What's Happening with the Lithium Market?

Is lithium finished?

No, of course it isn’t.

It has however been an “up and down” couple of weeks for everyone’s favourite battery metal, delivering lithium investors all sorts of emotions.

Today we’ll provide a summary of what’s been going on in the lithium space.

But first, here’s a calendar of all the high impact oil & gas drilling events that we are Invested in for 2023, including when each one is expected to start drilling.

Big oil & gas drilling events don’t come around often, are expensive and take years of preparation - rewards are potentially enormous, but rare.

The potential high rewards from a successful drill nearly always cause the share price to run up in the lead up to the drilling, and sometimes the share price spikes as the long awaited drilling result approaches.

Our strategy is to Invest at least a year before the drilling event, patiently hold as the share price slowly rises in the lead up to drilling, Top Slice and Take Profit before the result and be Free Carried into the result itself.

Ideally the share price has run enough that we can achieve Free Carry while retaining at least 50% of the position into the result.

This has worked for us more often than not, but obviously nothing in small cap investing is ever predictable, especially how the share price of a specific company might perform.

Here is the 2023 calendar or big drill events we are Invested in, in chronological order, based on guidance form each company (actual dates may vary):

88E, Oil - MARCH On track to spud its Hickory-1 appraisal well in Alaska in the coming weeks (read more)

GGE, Helium - MARCH The spud of the Jesse-2 well in Utah is expected in the coming weeks. (read more)

NHE, Helium - Q3 2023 - Scheduled to drill two targets in Q3 of this year at its helium resource in Tanzania. (read more)

IVZ, Natural Gas - Q3 2023- IVZ has announced they will be drilling Mukuyu-2 in Zimbabwe in early Q3. (read more)

EXR, Natural Gas - LATE 2023 Daydream-2 coal seam gas appraisal well in Queensland planned for late 2023. (read more)

TEE, Natural Gas - LATE 2023 A drilling decision is expected later this year on its 715 bcf prospective resource gas project in Queensland. (read more)

We have been Investing in high impact oil and gas wells since we started Investing in small caps.

We recognise that different types of wells can have different outcomes and those outcomes are often binary — either the company finds something or nothing.

This type of event with a binary result naturally results in large share price moves... in either direction.

However, in the lead up to an oil or gas drilling event, it’s often the case that share prices of these companies slowly edge higher as investors speculate on what drilling “success” might look like.

Observing this, we adopt a fairly common strategy for oil & gas explorers that we look to execute when Investing ahead of big drilling events.

Here is a bit more detail on what causes most oil & gas explorer share prices follow the pattern on which our strategy is based:

1. Invest early when the market isn't interested. We like to take a position well before a company lays out its drilling plan (happy for a 1 to 2 year wait). Generally this is when it has just picked up an acreage or when geophysics/seismic work is being planned for a “potential drill program”, the drill event is so far away that most people aren’t interested, and the share price is low.
2. Hold our Position as the company identifies a drill target. We like to hold onto our Positions while the company completes geophysics/2D and 3D seismic work. This process can often take longer than expected, leading to share prices trading sideways/lower, throwing up opportunities to increase our Investment in the company.
3. Top Slice our position. Typically, a company will outline its upcoming drill event months before drilling happens. Here the company sets out what it is targeting and often lays out a drilling timeline. This is often when the market first starts to take an interest in the company. This can present an opportunity to trim and help de-risk our position very slightly, sometimes it doesn’t.
4. Free Carry and hold the remainder of our position. In the lead up to, and during the drilling of a well, is when we tend to see the most market interest in an oil & gas explorer. This typically leads to share prices spiking higher as investors speculate on exploration success. We often look to Free Carry our positions here and sometimes even take some profit. In the event the company is successful, we still hold a meaningful enough position. If it isn’t successful, we have protected against large losses as the share price falls.

The obvious caveat to this approach is that market conditions can play a big factor in how well we are able to execute this plan.

We are also using this approach as part of a diversified Portfolio, so any losses we do have on these big drilling events is mitigated by our other Portfolio positions.

