The share prices of the major Australian lithium miners have been hammered in 2018.
Big name industry players like Mineral Resources Limited (ASX: MIN), Galaxy Resources Limited (ASX: GXY) and Pilbara Minerals Ltd (ASX: PLS) have all suffered declines of over 30% in their share prices since the beginning of the year, while shares in Altura Mining Ltd (ASX: AJM) have shed 40% of their value, and Orocobre Limited (ASX: ORE) is down almost 50%.
Throughout 2017, forecasts for increased global demand for lithium as one of the essential components of the batteries that power electric cars has massively inflated the valuations of these local miners.
But now rising concerns over a potential global glut of lithium have weighed heavily on their share prices and sent them tumbling lower this year.
This shifting story of global demand and supply expectations has played out in the share price of small cap lithium miner Neometals Ltd (ASX: NMT). The company’s share price surged 30% higher in 2017, but investors have seen those gains completely eroded in 2018. In fact, its current price of $0.28c is below what it was worth back in January 2017.
Despite a lacklustre 2018, longer-term investors who have held onto their shares in these lithium miners for at least a couple of years are still most likely sitting on some pretty hefty gains.
For example, even at these deflated prices, shares in Neometals are still up over 60% since the beginning of 2016. But after looking nervously at these share price charts for the last few months, even the most loyal lithium investors – and I count myself amongst them – might wonder whether now is finally the time to cut and run.
However, I’ve decided to hold on to my shares in Neometals, and here’s why.
In addition to its Mt Marion lithium project, which it jointly owns with Mineral Resources and Chinese lithium producer Jiangxi Ganfeng Lithium Co., Ltd, Neometals also solely owns a titanium and vanadium project at Barrambie in Western Australia.
The Neometals board recently approved a plan to demerge the titanium and vanadium assets into a new ASX-listed company, allowing Neometals to continue as a pure-play lithium producer. Under the proposal, existing shareholders in Neometals will receive shares in the newly formed company in proportion to their current holdings.
Neometals is hoping that the demerger will unlock the full value of both of its key mining assets. On the one hand, Neometals plans to become a vertically-integrated lithium producer. It has its own offtake agreement at Mt Marion and is developing a lithium refinery to convert the lithium mined there into higher-value lithium hydroxide. It is also developing a lithium battery recycling plant to salvage minerals from dead batteries.
And on the other hand, the newly demerged company will continue to develop the titanium and vanadium project. The company claims that Barrambie is one of the highest grade titanium deposits in the world. Because of its strength, titanium is important as an alloying agent with other metals like aluminium and iron and is used in the production of aircraft and spacecraft, as well as everyday items like drill bits and golf clubs. Vanadium is often alloyed with steel and used to build gears, axles and crankshafts.
Past experience has shown that demergers can often deliver better value for shareholders. The newly formed company can benefit from a more focussed management team and better access to capital. Investors also gain through greater transparency over the new company’s financials.
The 2015 South32 Ltd (ASX: S32) spin-off from BHP Billiton Limited (ASX: BHP) is a good recent example of this, where the share price of both the parent and child companies have increased significantly since the demerger.
Obviously, if the demerger plan goes ahead, there’s no guarantee that either Neometals or the new titanium and vanadium-focussed company will increase in value. But after a disappointing 2018, this news should give investors like myself at least one reason to stay interested in Neometals in FY19.
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Returns as of 6th October 2020
Motley Fool contributor Rhys Brock owns shares of Galaxy Resources Limited, Neometals Ltd, and Pilbara Minerals Limited. 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 Scott Phillips.
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