Top 5 ASX Lithium Stocks to Watch in 2022

If you’re reading this sentence, you’re probably one of the many thousands of investors who have caught the lithium bug! The narrative around lithium has centred on strong demand, looming supply deficits, and booming price predictions. However, the hype doesn’t always translate into a rising share price for a company, even a lithium company.

In this article, I’ll dial down the hype and look at the Top 5 ASX Lithium Stocks which are producing lithium or are very close to it.

The lithium hype

There are now dozens of lithium stocks on the ASX, many having popped up over the last 12 months to cash in on the explosion of interest in lithium explorers and producers among Aussie investors.

Fantastic narratives are often useful in pumping up share prices in a sector where there is a great deal of hype. Often, buying based upon a fantastic narrative pushes up prices, which draws in those optimistic for quick gains, which pushes up prices, which draws in even more optimists, which…well you get the picture!

At some stage, something in the world usually occurs to tip the balance away from frenzied buying to the crystalising the newly acquired paper profits of early adopters. Without any new demand for lithium company shares, even a modest influx of supply can send prices tumbling. This is evident on the price chart of pretty much any lithium stock on the ASX over the last 12 months.

We’ve done the boom. We’ve done the bust. Investors who once believed they were about to ride ‘the next big thing’ to easy riches are now scratching their heads and wondering where they went wrong.

However, there are companies which stand a good chance of producing reliable profits throughout the lithium price cycle, which I have explored below.

Related article: Investing in Lithium: The commodity of the moment

Lithium market dynamics

Years of underinvestment in the lithium exploration and production sector post-GFC, versus the growing adoption of electric vehicles and a general expansion in the usage of lithium-ion batteries to power our favourite gadgets, has contributed to a generational supply deficit in the lithium market. In simpler terms, for the time being there is far greater demand for lithium than there is supply.

It can take from five to 10 years to get a new lithium mine online. We’ve known about the deficit for a few years now, and it’s for this reason the supply deficit is predicted by many to last until at least 2030. There’s far less agreement in projections from 2030, because by around then, much of the planned supply from new mines currently under development is expected to hit the market.

Lithium prices have soared over the last couple of years due to the prevailing supply deficit, and local lithium explorers and producers have benefited. In late-May, a research report from Goldman Sachs suggested the imbalance in the lithium market could be met by increased supply from Chinese miners targeting unconventional lepidolite resources. Around the same time, investment banking rival Credit Suisse made similar claims about an expected influx in supply tipping the lithium market back into balance as soon as 2023-24 – far sooner than most expected. These reports sent shockwaves through ASX listed lithium plays and share prices tumbled.

Other research houses have since moved to dispel Goldman and Credit Suisse’s claims, and to promote their own bullish demand-supply cases. More recently, Elon Musk, never one to shy from providing a contentious opinion, claimed lithium refiners have a “licence to print money”. The share prices of ASX listed lithium players appear to be stabilising on this positive rhetoric, but they are far from booming as they did prior to May’s selloff. The key takeaway message is: No one knows the future, and investors should be open to both sides of the argument – and not just assume the lithium boom is a lock.

Lithium hard rock or brines

For the record, Chile has the largest lithium reserves, at 8 million tonnes, it’s well over double Australia’s 2.7 million tonnes. However, at the time of writing, Australia was the largest lithium producer with just over half of global production. Interestingly, each country hosts very different lithium deposits.

The lithium the world is clamouring for is generally sourced by two methods targeting two distinct lithium hosting minerals. So called ‘hard rock’ lithium minerals such as spodumene occur naturally within the earth’s crust. Spodumene can be relatively easily refined to lithium hydroxide compared to other lithium host minerals (see “lithium brines” below). Lithium hydroxide is a key input in the lithium-ion battery manufacturing process. Australia is considered to host the world’s largest deposits of hard rock lithium and is currently the world’s largest producer of spodumene.