Importantly, while this Investment approach works for us, it may not be suitable for everyone. Only invest what you can afford to lose when it comes to speculative small cap stocks, and always seek financial advice before investing.

A wild ride in the lithium space

The lithium space was making headlines this week.

The lithium bears landed a few punches early on, but ultimately it looks like the bulls came out on top.

A rollercoaster of emotions and test of resolve for lithium investors.

On Monday, Chinese battery makers were rumoured to be offering discounts to carmakers, accelerating weakness in lithium prices.

After hitting record highs in December, lithium prices have pulled back in the new year.

Some analysts were saying they anticipate (at least short-term) prices to drop a further 25% as lithium supply outpaces demand...

(Source)

This negative news was offset in the same week by news that “An investigation into illegal mining in China’s lithium hub could cut global supply of the battery raw material by 13% this month, analysts said on Monday, potentially supporting prices that have plunged from record highs.”

(Source)

According to Reuters “The city of Yichun in southern China, which produces about 29% of the country’s lithium salt and is known as Asia’s lithium capital, said late on Friday it was cracking down on criminal activity, such as unlicensed and environmentally-damaging mining.”

Later in the week we saw lithium major Albemarle announce plans to expand its lithium hydroxide processing capacity in WA, with the company looking to establish direct supply routes to European buyers.

The multi-billion dollar lithium producer thinks supply chains are still fractured and it is pouring capital into fixing them... something you wouldn't expect to see if Albemarle believed that lithium supply really does outweigh demand.

(Source)

More support for a lithium bull case came later in the week at Tesla’s annual battery day, where CEO Elon Musk laid out what he thinks is needed for the world to transition to a “sustainable future”.

Musk outlined his “Master Plan 3” that would see $10 trillion spent globally to eliminate fossil fuels and bring about a sustainable future powered by renewable energy. This will include sourcing and securing the critical raw materials needed to build out battery supply chains.

Musk said, “As we improve the energy density of batteries, you'll see all transportation go fully electric, with the exception of rockets”.

Commenting on Musk’s plan, Benchmark Minerals’ Simon Moores noted that “scaling specialty chemical supply – especially lithium – is probably the hardest thing to do in the battery supply chain”.

For us, a key takeaway was that Musk didn't just focus on electric vehicle (EV) markets but instead included energy storage markets too.

(Source)

Until now much of the lithium demand story has centred on EV batteries, but it is so much bigger than that.

The reality is that a transition to intermittent renewable energy sources, like wind and solar, will require balancing energy supply when the wind isn't blowing or the sun isn't shining.

One of the best ways to do this is with massive battery stacks built alongside renewable power.

This means when there is adequate wind for energy grids, any excess power can be used to charge the batteries so that when the wind isn't blowing the batteries can be turned to supply power to the grid.

The recent Inflation Reduction Act (IRA) in the U.S., and similar legislation expected to come in Europe, is also adding to the tailwinds for the sector.

Research from Bloomberg has the market for battery storage growing by around 15-fold by 2030.

(Source)

Our view is that the recent commentary around excess lithium supply is just “noise” — we expect supply shortages to persist over the medium term.

American, European and Asian carmakers have all made commitments to completely electrify their vehicle fleets by the years 2030, 2040, or 2050.

Add the fact that lithium batteries are set to play a big part in the energy storage industry, which we think will be the big story of the next decade.

On the demand side, it takes only 2-3 years to build out downstream processing/battery manufacturing capacity.

But on the supply side, the International Energy Agency (IEA) estimates that the average lead time from discovery to production on critical minerals projects was more than 17 years.

See our detailed Lithium Outlook for 2023 here.

Here are the companies we hold in our Portfolios that provide exposure to lithium: VUL, LRS, TYX, EMH, RAS, MEG, MAN, PUR.

