Lithium producers have taken the spotlight from infant formula producers as some of the most exciting shares on the ASX, producing some truly astonishing returns so far in 2016.
Highlighting this fact, I selected six lithium producers at random and plugged each of them into Google Finance to find their year-to-date returns, and not one of them has gained anything less than 110% so far this year:
- Dakota Minerals Ltd (ASX: DKO) shares are up 136.4%
- General Mining Corp Ltd (ASX: GMM) shares have risen 241.2%
- Galaxy Resources Limited (ASX: GXY) shares have gained 369.6%
- Prospect Resources Ltd (ASX: PSC) shares are up 380%
- Altura Mining Ltd (ASX: AJM) shares have gained 336.4%
Orocobre Limited (ASX: ORE) was the 'worst' performer on the list, returning just over 112% in less than six months. It was enough to earn the business a promotion into the S&P/ASX All Australian 200 Index as part of the June Quarterly rebalance of the S&P Dow Jones Indices.
Indeed, the catalyst for the boom has been a surge in the price of lithium itself. Lithium batteries are used in smartphones, while they are also widely used in renewable energy that looks almost certain to play a big role in our future whereby cars (think Tesla) and even homes (again, think Tesla) are expected to be powered by rechargeable batteries.
However, investors do need to be wary of the meteoric rise of this sector. Rising lithium prices have already attracted a number of new entrants into the industry which would theoretically push returns back towards equilibrium, over time.
If a larger and more cashed-up player, such as Rio Tinto Limited (ASX: RIO), BHP Billiton Limited (ASX: BHP) or Vale became involved, that could certainly have an impact on the smaller, higher cost producers – many of which could be squeezed from the market.
Of course, seeing returns such as those highlighted above over such a short space of time can make a move into the sector incredibly tempting. But investors should remain cautious, and remember to do their due diligence on any opportunity rather than simply assume prices will continue to rise. That may happen for a short period of time, but generally it cannot be sustained in the long-run.
