Australian lithium producers were big winners on Friday. The share prices of both Galaxy Resources Limited (ASX: GXY) and Orocobre Limited (ASX: ORE) surged 13% higher, while Pilbara Minerals (ASX: PLS) shot up 8% and Mineral Resources Limited (ASX: MIN) was up close to 6%. It capped off an impressive week for the sector, in which all these companies posted hefty double digit gains.
However, for shareholders it's been a long time coming. The share prices of all these companies peaked back around December or January, but have really been in a state of steady decline since. Orocobre and Galaxy have been the worst performers of the bunch, both over 40% off the 52-week highs they hit in January. But Pilbara Minerals and Mineral Resources aren't far behind – both now 30% down on the highs they posted around the same time.
So is this more recent performance a sign of a turnaround, or just a flash in the pan?
Investors will surely hope it's the former. Apart from Pilbara Minerals, which hit a 52-week low in early September, shares in all these companies had sunk to their lowest values in over a year.
In 2017, optimism about the growing electric car industry drove the share prices for pure play lithium companies to all-time highs. Lithium is a key ingredient in the batteries used to power electric vehicles. But this year, fears of a potential future glut of lithium have weighed heavily on the share prices of these producers.
However, the last couple of weeks have given lithium miners (and their shareholders) at least one reason to feel optimistic again. Tesla, probably the most famous electric car manufacturer on the planet, beat Wall Street expectations by posting net income for the most recent quarter of over US$ 300 million, against quarterly revenues of US$ 6.8 billion. Revenues were more than double that for the third quarter 2017, driven by strong demand for Tesla's more affordable Model 3 car.
Should you invest?
Despite the uptick in their share prices last week, these lithium stocks are still well off their January highs and could offer good value to investors looking to enter the sector. In fact, one of the reasons these companies rallied so strongly may also simply be that the market considered them to have been sold off too aggressively this year.
Plus these companies are also positioning themselves well for future growth.
Pilbara recently sent the first shipment of its high quality spodumene concentrate to its offtake partners in North Asia, reaching a key milestone in the commercialisation of its product. Spodumene is a mineral which contains lithium – the lithium is generally extracted by fusing the mineral with acid.
Orocobre, which operates a number of projects in Argentina, posted record underlying net profit for the year ended 30 June 2018 of US$ 25.7 million against revenues of US$ 116 million. The company expects to continue to ramp up production in FY19. Operating margins at its Olaroz Lithium Facility in FY18 were an impressive 67%, meaning any decent increase in output could deliver significantly higher profit to shareholders.
Galaxy Resources has also posted some strong financial results recently. NPAT for the half year ended 30 June 2018 was up 331% over 1H17 to US$ 11 million, while revenues surged an astonishing 682% to US$ 88.4 million. Galaxy also has a healthy balance sheet, with nil debt and a cash balance of US$ 45.1 million.
Mineral Resources is the most mature out of these companies and has a diversified mining portfolio which includes iron ore and manganese projects in addition to its lithium interests. It brought in revenues of $1.7 billion for FY18, up 16% against the prior year, and NPAT of $271.8 million.
As far as pure play lithium companies go, I think Galaxy presents the best investment option. Pilbara Minerals offers great upside potential but is a riskier investment given it is only just beginning to commercialise its product now.
As an established company with more diversified revenue stream, Mineral Resources may offer more risk-averse investors the opportunity for some exposure to the lithium industry without having to take on too much of the risk.
