Investors dipping toes back in lithium waters amid growing doubts over big banks’ bearish calls

A straw hats in winter approach to investing in the beaten up ASX lithium sector appears to be taking shape.

Lithium producers were notably resilient in the broader market’s recent shakedown, and the juniors are finding that decent exploration results are being rewarded again with share price gains, albeit off smashed levels.

Somewhat remarkably, the tentative recovery of investor interest in the sector is despite the investment banks continuing to trash talk lithium’s outlook.

There should be no surprise in that as they are the ones that have orchestrated the big short positions in the leading lithium stocks. So they are talking their own books, and that of clients they have hustled into the short trade.

So why are straw hats in winter-type investors side-stepping the advice of the investment banks to dip their toe in to the lithium pool? It is on expectations that after some more pain on the lithium price front, the back end of the year could see prices rebounding on structural supply deficits.

They might well have been reading the latest edition of the EV Battery Lithium Monthly by industry consultant Adamas Intelligence.

It said it expects lithium demand to “rebound” in the June quarter.

“Led by a projected 40% rise in passenger EV sales this year (including HEVs) and a 6% rise in average pack capacity, we expect a 48% increase in LCE demand from the sector in 2024,” Adamas said.

“To reconcile mined supply to deployed lithium, we assume a 6-month lag between production and end-use consumption, analogous to real world transient effects.

“Our analysis expects a small structural deficit in Q2 2024, growing to more pronounced volumes in Q3 and Q4 as end-user demand ramps up, fuelling the drawdown of LCE inventories and an expected resumption of buying pressure in H2 2024.”

It should be required reading for any investor being cajoled by the investment banks – one suggested this week suggested prices were set to fall by 30% - into taking up short positions in the leading producers.

James Bay:

The other lithium thematic out there is that Quebec’s James Bay region is ripe for corporate action on the assumption that the looming deficit in supply does pan out as Adamas and others suspect.

Unlike the Western Australian spodumene space where the world’s biggest lithium players have been snapping up companies and projects, James Bay has seen little activity, only because the WA industry got going first.

It can’t last. The government there is mad keen on becoming a lithium hub for the voracious North American battery and auto markets. Access to clean hydropower and to infrastructure that is not all that remote compared with back blocks of WA are other attributes that suggest corporate action there must be brewing.

Then of course there is the world-scale of the deposits found there to date.

Distil all that down and names like Patriot (ASX:PMT) and Winsome (ASX:WR1) pop on to the screen, with Patriot distinguishing itself by having US lithium giant Albemarle already on the register with 5%.

James Bay juniors:

Take the emerging supply deficit and the likely elevation of James Bay as a corporate action hotspot, and the ASX-listed James Bay juniors are likely to enjoy a better a year than was the case in 2023.

The earlier point that explorers are again being rewarded for decent exploration results holds true amongst the James Bay players.

Cygnus Metals (ASX:CY5) is a recent example. It shares have moved up from a mid-March low of 4.8c to 7.5c, a gain of 56%, albeit leaving it well short of its 52-week high of 37c. Its market cap stands at $21 million.

Cygnus has a 10.1 million tonne resource grading 1.04% lithium at its Pontax discovery. Back when things were feverish in the lithium space that would be good enough for a $100m market cap.

Having said that, Cygnus’ recent share price gain is a response to an impressive 43.7m hit grading 1.15% hit at its Pegasus project, part of the broader Auclair project, where exploration is in its infancy.

The Pegasus pegmatite outcrop, and the Lyra outcrop, were only identified late in the 2023 field season. Cygnus plans to be back prospecting there shortly and will roll out the drilling rig in May.

It also recently added the Sakami prospect, along strike from Patriot’s Corvette project and Winsome’s Cancet project, to its portfolio. It is early stage stuff but rock chip sampling has indicated a lithium-caesium-tantalum trend worth following up.

Having said there has not been much in the way of corporate action in the James Bay region, Winsome, mentioned earlier, recently elevated its status there by securing an option over the mothballed processing plant and associated infrastructure at the Renard diamond mine.

The idea is a potential repurposing of the plant into a lithium processing plant for Winsome’s 59 million tonne at 1.12% Adina lithium deposit (it is about to be upgraded), 60km to the north of Renard.

The market liked the idea of the knockdown cost on the option being exercised (it is a fraction of the $C900 invested at Renard), and the operating and mineral permits that come with potential acquisition. Winsome was a 55c stock at in January. It is now $1.28.

Today’s interest though is what having Renard up and running might mean for other ASX lithium players in the James Bay region. It is a point not lost on Mont Royal (ASX:MRZ) which was last trading at 6c for a boutique market cap of $5.1m.

Out of the Michael O’Keeffe of Glencore/Riversdale fame stable of companies, Mont’s sweetly named Northern Lights project (no resource estimate) on a lightly explored greenstone belt is actually closer to Renard than Adina (a big and growing resource).

Mont said it “considers the potential repurposing of the Renard processing plant for lithium production to be a major strategic benefit to many lithium companies (exploration and development) operating in the Upper Eastmain district, with the potential to establish a near-term, central processing hub for lithium deposits throughout the region.

All very true and giving Mont good reason to get busy in the upcoming field season, with the company now fine-tuning a proposed drilling program at the Bohier prosect, the most advanced of the broader Northern Lights prospects.

It goes without saying leverage to success with the drill bit is extreme in Mont’s case, with or without lithium prices entering recovery mode later in the year.

Boss:

It has been an amazing journey for Boss Energy (ASX:BOE) since its 2015 pick-up of the Honeymoon uranium project in South Australia.

Mothballed in 2013 because of lousy uranium prices, Honeymoon was a project that no one wanted, except Boss, a true believer in the nuclear renaissance that has come to pass.

Boss is now a $1.83 billion company, so its derring-do move back in 2015 has had its rewards. But Boss has also made clear that a restart of Honeymoon should be seen as only the start of plans to leverage off the Honeymoon infrastructure and the regional resources to make for a bigger Honeymoon than the market currently has pencilled in.

That journey begins soon, with a diary entry based on previous statements from the company suggesting that Boss will be drumming its first yellowcake any day now.

The market’s immediate interest will be confirmation that the move back into production has gone smoothly and that all of the production and processing metrics are being met.

That’s perfectly understandable given Honeymoon is coming back with an ion-exchange (IX) enhancement over the solvent extraction method previously used.

Assuming all that gets ticked off, the market will turn its attention to Honeymoon’s upside, leveraging off its low capex restart and resource upside.

Initially at least, Honeymoon is coming back as a 2.5Mlb annual producer. Export permits allow for an eventual increase to 3.3Mlbs annually. It is upside worth having, given the uranium price is nice and strong at long last at $US88/lb.