As more lithium projects pop up we published an educational guide to help understand the risks and opportunities in the different types of lithium projects:

This week in our Portfolios 🧬 🦉 🏹

Sarytogan Graphite (ASX: SGA)

Our 2022 Small Cap Pick of the Year Sarytogan Graphite (ASX: SGA) has the highest grade graphite resource on the ASX and the second largest contained graphite resource - second only to $1.2BN Syrah Resources.

Late last year SGA achieved graphite purity levels of 99.87% after a breakthrough in metwork.

That is an excellent purity result at this early stage And it is an important step towards SGA putting its graphite into batteries and running battery anode performance tests - All of which is scheduled to happen this year.

So far SGA’s metallurgical testwork has only been done in small benchwork samples of 0.5-1kg that were needed for stage 1 purification.

Now that 99.87% purity has been achieved, it’s time to run the next set of tests that need a bigger graphite sample.

Ultimately, SGA is chasing 99.95% graphite purity to sell into the high value battery anode market.

📰 Read the full Note: SGA Scaling up its High Value Battery Quality Graphite Aspirations

Los Cerros Ltd (ASX: LCL)

Largely the domain of Tier 1 mining giants, our $21.6M capped Investment Los Cerros Ltd (ASX: LCL) is set to embark on its maiden drilling campaign in Papua New Guinea in March.

Late last year, LCL acquired five copper-gold and nickel projects in PNG ... and early sampling had some of the highest grades we have ever come across. Samples include gold grading above 60g/t, copper of more than 20%, as well as nickel sulphides assaying up to 45%.

In the coming weeks, LCL will begin its maiden drilling program at the high priority Kusi target.

LCL is also in the midst of a 3c Rights Issue, which was open to all LCL holders ahead of the drilling campaign.

This week we published a new Investment Memo for LCL that covers its newly acquired PNG project and outlines the objectives that we want to see the company achieve over the coming 12 months, along with our Investment plan.

Correction: please note that due to a data entry error, we have corrected and updated our Shares Held in Los Cerros (ASX: LCL).

Our latest Investment Memo, Article and Quick Takes published since 1 January 2023 have been updated to reflect the correct Shares Held at the time that content was published.

Correct LCL Shares Held: 8,055,814

📰 Read the full Note: LCL Drilling PNG Copper-Gold Targets Next Month

88 Energy (AIM / ASX: 88E | OTC: EEENF)

The ice pad is almost finished, and the drill rig is about to travel to site ahead of 88 Energy’s (ASX:88E) 2023 drilling event.

88E is just weeks away from drilling its Hickory-1 well. The company will drill through six stacked targets, which combine to form a 647 million barrel prospective mean unrisked resource (net to 88E).

The plan for Hickory-1 is relatively simple: the $241M-capped 88E will be looking to confirm an oil discovery and re-rate in similar fashion to its neighbour to the north, Pantheon Resources.

Pantheon has been actively exploring in the region for a few years — it now has a market cap of $775M, having risen from just $60M to reach a peak of just under $2BN last year.

We like that 88E is fully funded for drilling, having recently raised $17.5M bringing its cash balance to ~$32.4M.

📰 Read the full Note: 88E spudding early March - six stacked targets to hit

Noble Helium (ASX: NHE)

Noble Helium (ASX:NHE) has some of the best helium acreage in the most prospective untested helium ground on the planet.

In Tanzania’s North Rukwa Basin, NHE is planning for two high impact drilling events this year.

The Rukwa Basin has potential to be the world’s third largest helium reserve behind the USA and Qatar and to provide the equivalent of around 30 years of (current) annual helium supply.

Here, NHE has an independently certified Mean Unrisked Prospective helium resource of 175.5Bcf.

NHE has nine prospective drilling targets and is in the process of narrowing these down to the best two candidates.

Once it has selected the two best drill targets, NHE is looking at a potential farm-out of the project with non-binding bids due by the end of Q1.

This is all ahead of the expected first drilling event in the third quarter of this year.

📰 Read the full Note: Big Few Weeks for NHE - Farm in bids due end of quarter

Top End Energy (ASX: TEE)

Said to have potential to solve Australia’s east coast gas crisis, the Beetaloo Basin in the NT hosts multiple actively exploring ASX companies, including our own Investment Top End Energy (ASX:TEE).

