.5c. So a 16c paper bid would have represented a 52% premium.
But with Kin on its way to growing its resource base to something like 2.5Moz in time, 16c was on the mean side of things, particularly as an ounce of gold in the ground at Leonora is worth more to St Barbara than anyone else.
The spurned over was effectively the same price St Barbara paid for its initial 19.8% Kin stake. That did not represent a control block. Bidding for all of Kin is a different thing all together, with a 30% premium to 16c being a more fair dinkum thing to do.
Just for the record, St Barbara happily paid a 92% premium in its 2012 takeover of Allied Gold and a 40% premium in its 2019 takeover of Canada’s Atlantic Gold.
Kin’s rejection of the St Barbara approach has been given some bite with the company pushing the button on a $13m rights issue, at a price to be determined. It will fund an exploration push to take Kin along that pathway towards a 2.5Moz resource. Kin last traded at 12.5c.
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