The electric vehicle (EV) wave is one of the major thematics in the global investment markets, as the world starts the move from fossil-fuel based engines to electric engines.

According to the International Energy Agency (IEA), the number of electric cars, vans, trucks, and buses on the world’s roads is on track to increase from 11 million vehicles to 145 million by the end of the decade. The IEA found that if governments agreed to accelerate their policies to encourage EV production, that number could jump to 230 million EVs.

If the market pans out like that, it would be good news for Australia’s producers of the vital materials required for EV batteries, which continue to be dominated by lithium-ion batteries (LIBs). These batteries are also a critical part of the expansion of renewable energy, which only magnifies demand. According to research firm Statista, global lithium consumption is projected to rise from 317,000 tonnes in 2020 to 839,000 tonnes by 2025, and then climb to almost 1.8 million tonnes by 2030, driven by EV uptake and the expansion of “big batteries” in renewable energy applications.

It’s not only lithium that is relevant to Australian producers – as demand for LIBs continues to rise, the need for graphite increases with it. Graphite is a crucial component of these batteries.

Australia is the largest producer of lithium concentrate: according to the United States Geological Survey (USGS), in 2020, out of 82,000 tonnes of lithium concentrates produced globally, Australia accounted for 40,000 tonnes, with China second on 14,000 tonnes. Even though China is expected to invest heavily in expanding its domestic production capacity, it will continue to import lithium concentrates for its battery industry.

An April report from global credit ratings agency Fitch said the firm expects Australian lithium concentrate production to increase by 10.7% year-on-year in the coming decade, rising from 44,800 tonnes in 2021 to 110,500 tonnes by 2030. Similarly, Fitch expects China’s lithium concentrate production to increase by 9.7% year-on-year, rising from 16,800 tonnes in 2021 to 35,000 tonnes by 2030.

However, the stock market has well and truly picked up on this outlook.

Since I looked at Australia’s big four lithium producers in June last year, the tale of the share prices has gone as follows:

• Galaxy Resources (GXY) 96 cents to $3.93, up 4.1 times
• Mineral Resources (MIN) $20.44 to $47.75, up 2.3 times
• Pilbara Minerals (PLS) 31 cents to $1.14, up 3.7 times
• Orocobre (ORE) $2.44 to $6.75, up 2.8 times

Not surprisingly, this has pushed the share prices well past what analysts consider to be fair value.

At the moment, the current share prices versus consensus valuations for these stocks are:

• Galaxy Resources (GXY, $3.93), versus analysts’ consensus target prices of $3.34 (Thomson Reuters), $3.66 (FN Arena)
• Mineral Resources (MIN, $47.75) versus analysts’ consensus target prices of $47.00 (Thomson Reuters), $45.32 (FN Arena)
• Pilbara Minerals (PLS, $1.14), versus analysts’ consensus target prices of $1.125 (Thomson Reuters), $1.09 (FN Arena)
• Orocobre (ORE, $6.75) versus analysts’ consensus target prices of $6.23 (Thomson Reuters), $6.02 (FN Arena).

It’s the same story at IGO Limited (IGO, $7.49), which entered the lithium arena in December, grabbing a 25% stake in the world’s largest hard-rock lithium mine, the Greenbushes mine in Western Australia, and a 49% stake in a lithium hydroxide plant at Kwinana, south of Perth. IGO invested $2 billion in Tianqi Lithium Energy Australia, the Australian arm of China’s Tianqi Lithium Corporation. It’s an excellent diversifying move by the nickel and gold miner, but the share price surged on the news. Thomson Reuters posts a consensus valuation of $6.90 on IGO while FN Arena has $6.71.

There is not much potential joy there for investors, unless they are prepared for a very long-term hold.

There are exciting things happening in the sector.

Last month, Galaxy Resources (GXY) and Orocobre (ORE) agreed to a merger to create the world’s fifth largest lithium chemicals company, worth $4 billion.

