I. Sector Landscape
International demand for battery materials has gone through the roof as sustainability and climate crisis gains global importance. Australia has remained the key focus for international battery manufacturers, considering the abundance of natural resources. Continuous demand for Australia’s cobalt, vanadium, lithium and graphite resources, coupled with associated downstream investment, may seek expansion in the battery value-add supply chain.
Australia remains to be the world’s most extensive Economic Demonstrated resource of uranium. The build-up of nuclear momentum holds a significant uncovered demand in the forthcoming decades. Uranium prices have languished since the disaster of Fukushima in Japan in 2011. Now nuclear is making a cautious comeback amidst international clean energy mandates.
Mining Activities in Australia
Mineral Exploration Trending Upward: Total expenditure in mineral exploration has surged by 3.7%, clocking $878.3 million in June 2021 quarter. Total meters drilled surged to 3,469.8 meters, up by 5.5% sequentially. The mining industry shall receive favourable support from the government under the National Resources Policy Framework, which shall deliver globally attractive and competitive investments.
Figure 1: Mineral Exploration Activities Seeks an Up-trend:
Source: Based on The Australian Bureau of Statistics data, Analysis by Kalkine Group
Recent Commercial Indicators in the Sector: In June 2021 quarter, mining value-added surged by 0.7%, and exploration spending reached $956 million for all commodities. Resources and energy Export Values Index kicked up by 33% since June 2020 quarter. Resources and Energy exports are estimated to clock $310 billion for FY21.
Significant Opportunities Sought in Uranium
Uranium Prices Clocking New Highs: Uranium stocks and ETFs have skyrocketed amid rising demand from China and India amidst the growing need for meeting electricity demand. Large uranium purchases by the Spott Physical Uranium Trust, a Canadian Closed-End Fund (CEF), have pushed uranium prices to their highest level since 2014. As of 15 September 2021, uranium closed at US$48.55/ounce relative to US$30.45 recorded on 13 August 2021 (the previous month).
Figure 2: Australia’s Global Contribution in Uranium:
Source: Based on Geoscience Australia Data, Analysis by Kalkine Group
Exports and Other Production Factors: Australia’s average annual export of uranium for the past ten years has approached circa 6,048 tonnes. Post closure of two mines in 2014 and 2015, Australia’s uranium supply has decreased moderately over the last ten years. Australia is left with two operating uranium mines, post ERA’s Ranger mine closure in the Northern Territory on 8 January 2021. The closure will likely drain production levels; however, export revenues are expected to recover partially as prices are pushed upwards.
Uproar in Battery Materials
Global Production of Graphite: Graphite production is highly concentrated, with China account for circa 80% of global production. International graphite production declined by 27% in 2020 amidst the COVID-19 pandemic. Asia remains the major consumer of graphite refractories turns out to be the most significant user with 44% consumption of world production.
Potential for Lithium Metals: Spot spodumene prices have surged by 58% and stood at US$640/tonne for December 2020 to May 2021. Australia’s lithium production is expected to clock 213,000 tonnes LCE in FY21, and export earnings are estimated to clock 1.4 million tonnes. Demand from auto manufacturers remains robust and is expected to surge dramatically.
Dramatic Upswing in Nickel Consumption: In March 2021 quarter, the global consumption of nickel surged by 19% PcP, amidst industry resurgence from COVID-19 impact and robust demand from Electric Vehicles (EV) battery market and stainless-steel consumption. In FY21, Australia’s nickel exports are estimated to clock $3.6 billion, marginally lower by 4.5% PcP. The growth in export volumes, coupled with an increasing price outlook, is expected to drive export earnings.
Index Performance
ETFS Battery Tech & Lithium ETF, representing lithium and battery materials stocks, posted one year returns of ~+52.21% as compared to ASX 200 Index gains of ~+25.25%. Rapid adaption of battery storage requirements, zero carbon push by regulatory bodies, spurt in demand for electric vehicles,, and government stimulus are some of the driving factors.
Figure 3: ETFS Battery Tech & Lithium ETF outperformed the ASX 200 Index in the past one year by astonishing ~26.96%.
Source: REFINITIV as on 16 September 2021
Key Risks and Challenges
Global competition to cater EV sector has driven up high, which may translate into price pressures on lithium, graphite, and nickel. Despite intensive government support, EVs face high affordability issues. Lithium iron phosphate (LFP) battery usage assumes a potential threat from cell to pack (CTP) layout improvements due to limitations on the driving range. Potential concerns over the long-term availability of nickel supply have flagged the preference of lithium-iron-phosphate battery over nickel-heavy battery chemistries. Forecasts for Nickel Prices are revised downwards, which may cause a contraction in export earnings.
Figure 4: Key Risks and Challenges:
Source: Analysis by Kalkine Group
Outlook
Figure 5: Outlook Framework for Battery Materials and Uranium Mining Sector:
Source: Analysis by Kalkine Group
The Green Investments by Countries: The resilient US Green Deal shall earmark US$1.7 trillion for infrastructure projects, including ‘green infrastructure.’ Coupled with green investment in EU countries’ EUR750 billion fiscal stimulus packages shall deliver growth in battery minerals.
Widening Global Nuclear Installations: The broadening out of global nuclear installations as an increased number of countries are now installing reactors, uranium seeks high growth potential in terms of demand. Prices have already jumped through the roof, presenting favourable conditions for export earnings growth.
