Why there's still room in the tank for battery materials

There have been very few market themes in recent years (perhaps apart from buy-now-pay-later) that have whipped the market into a frenzy quite like battery metals.

The promise of widespread electric vehicle adoption and the demand it could create saw the share prices of producers and explorers alike surge.

In 2022, the rising tide lifted all boats as lithium prices soared. So far, 2023 has been a more sobering experience.

This now begs the question - can these commodities resume their upward trajectory, or will they be resigned to suffer the same fate as the many hot commodities that came before?

To unpack these themes, Bell Direct’s Grady Wulff is joined by Tim Serjeant from Eley Griffiths Group and Todd Warren from Tribeca Investment Partners. 

They share their insights on the current state of the commodities markets and two commodities (and stocks) they like moving forward. As an added bonus, they each share a commodity and a stock they believe the market has misunderstood.

Note: This episode was filmed on Wednesday 19 April 2023. You can watch the video, listen to the podcast or read an edited transcript below. 

Edited Transcript 

Grady Wulff: Hello, and welcome to Livewire's Buy Hold Sell. I'm Grady Wulff, and today we are lucky to be joined by two resources specialists for their outlook on the battery materials sector and stocks moving forward. Now you'll find out exactly which commodity has run out of steam and which has plenty left in the tank, and it gives me great pleasure to introduce our guests for today, our experts for today. I have Tim Serjeant from Eley Griffiths Group, and Todd Warren from Tribeca. Gentlemen, thanks for joining me.

Are we in some kind of supercycle? 

Todd Warren: Supercycle is always a strong term. Cautious to endorse that one, but we are very bullish about what the future holds for the sector, and particularly those future-facing commodities that are related to decarbonisation. We think the upside that will come from that new level of demand at a time when supply is really challenged which is really going to bode very well for the sector.

Grady Wulff: Tim, thoughts? Agree, disagree?

Tim Serjeant: In a relative sense, I think materials and energy is going to remain a good place to be. And there's a couple of reasons I say that. I think the supply outlook is a response of what happened a decade prior where management teams and boards destroyed capital, and they've had to since endorse a value-over-volume approach and start the industry of capital. COVID has been an accelerant on the demand side, I think, for a number of commodities and where we stand today, we're seeing a pretty constructive M&A backdrop. So that all leads me to think that materials and energy is going to be a good place to be.

Battery metals - where are we at in the cycle?

Grady Wulff: Now staying with you, talking about battery material stock specifically, or the commodity specifically, where are we at in the cycle, in your opinion?

Tim Serjeant: Look, it's early, and I think in a baseball parlance it'll be second or third inning. And why I say that is if we have to look at where some of these raw materials markets have to get up to by 2030 or 2050 to meet decarbonisation goals, we're looking at three to 10x in terms of the size of those markets. So that's the first thing.

I think the second thing is from a government policy perspective, we're seeing the Inflation Reduction Act in the US and equivalent one launched in Europe. And that's really, I guess, to drive and incentivise investment going forward. So that's why it's I think still fairly early.

Grady Wulff: Todd, where are we at in the cycle, in your opinion?

Todd Warren: Totally agree with Tim. Tim's touched on a few things there, but government policy has really been the missing piece here, aside from the fact that permitting has always been a challenge and getting more and more challenging at a time when we desperately need more of these commodities out of the ground. But we need governments to put their shoulder to the wheel. We're seeing it in the US with the Inflation Reduction Act, and you're starting to see similar policies around the world. But that's really what's going to incentivise more investment in the sector at a time when, as I say, demand, and Tim's touched on it, demand is lifting exponentially.

Is lithium still safe - was it ever?

Grady Wulff: Absolutely. Staying with you, we've seen some serious volatility in the price of lithium lately. Is it still safe in your opinion or what are your thoughts on lithium?

Todd Warren: Well, yeah, there's been a bit of hate, frankly, actually for lithium more recently.

Grady Wulff: Didn't want to say the H word.

Todd Warren: And you've seen the prices pull back quite significantly. Whether that's a real market or not, because we're watching the spot price and the spot market is very thin. There's actually not much lithium traded in the spot price. But where we're seeing it today, we think it's just a function of where the supply and demand is. It's just accelerating at a different rate. Supply overall is still struggling to keep up with this massive lift in demand from batteries and EVs and the like. And we are actually starting to feel more constructive at these levels, where they were probably a little bit overcooked a few months back.

Grady Wulff: Absolutely. Tim, agree, disagree?

Tim Serjeant: Broadly agree. I think lithium's never been safe. I think you've seen a commodity rise sort of 10x and then maybe it's sort of halved off its most recent high. So still up five times. And I think from a volatility perspective, as investors we embrace that. That gives us opportunity, and I think the opportunity for the incumbent players in the industry, the ones who have a longer-term horizon, can sort out the potential, the wannabes from the winners. And I think as investors that's what we enjoy as well. That volatility's something to embrace.

Grady Wulff: Tim, where do you see the long-term price stability going for the outlook of lithium once this supply/demand equilibrium kind of evens out a little bit more?

Tim Serjeant: Look, everyone wants to bring it back to marginal cost of production, and I think for lithium that's really challenging. Most people talk about a $15,000 to $20,000 per tonne chemical price. But the reality is when you've got a commodity that's growing 25%, 30% per annum and a supply outlook that's lagging, any period of surplus is going to be relatively short-lived. So I think it's probably too premature, but what I would say is that longer-term marginal cost production over time tend to inch up.

Grady Wulff: Todd, thoughts? Long-term outlook on lithium prices?