TEE holds a 50% interest over ~166,000km2 of exploration permit applications in the NT, with some of this ground sitting on the basin margin edges of the Beetaloo Basin.

Here, at the edges of the basin, TEE is looking to see if the Beetaloo formations extend to the previously overlooked acreage on the fringes.

TEE currently has a market cap of just $14.7M, but if it’s right in its exploration theory it could re-rate in line with other major operators in the Beetaloo that have market caps in the hundreds of millions.

But before TEE can begin any on the ground exploration work, exploration permits need to be granted.

We expect an outcome on its highest priority permit in the coming weeks.

While TEE waits to start exploring its NT ground, it's our view that the work being done by other ASX Beetaloo Basin stocks will increase the look-through valuation of TEE’s ground.

A recent $60M investment into the basin’s gas projects by Texan oil and gas billionaire Bryan Sheffield only helps on that front.

📰 Read the full Note: TEE’s Beetaloo exploration permit could only be a few weeks away

Macro News - What we are reading 📰

Battery materials

Vulcan Energy reaches watershed in high-stakes lithium play

PM’s battery dream ‘admirable’ but unlikely: CEOs

Copper Diverges from Crude Oil amid Construction Boom, China Prospects

Lithium leader doubles down on multibillion-dollar spend in WA

China lithium probe shuts down chunk of global supply

USA battery Materials

EU Close to Deal With US on Battery Materials, Trade Envoy Says

Oil & gas

States hit for ‘demonising’ gas

Gas is the perfect partner for the world’s transition to renewable energy

Rare Earths

Chalmers blocks Chinese investor from rare earths stake

Green hydrogen

Green Hydrogen Project Is New "World's Biggest"

DBI says hydrogen too cold for tropical north Queensland

Uranium

Nuclear Power’s Revival Reaches the Home of the Last Meltdown

France Forges Pact to Make Nuclear Part of EU Clean Energy Shift

This week’s Quick Takes 🗣️

88E: Drilling adjacent $755M Pantheon Resource set for early March

88E: Permitting update at 88E’s Project Phoenix

AKN: Out of Trading Halt; seeking to have licenses reinstated

EXR: Gas production testing hits another milestone

GAL: Highest grade palladium and platinum to date

GGE: US helium appraisal well set for mid-March

GGE: Drilling in the coming weeks - well site now 70% complete

LCL: Today is the last day to secure Rights Issue

LNR:10,000m+ rare earths drilling program to start in April

MAN: $360M Galan Lithium buying MAN shares on market

MEG: Megado gets new rare earths ground in USA

TEE: Final permitting meetings set for mid-March in the NT

TG1: Joint Venture (JV) agreement signed with $10BN IGO

TYX: Helicopter secured to test high priority lithium targets

VN8: Half year results - how did this telco fare?

⏲️ Upcoming potential share price catalysts

Updates this week:

• GAL: Is undertaking a second round of drilling at its Callisto PGE discovery in WA.
  • This week GAL reported its highest grade palladium and platinum results from Callisto, as we covered here.
• 88E: Drilling for oil in the North Slope of Alaska next to UK listed Pantheon Resources.
  • Ice pad construction nears completion; mobilisation of rig to commence shortly.; formation of unit approved.
• GGE: Preparing to drill its US helium project looking for a commercially viable flow rate.
  • Jesse-2 well site construction at 70%, on schedule for mid-March spud. See our Quick Take on the news here.
• PRL: Awaiting final execution of a joint development agreement with Total Eren.
  • PRL remains suspended pending “a material update in relation to the Binding Term Sheet entered into with Total Eren”.

No material news this week:

• EV1: Updated DFS looking to improve on the already relatively strong US$323M NPV; Framework Agreement with the Government of Tanzania.
• KNI: Drilling 2/3 of its Norwegian battery metals projects inside the EU.
• TMR: Maiden JORC resource estimate for its Canadian gold project.

Have a great weekend,

Next Investors