Increased Graphite Production Estimates: Production is projected to rise by 4% annually until 2030, to 2.4 million tonnes. The most significant growth is expected in China, followed by Africa.
Expansion in Domestic Lithium Refining: Amidst the rising demand for EV batteries, Australia has expanded its lithium refining base. Exports in FY22 are expected to climb by 44% and clock the $2.0 billion mark amidst robust demand and substantial gains in spodumene prices.
Favourable Export Volumes in Nickel: Australia’s nickel export volumes are estimated to clock 248,000 tonnes in FY22, up by 26% YoY in FY22, and a further jump of 251,000 tonnes in FY23. This comes amidst the rising demand for EV batteries and stainless-steel production.
II. Investment theme and stocks under discussion (ERA, VMY, ZIM, WSA)
After understanding the sector, let us now look at four companies listed on the ASX. The price potential of the companies under discussion has been analysed based on the valuation and technical levels.
1. ASX: ERA (Energy Resources of Australia Limited)
(Recommendation: Speculative Buy, Mcap: A$1.69 billion)
ERA is engaged in the business of mining, processing as well as selling uranium oxide.
Valuation:
The stock of ERA gave a positive return of ~33.478% in the past one year. On TTM basis, the stock of ERA is trading at EV/Sales multiple of 10.9x, lower than the industry median (Energy) of 66.2x. Considering the high potential of nuclear adoption, resistance outbreak in uranium prices, technical overview mentioned below, and TTM valuation, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.470, up by ~2.173% on 16 September 2021. Investors with high-risk appetite should evaluate this stock in view of the technical support and resistance levels as well as taking into consideration associated risks such as highly concentrated exposure to uranium and potential exploration risks.
Technical Overview:
ERA prices witnessed significant gains in the current month after the stock broke the AUD 0.366 resistance level by an upside which could lead the prices to the next resistance levels i.e., AUD 0.587 and AUD 0.712. On the lower side, immediate support levels are AUD 0.366 and AUD 0.295. Volumes have increased drastically along with increase in prices further indicates active buying participation in the stock. RSI (14-period) is hovering at ~70 level indicates the prices are trading in a bullish momentum.
2. ASX: VMY (Vimy Resources Limited)
(Recommendation: Speculative Buy, Mcap: A$252.35 million)
VMY is an Australian-based exploration and evaluation company, engaged in the exploration and evaluation of the Mulga Rock Project.
Valuation:
The stock of VMY gave a positive return of ~550.00% in the past one year. On TTM basis, the stock of VMY is trading at Price/Book Value multiple of 48.1x. Considering the high potential of nuclear adoption, resistance outbreak in uranium prices, and technical levels mentioned below, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.248, as on 16 September 2021, at 01:02 PM (GMT+10), Sydney, Eastern Australia. Investors with high-risk appetite should evaluate this stock in view of the technical support and resistance levels as well as taking into consideration associated risks such as highly concentrated exposure to uranium and potential regulatory risks.
Technical Overview:
VMY prices witnessed significant gains in the current month after the stock broke the upward sloping trend line resistance of AUD 0.200 by an upside which could lead the prices to the next resistance levels i.e., AUD 0.306 and AUD 0.370. On the lower side, immediate support levels are AUD 0.200 and AUD 0.155. Volumes have increased drastically along with increase in prices further indicates active buying participation in the stock. RSI (14-period) is hovering at ~76 level on monthly time frame chart further indicates that the prices are trading in a bullish momentum.
3. ASX: ZIM (Zimplats Holdings Limited)
(Recommendation: Hold, Mcap: A$2.26 billion)
ZIM is engaged in the production of Platinum Group Metals (PGMs) and associated metals like nickel, gold, copper, cobalt and silver.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 15.92% on 16 September 2021. The stock might trade at a slight premium compared to its peers’ average EV/Sales (NTM trading multiple), given the ongoing progress in Mupani Mine. For the purpose of valuation, peers such as Western Areas Ltd (ASX: WSA), Macmahon Holdings Ltd. (ASX: MAH), Fortescue Metals Group Ltd. (ASX: FMG) have been considered. Considering the favourable commodity prices, increased capacity from development projects, technical levels, and valuation, we give a “Hold” recommendation on the stock at the current market price of $21.290, up by ~1.140% on 16 September 2021. In addition, the stock has delivered an annualised dividend yield of 5.18%.
4. ASX: WSA (Western Areas Limited)
(Recommendation: Hold, Mcap: A$981.01 million)
WSA is a leading producer in Australia that supplies high-grade nickel concentrates to the local and international smelter and refinery operators.
Valuation
Our illustrative valuation model suggests that stock has a potential upside of 12.46% on 16 September 2021. The stock might trade at a slight premium compared to its peers’ average EV/Sales (NTM trading multiple), considering the upliftment in production from Forrestania mine. For the purpose of valuation, peers such as IGO Ltd. (ASX: IGO), Newcrest Mining Ltd., (ASX: NCM), OZ Minerals Ltd. (ASX: OZL) have been considered. Considering the improved demand and price potential for nickel, capacity expansion initiatives, and valuation, we give a “Hold” recommendation on the stock at the current market price of $3.070, up by ~0.655% on 16 September 2021. In addition, the stock has delivered an annualised dividend yield of 0.32%.
Note: All the recommendations and the calculations are based on the closing price of 16 September 2021. The financial information has been retrieved from the respective company’s website and REFINITIV.
Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation and Technical Indicators has been achieved and subject to the factors discussed above.
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