The other major source of lithium comes from lithium brines. Here, lithium is hosted in minerals dissolved in groundwater which is pumped to the surface in large ponds and evaporated for collection. The target mineral is lithium carbonate which can be processed to produce battery grade lithium hydroxide. For this reason, lithium carbonate generally commands a lower price in the market than lithium hydroxide. Chile is considered to host the world’s largest deposits of lithium brines and is currently the world’s largest supplier of lithium carbonate.

Top 5 ASX Lithium Stocks to watch

Let’s now explore the top five lithium stocks to watch on the ASX. They are listed below in order of greatest market capitalisation.

Mineral Resources (ASX: MIN)

MinRes, as it is often nicknamed, is a truly diverse resources company. Its major divisions include mining services, iron ore production, natural gas, and of course, lithium minerals production and refining.

MinRes is aiming to be a top five global lithium minerals producer via its two main lithium assets. The Mt Marion mine located in WA’s Goldfields region is currently producing approximately 450,000 tonnes of spodumene concentrate per annum. MinRes is in the process of upgrading Mt Marion to increase production to 900,000 tonnes of spodumene concentrate per annum by December 2022.

The Wodgina mine located in WA’s Pilbara region is currently under development and hosts one of the world’s largest hard rock lithium deposits. At full capacity, MinRes expects Wodgina will produce 750,000 tonnes of spodumene concentrate per annum. Wodgina is MinRes’s long play as it is expected to have a mine life in excess of 30 years. Wodgina is 50% owned by MinRes and 50% owned by major chemical conglomerate Albermarle. It’s intended MinRes will handle the mining side of the equation and Albermarle the refining side of producing battery grade lithium hydroxide from companies’ Kemerton joint venture near Bunbury in WA’s South-West.

MinRes has a clear plan to ramp up lithium minerals production over the next couple of years, and because of its exposure to the refining side, is well positioned to benefit from more than just the mining aspect of the lithium value chain. Its ability to take advantage of current high spot prices, superior scale, and track record of execution are all highly attractive traits for investors.

If there is a risk, it’s potentially from the other parts of the MinRes business. It’s far from a lithium pure-play, well really, it could more accurately be described as an iron ore company with some fantastic lithium assets. Lithium will likely grow significantly in terms of contribution to the bottom line from here, but potential MinRes investors must also be comfortable with the rest of the MinRes business.

MinRes is presently enjoying excellent cash flows across its major operating divisions and has an excellent balance sheet with very little debt. It has steadily grown its earnings consistently each year for the past five years and has also paid shareholders a dividend each year over this time. MinRes’s average return on equity over the last five years is 23% which places it among the top performing companies for shareholder return on the ASX over this time.

The current market consensus is for MinRes to earn a net profit after tax (NPAT) of approximately $404 million or $2.13 per share. At the time of writing, this means MinRes is trading at a price to earnings ratio (PER) of around 22 times FY22 earnings. Earnings growth is expected to average 49% per annum for the next three financial years.

IGO (ASX: IGO)

Like MinRes, IGO is also a diversified mining company with interests in nickel, copper, cobalt, and lithium. Each of these minerals are important in the production of electric batteries. This makes IGO more of a pure-play battery metals company than MinRes, which could be more appealing to some investors.

The Nova Operation is IGO’s flagship operation. It is located in the Fraser Range, 360km southeast of Kalgoorlie and 380km from the Port of Esperance in WA. In FY21, Nova achieved total production of 29,000 tonnes of nickel, 13,000 tonnes of copper, and 7,000 tonnes of cobalt.

IGO’s recent takeover of Western Areas has delivered it access to two other nickel producing mines, Cosmos which is under development, and the long-life Forrestania Nickel Operation which produces nickel from the Flying Fox and Spotted Quoll mines. The Western Areas acquisition will add around another 25,000 tonnes of nickel production per annum.

