Even though lithium prices have cooled off over recent months, battery ingredients such as that and rare earths will remain in high demand in the long run.
This is especially because of one modern phenomenon.
"Lithium-ion batteries are not new — they've been powering laptops, mobile phone batteries, and even off-grid camping setups for some time," Shaw and Partners portfolio manager James Gerrish said on Market Matters.
"However, it's the growth in electric vehicles that is driving the demand for this lightweight, high-energy-density input."
If you're spooked by the 70% pullback in lithium price over the past half-year, Gerrish reminded that it shouldn't affect the long-term worthiness of those stocks.
"Commodities are cyclical… high prices incentivise new production that ultimately solves those high prices," he said.
"While we cannot see lithium prices re-scaling the 2022 highs for many years, there is still plenty of opportunity."
In fact, the sell-off has made it a tempting time to buy.
"Following a sharp correction, Market Matters believes the risk/reward in lithium & other related commodities has improved."
Let's take a look at the three ASX shares Gerrish nominated as the best buys in the battery materials space:
10% profit in 2 weeks? Yes, please
Pilbara Minerals Ltd (ASX: PLS) is the pick of the lot for Gerrish at the moment. He would use any daily dips to buy more.
"We recently bought Pilbara Minerals in the Flagship Growth Portfolio and are now sitting on a ~10% paper profit in around two weeks," he said.
"We view Pilbara as the lower-risk exposure in a risky sector, where growing production will underpin growing earnings and dividends."
He admitted the last guidance showed costs heading up for the lithium miner.
"Pilbara reported average realised price of US$4,840/t which was down 15% Q/Q and that theme will continue, but the margins for this early producer remain solid."
The company's financial position looks secure enough to keep pumping out the dividends.
"Their cash balance rose $457 million in the quarter, pushing their bank balance up to a net cash position of ~$2.7 billion. This will support fully franked dividends in the range of 5%."
A more speculative punt for Gerrish is Global Lithium Resources Ltd (ASX: GL1), which he described as "a higher-risk exploration company with solid upside".
"Global is a $400 million lithium exploration company that is not in production and is therefore not producing earnings," he said.
"However, they are undertaking a large-scale exploration program at their Western Australia assets with good prospects in a solid area around Kalgoorlie."
Recent test results were "encouraging", he added.
"They are progressing through various stages of permitting and feasibility in their two operations."
On the rare earths side, Gerrish is "long and bullish" on Iluka Resources Limited (ASX: ILU).
"They are advancing the Eneabba phase 3 project, which consists of the construction of the first integrated rare earths facility in Australia — and this remains on track."
Iluka's bread and butter is mineral sands, which doesn't attract as high a valuation as rare earths producers.
But this is why it might prove to be a bargain buy right now.
"The proportion of their earnings that will come from rare earths in the future will increase meaningfully, from ~3% today to around 15% in the next 5 years."