Todd Warren: Higher than the market would have you believe. I think there's a couple of things I'd say. Number one, all the assumptions in market models today are really assuming that all these projects come on time, on budget. They never do. So put that out of your mind right away. Number two, we're actually going to need technological advancements. And so to Tim's point about marginal cost, we don't know where it sits because where there's talk about Chinese lepidolite. We actually don't know what it costs to get it out of the ground, or whether it's direct lithium extraction out of brines in South America. We don't know what it costs to get it out of the ground. So until we've got a better handle on that, it remains a bit of an unknown number.

Battery metals - Which horse to pick and two big buys

Grady Wulff: It is a very unknown space at the moment. It's exciting though. The EV space and the battery space is very exciting. Sticking with battery materials, which one do you believe is set for serious highs over the next 12 months?

Todd Warren: We're going with graphite. We like graphite. We think graphite is a bit like the lithium of 2020. At that point for lithium, you really saw the price start to accelerate as demand from batteries exceeded 50% of the total lithium market. And that's what we're seeing in graphite right now, where demand from batteries is exceeding 50% and taking over from the steel market, at a time when we need so many more of these mines to come to market. And yet there's one listed western world producer of graphite today, natural graphite. So yeah, we are very excited about the graphite market.

Grady Wulff: So is that your stock that you're bringing us today?

Syrah Resources (ASX: SYR)

Todd Warren: Syrah, SYR, listed here in Australia. These guys have a mine in Mozambique, which is a very high grade. It's a huge mine and a very large component of the world's resource of natural graphite. But where they've really stolen a bit of a march is in their downstream developments in the US. So they're getting significant funding from the US government through the Inflation Reduction Act to not just build stage one, which they will be as of some time this year up and running with, but then also they've got a $220 million grant from the government as well for stage two. So we're very excited about the growth profile at a time when it's very difficult to get graphite exposure.

Grady Wulff: Absolutely. Well that's exciting. Syrah is your pick. Tim, your pick of the bunch for the battery material stock set to soar over the next 12 months, and a stock for us please.

Tim Serjeant: Yeah, so I'm going with rare earths, and rare earths have halved. So I'm tipping they can get back to their 12-months highs. And there's a couple of reasons why they've halved, but I think most of them are non-fundamental in nature. A bit like graphite, rare earths, a specialty metal, is a fairly niche and opaque market as it stands today. What excites me about rare earths is the structure of the market, and it's the fact that China is such a dominant player in the mid and downstream processing of that commodity today, and it simply just has to diversify for geopolitical and supply chain reasons.

Lynas Rare Earths (ASX: LYC)

So to that end, I think the stock today, to me, where the risk-reward looks attractive once again is Lynas. Investors have been right to be cautious on Lynas over the last six months. Prices have corrected 30% or 40%. They've had issues with permitting and licence renewal in Malaysia, and there's obviously CAPEX being spent and sunk at Kalgoorlie. But those things are largely known now by the market and I think strategically, the businesses is in as good a shape as it's ever been. It's been able to diversify its infrastructure base. So fast-forward 12 months, we'll have assets in Australia, Malaysia, and potentially in the US as well on the separation site. It's got a really good balance sheet and good management team to manage its way through. So I think Lynas can rebound.

Hot commodities

Grady Wulff: And now on the broader commodities front, what's one commodity you think the market's got really wrong and a stock that matches that?

Tim Serjeant: Yeah, so look, I'm going to say gold. I think it's topical at the moment. It's a commodity that is on its highs, but I don't think positioning is anything near where the commodity would have you believe. And I look at ETF holdings, I look at whether just people generally over or underweight the sector, I look at positioning from a speculative standpoint and it's certainly not extreme. And so I think the gold price has to hold here for the equities to catch up and rally. People have rightly been shunning the gold sector because operationally there have been some challenges. But by and large, if gold holds, I think the sector can rally.

Genesis Minerals (ASX: GMD) 

The couple of stocks, I'll give you one, I think Genesis Minerals, which has just undertaken a pretty significant transaction with St Barbara buying its Leonora assets. And if that transaction does complete, as it probably should in June and July, I think that stock is going to be one of the market embraces.

Grady Wulff: Todd, thoughts? 

Todd Warren: Uranium. It’s a commodity we think is not well understood by the market. It's a commodity that carries some baggage clearly, given its history. But I think there's a growing realisation around the world that we are only going to achieve decarbonisation through base load support from something like nuclear power, which supports the intermittency of renewables. 

To that end, we're starting to see governments around the world getting behind nuclear again, whether it's the US pulling back from any decommissioning plans. You've got the EU including nuclear power as part of their sustainable finance taxonomy. You've got the Japanese restarting a whole bunch of reactors. You've got the Chinese building more reactors than they ever have. We've got actually more reactors under construction today than we have since the 70s.

Grady Wulff: And to that note, a stock you've bought along for us today.

Boss Energy (ASX: BOE)

Todd Warren: Yeah, Boss Energy, BOE listed here. They have one of the very few fully-funded, shovel-ready, fully-permitted projects around the world. So they will likely be in a production six or 12 months away. And we are pretty excited that they're going to be coming into production right at the sweet top spot when the commodity starts to run.

Grady Wulff: Very exciting times. And that's all we have time for today for this battery materials special of Buy Hold Sell. I really hope you enjoyed it because we had such a good time filming it. So if you did, why not give it a like. Make sure you subscribe to our YouTube channel. We're adding so much great content every single week.

If you had to go all in on one stock, what would it be and why?

There were some great picks across various commodities in the show, but what commodity stocks do you like and why? Let us know in the comments section below.