IGO’s lithium assets are held by way of a joint venture with Tianqi, a mining conglomerate based in Sichuan, China. Tianqi is a major player in the global lithium supply chain accounting for just under half of the world’s lithium production. IGO has 49% interest (51% Tianqi) in the joint venture which owns a 51% stake in the Greenbushes Lithium Mine and 100% ownership of the Kwinana Lithium Hydroxide Refinery located just south of Perth, WA.

Greenbushes is considered to be the world’s largest high-grade hard rock lithium deposit. With a mine life of around 25 years, it is the jewel in IGO’s lithium portfolio. The mine’s operator, Albermarle, owns the remaining 49% interest and is in the process of upgrading the mine’s capacity to around two million tonnes of spodumene concentrate per annum. Put simply, Greenbushes is a monster in terms of global lithium production.

Better still, IGO stands to benefit further up the supply chain, and therefore value chain, by processing the spodumene concentrate from Greenbushes into battery grade lithium hydroxide at its Kwinana plant. The joint venture aims to become a major supplier to several European and Asian electric battery manufacturers.
Like MinRes, IGO is a cash cow at the moment enjoying elevated prices for each of the key battery minerals it produces. It has grown its earnings four out of the past five years and has also paid a dividend each year over this time.

The current market consensus is for IGO to earn a NPAT of approximately $392 million or 52 cents per share. At the time of writing, this means IGO is trading at a PER of around 19 times FY22 earnings. Earnings growth is expected to average 21% per annum for the next three financial years.

Allkem (ASX: AKE)

Unlike MinRes and IGO, Allkem is closer to a pure-play lithium company. Lithium is by far the main focus for the company, but it also owns a producing borax project in Argentina (Borax Argentina 100% owned) which it acquired from Rio Tinto in 2012.

Borax Argentina only makes a relatively small contribution to the Allkem bottom line. However, Allkem’s list of lithium assets is extensive. It owns two hard rock deposits across two continents, three lithium brine projects in South America, and a majority stake in a lithium hydroxide processing plant in Japan.

Allkem’s hard rock lithium projects include the Mt Cattlin Project in WA and the James Bay Project in Canada. Mt Cattlin is located 200kms from the port of Esperance and is currently producing approximately 220,000 tonnes of spodumene concentrate per annum. All production at Mt Cattlin is sold under long-term contracts. Allkem is actively exploring within the Mt Cattlin Project area and believes there is potential to increase the ore reserves there by as much as 50% from the 2021 reserves base of approximately eight million tonnes spodumene.

The massive 40 million tonnes of spodumene resource at the James Bay Project, Quebec, is in the engineering design phase. Allkem expects it to produce over 300,000 tonnes of spodumene concentrate per annum commencing around the first half of 2024. James Bay is a low cost (US$333 per tonne) operation with an expected mine life of around 20 years. James Bay also has the benefit of being located relatively close to the large US electric vehicle manufacturing market.
Allkem’s flagship asset is the 66.5% owned Olaroz Lithium Project located in northern Argentina. It is the world’s first commercial lithium brine operation constructed in approximately 20 years. Olaroz contains 16.2 million tonnes of lithium carbonate equivalent and has a very long expected mine life of 40 years. Once the Stage 2 expansion is completed later this year, production at Olaroz will be approximately 42,000 tonnes per annum of lithium carbonate.

About 200kms south of Olaroz is Allkem’s Sal de Vida Project, another lithium brine project containing around seven million tonnes of lithium carbonate equivalent. Sal de Vida Stage 1 is under construction for an initial production target of 15,000 tonnes per annum of lithium carbonate in late 2023, scaling up to as much as 45,000 tonnes per of annum lithium carbonate by late 2024.

The final but important piece of the Allkem lithium value chain puzzle is the Nahara lithium hydroxide processing facility in Japan. Construction of the Nahara lithium hydroxide plant in Japan is complete and commissioning activities are underway. First production of lithium hydroxide for sale into the massive Japanese electric vehicle market is expected in late September.