The deal will create “a new force in the global lithium sector,” according to the announcements made to the Australian and Toronto exchanges, with “a diversified production base and exciting growth platform, with potential to unlock significant synergies and realise value.” The two companies have a complementary portfolio of brine and hard-rock spodumene (lithium ore) assets spread across Australia (Galaxy) and Argentina (Orocobre) and a vertically-integrated supply chain.

Orocobre owns 66.5% of the Olaroz lithium facility in Argentina’s high desert, where briny groundwater is pumped to the surface, concentrated in evaporation ponds, then purified into lithium carbonate of more than 99% purity. As such, it is different to its hard-rock mining rivals – it bills itself as a supplier of lithium chemicals rather than lithium ore. Galaxy owns and operates the Mt Cattlin mine in Ravensthorpe, Western Australia, which produces spodumene and tantalum concentrate, the James Bay lithium pegmatite (another lithium ore) project in Canada, and is developing the Sal de Vida lithium and potash brine project in Argentina.

The merged Orocobre/Galaxy (the new name for the combination has not been chosen) will boast two mining operations generating positive cashflow, $US487 million of cash and $US173 million of debt, and a “long list of growth projects.” It will also have exposure to a third significant part of the lithium “story” – downstream processing. Orocobre owns a 75% stake in a processing plant that is being built in Japan. The plant will turn lithium carbonate from Olaroz into lithium hydroxide, which is the product increasingly in demand from the manufacturers of modern lithium ion batteries.

MinRes (MIN) is one of the world’s top five lithium miners, owning 40% of the largest hard rock lithium deposit, Wodgina, in partnership with big US lithium group, Albemarle. Although currently on “care and maintenance,” Wodgina is the world’s largest known hard rock lithium resource, with an expected mine life of more than 30 years, shipping 750,000 tonnes a year of 6% spodumene concentrate to Chinese customers. The partners say “planning is underway” for a restart at Wodgina. MinRes’ Mt Marion spodumene lithium mine near Kalgoorlie suffered a 16% slide in production in the March quarter, but the company said shipments of spodumene concentrate from Mt Marion are “back in line with expectations,” and the mine remains on track to meet or exceed its shipment guidance for the financial year. The MinRes/Albemarle joint venture has a spodumene processing operation at Wodgina and is building another processing plant at Kemerton in Western Australia.

And don’t forget, while lithium gives future potential to MinRes, the company is also in the nice position of also being Australia’s fifth-largest iron ore producer; additionally, it has a stable base of cash flow and profits coming from its mining services business. MinRes is the world’s largest crushing contractor, and a leading “pit-to-port” mining services supplier. The diversified cashflows support a healthy dividend position: according to the collation of analysts’ estimates by FN Arena, MIN is expected, at the current price of $47.75, to pay a dividend yield of 4.3%, fully franked, in FY22, equivalent to a grossed-up yield of 6.1%.

Pilbara Minerals (PLS) owns and operates the Pilgangoora lithium-tantalum project in the Pilbara region of Western Australia. A world-class asset, Pilgangoora is a hard-rock lithium source with strong offtake agreements with Chinese customers. It also has an agreement with Korean metals giant POSCO to proceed with the development of a 40,000 tonnes-a-year conversion facility in South Korea, which will convert its lithium ore to lithium carbonate equivalent (LCE), supported by POSCO’s leading purification technology, PosLX.

Pilbara cut back lithium production in June 2019, but as customer demand started to strengthen began increasing mining volumes and plant production in the December quarter last year. In the March quarter the company achieved record production in the of 77,820 dry metric tonnes, which equates to an annualised rate of 311,000 tonnes for its spodumene concentrate product, up from 63,712 dmt in the December quarter. Pilbara Minerals has started construction work on an expansion of the Pilgangoora production plant to lift capacity by 15%. But on analysts’ consensus, it’s the same story – the stock has more than quintupled in the last 12 months, so as you would expect, brokers see it as not having much more room to move higher.

Investors might have to look a bit wider.

In February, I looked at Battery Metals stocks including Piedmont Lithium (PLL), which has a supply deal with Tesla from its Piedmont Lithium project in North Carolina, under which supply must start between July 2022 and July 2023. While PLL has moved from 66 cents to 92 cents, analysts have a consensus valuation of $1.15 on the stock.

