It’s no secret that Australia’s lithium stocks have staged a spectacular run over the past 12 months or so.

The likes of Orocobre Limited (ASX: ORE), Galaxy Resources Limited (ASX: GXY) and Pilbara Minerals Ltd (ASX: PLS) have seen their share prices soar 666%, 72% and 47% in the past 12 months.

Others, less well-known, like Kidman Resources Ltd (ASX: KDR), Neometals Ltd (ASX: NMT), Altura Mining Ltd (ASX: AJM), European Metals Holdings Ltd (ASX: EMH) have seen their share prices rocket up 456%, 89%, 189% and 257% respectively in the past 12 months.

Early investors who have stayed the course may well be cheering their huge capital gains at this stage. Other investors who have seen the capital gains on offer may well be tempted to jump into the companies mentioned above, or perhaps the next undiscovered “hot” lithium explorer which hasn’t seen the share price gains yet.

I’m here to tell you that that is a one-way trip to the poorhouse.

There are certainly plenty of ASX-listed companies that now tout themselves as ‘lithium plays’, having either acquired a potential lithium asset outright, a share in a potential deposit or even ‘discovered’ traces of lithium on their existing tenements.

There’s certainly no shortage of companies that have seen their share prices rocket on the day they make an announcement that suggests they might be Australia’s next big lithium play.

The problem for most of these companies – and their shareholders and investors – is that the risks substantially outweigh the potential capital gains.

Here are some of the multitude of issues that investors need to consider:

  1. Lithium is the 25th most abundant element on earth according to Wikipedia, so not exactly hard to find. Simply discovering a potential deposit means very little and needs much more work.
  2. Not every discovery will be commercially viable. In other words, many discoveries will progress nowhere because the lithium can’t be extracted profitably.
  3. According to the Handbook of Lithium and Natural Calcium, “lithium is a comparatively rare element, although it is found in many rocks and some brines, but always in very low concentrations. There are a fairly large number of both lithium mineral and brine deposits but only comparatively few of them are of actual or potential commercial value. Many are very small, others are too low in grade.
  4. To go from exploration to commercial production takes years and millions (if not billions) of dollars of funding – not every company will be able to do that successfully.
  5. Buying into a lithium company means investors are also taking a punt on management and their expertise – an additional risk.
  6. The world’s top four producers are all looking to expand output and capture more of the lithium value chain – including processing.
  7. By the time the company commences commercial production, the lithium market could be oversupplied and prices heavily depressed.Even worse, the company could commence production – adding to further oversupply – and prices sink.
  8. Batteries will improve in future and may no longer contain lithium. Many popular AA and AAA rechargeable batteries are nickel-metal Hydride (NiMH). Will there be a better rechargeable battery than lithium in future? Possibly.

Foolish takeaway

By my count, there are at least 30 ASX-listed companies that have announced they are actively pursuing lithium deposits. I’d happily bet that at least two-thirds (20) of them won’t end up as lithium miners within the next decade, and I’d be surprised if more than five become profitable.

Buyer beware.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.