The current market consensus for Allkem is to earn a NPAT of approximately $436 million or 74 cents per share. At the time of writing, this means Allkem is trading at an attractive PER of around 14 times FY22 earnings. Earnings growth is expected to average 30% per annum for the next three financial years.

Pilbara Minerals (ASX: PLS)

Pilbara Minerals is another key player in the ASX listed lithium space. It recently joined the ranks of producers, now sitting alongside MinRes, IGO, and Allkem. Unlike those three, however, it is a 100% pure-play lithium company.

In October 2021, Pilbara commenced production at its flagship wholly owned Pilgangoora lithium-tantalum project which is located 120km from Port Hedland in WA’s north. Pilgangoora is one of the biggest hard rock lithium deposits in the world to go into production in this current ramp up to meet growing lithium minerals demand. The current capacity of the mine is 330,000 tonnes per annum of spodumene concentrate, but in June, Pilbara Minerals approved a $100 million investment to upgrade its capacity by a further 100,000 tonnes.

The company is also working towards bringing its Ngungaju processing plant online to increase total production capacity from Pilgangoora to as much as 580,000 tonnes per annum of spodumene concentrate. Ngungaju is expected to be online before the end of this year and Pilbara Minerals has further plans to increase production to as much as one million tonnes per annum of spodumene concentrate in the longer-term.

Pilbara Minerals is on track to deliver its maiden profit in FY22. The current market consensus is for it to earn a NPAT of approximately $685 million or 23 cents per share. At the time of writing, this means Pilbara Minerals is trading at an attractive PER of around 11 times FY22 earnings. Earnings growth is expected to average 5% per annum for the next three financial years.

Related articles: How to buy Pilbara Minerals (ASX:PLS) shares?

Liontown Resources (ASX: LTR)

Liontown Resources is the only non-producer on this list. Having said this, it is on a clear path to production at its flagship Kathleen Valley hard rock lithium project near Kalgoorlie in WA. Kathleen Valley is presently at the Engineering, Procurement, Construction Management (EPCM) stage where the final details are sorted out prior to mine construction.

That construction should start later this year, with completion in late 2023 and commissioning in early 2024. Kathleen Valley is expected to produce 275,000 tonnes of spodumene concentrate in the first year of production. From there, Liontown Resources believes it can scale production up to 425,000 tonnes of spodumene concentrate in year two, and up to 450,000 tonnes per annum from year three onwards. The expected mine life of Kathleen Valley is in excess of 40 years.

These numbers, along with a total resource base of 156 million tonnes of spodumene, clearly demonstrates Liontown Resources’ potential to evolve into a globally significant lithium producer.

But it’s one thing to produce the lithium – it’s another to sell it and make some money out of it. Liontown Resources is way ahead on this front. Around 90% of the company’s forecast production is already spoken for under binding offtake agreements with the likes of LG Energy Solution, Tesla, and Ford. Electric battery and electric vehicle manufacturing royalty!

Liontown Resources is fully funded to production at the $525 million Kathleen Valley project which removes one significant risk factor for shareholders. If there is one elephant in the room, however, it is the question about what lithium prices will be doing in 2024 and beyond when production at Kathleen Valley commences. While ASX listed cousins MinRes, IGO, Allkem and Pilbara are all partying it up and enjoying the recent surge in lithium prices, Liontown Resources shareholders run the risk they end up late to the party.

Liontown Resources is not expected to deliver its maiden profit until FY25. The current market consensus is for it to earn a NPAT of approximately $203 million or 18 cents per share in that year. At the time of writing, this means Liontown Resources is trading at a PER of around seven times FY25 earnings. Of course, there is significant execution risk between now and FY25 to consider before comparing this value to the PER’s of the other existing producers.

Should you buy lithium stocks?

Before investing you should consider your own personal circumstances, investment goals and strategy, and thoroughly research which option could be best for you. Also, keep in mind that past performance is not an indicator of future performance. If ever in doubt, seek the assistance of a professional financial advisor.

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