Another interesting emerging story is Core Lithium (CXO), which is developing the Finniss Lithium Project, just south of Darwin in the Northern Territory, at which, last month, it announced that test work on a spodumene mineral concentrate sample has produced “battery grade” lithium hydroxide monohydrate (LH), which the company says is suitable for high-end uses in the lithium battery, renewable energy and electric vehicle industries.

Core is completing the definitive feasibility study (DFS) on the project and expects to reach a final investment decision (FID) in the third quarter of this year. Finniss is the first Australian lithium mine approved outside Western Australia, and its location just one hour south of Darwin by road gives it convenient access to infrastructure, port facilities and skilled workforce.

Over in the graphite space, the ASX’s main exposure is Syrah Resources (SYR), which owns the Balama operation in Mozambique, considered by analysts to be the world’s largest and most prospective graphite deposit, with an estimated mine life of about 50 years, and a high grade. There is also a significant resource at Balama of vanadium, another metal that has many applications in batteries and renewable energy.

Balama came online in late 2017 and produced its first un-purified spherical graphite product in December 2018: the company sold 163,000 tonnes of Balama product to the global market in 2019, despite persistent delays affecting the concentrate processing plant. But in March 2020, the project fell victim to COVID-19: travel restrictions that limited the movements of its workers forced Syrah to suspend production.

Balama did not restart until the March 2021 quarter, with the first shipments heading off in April – mostly to China, to feed increased anode demand (which has more than doubled over last 12 months) on the back of the rebound in global EV sales. Also, a strong global steel market is increasing coarse graphite demand.

Syrah has also developed its Battery Anode Material (BAM) strategy, under which its Vidalia graphite processing plant in Louisiana will use natural graphite from Balama to supply battery-grade spherical graphite anode material to EV manufacturers and battery producers in the US. Broker Foster Stockbroking says potential share price catalysts will be first shipments of Vidalia active anode material (AAM), progress in financing and offtake agreements for Vidalia, and the final investment decision (FID) on the project. Syrah thinks it has great potential to export AAM from the US to markets that want an alternative/complementary source to supply from China.

While market consensus believes that SYR is another EV stock to have shot beyond fair value: Thomson Reuters has a consensus valuation of 91.9 cents, while FN Arena has $1.18, versus a share price of $1.175. However, Foster Stockbroking (which acted as a joint lead manager for the $56 million placement in December 2020, which was done at 90 cents a share) has a share price target well above the consensus, at $1.75. It’s also worth pointing out that the country’s largest superannuation fund, the $200 billion AustralianSuper, is a big believer in Syrah – it is the largest shareholder, owning 17% of the company.

A speculative situation in the graphite arena is Renascor Resources (RNU, 8.3 cents), which has the Siviour purified spherical graphite (PSG) project in South Australia, which it says will be among the world’s lowest-cost producers of an important value-added graphite product, a critical mineral that is fundamental to supporting the next wave of new energy technologies. Renascor plans to integrate the Siviour graphite mine and concentrator with a downstream PSG manufacturing facility.

Renascor announced in March that one of Asia’s largest battery chemicals trading companies, Japanese group Hanwa, had signed a deal to take 10,000 tonnes per year of purified spherical graphite over a term of ten years, with the annual delivery amounts yet to be decided. So far, Renascor has offtake deals with two Chinese anode companies that cover all of stage one production from Siviour plant. However, the project is still in the feasibility studies stage.

Another approach worth considering for investors who like the battery metals thematic but who don’t want to take single-stock risk, is to take a broader exposure such as ETFs like the ETFS Battery Tech & Lithium ETF (ACDC, $92.65), which offers exposure across the battery technology supply chain globally, not only to some of the ASX stocks in this article – such as Galaxy Resources, Mineral Resources and Pilbara Minerals, but major global players such as Dutch specialty metals company AMG Advanced Metallurgical Group, General Electric, Tesla and Daimler.