Lithium stocks have been a great place to park your money of late. Shares in lithium juniors Orocobre Limited (ASX: ORE) and Galaxy Resources Limited (ASX: GXY) are up 65% and 261% over the last 12 months.
Resource stock prices follow commodity prices and the price of lithium has been on a tear, doubling from its long-term average of $5,000 per tonne. Demand for the metal is expected to accelerate over future years thanks to the rise of electric vehicles.
Both Orocobre and Galaxy are in the early stages of production and so their respective market values of $852 million and $1.1 billion are largely based on future expectations.
Orocobre's 66.5% owned Argentinian joint venture project, Olaroz, produced just 6,903 tonnes of lithium carbonate in 2016, but it is looking to expand that to between 35,000 and 42,500 tonnes per year by 2019.
Currently the project generates a gross cash margin of US$5,755 per tonne which translates to around a $200 million per year share for Orocobre at peak production of 40,000 tonnes. However, this does not account for any change in lithium prices or a likely fall in cost per tonne as production ramps up. Nor does it include indirect costs such as depreciation and head office expenses.
Galaxy, which went into a trading halt yesterday to raise capital, also has a project in Argentina called Sal de Vida. Sal de Vida has an estimated net present value (NPV) after tax of $1.4 billion, but is yet to enter production.
Galaxy's near term opportunity is Mt Cattlin in Western Australia which is expecting to produce 160,000 tonnes of lithium concentrate in 2017. This project could generate revenues of more than $100 million this year depending on lithium grade.
Unlike Sal de Vida and Olaroz which are brine deposits, Mt Cattlin is a less economical hard rock deposit which has become viable thanks to the buoyant lithium price. Galaxy expects the project to deliver strong cash flow and margins although the exact quantum is undisclosed.
Galaxy has a third hard rock project in Canada but this is at the earliest stage of commercialisation of the three with exploration commencing this year.
Foolish takeaway
I have no idea where the lithium price is headed in the coming years. Will supply catch up with demand because the lithium price is above the point whereby hard rock deposits become feasible again?
Will demand for electric vehicles overcome this effect?
Will lithium recycling put the brakes on demand? I simply don't know the answer to these questions.
Galaxy's Mt Cattlin project has already been mothballed once in its life and the same thing could happen again if lithium prices fall.
If I had to own one of these lithium producers it would probably be Orocobre because it is closer to generating positive cash flows and is purely exposed to lower cost lithium brine.
