This year could be the best one yet for lithium as the price of the battery making commodity has more than doubled over the past 12 months.
If this keeps up, lithium would enjoy its best year-on-year gain since at least 2002 and there's one large ASX miner that could be jockeying to hitch a ride on this boom.
I am talking about our third-largest iron ore miner Fortescue Metals Group Limited (ASX: FMG) as its move to spoil the takeover party of Atlas Iron Limited (ASX: AGO) has prompted some experts to ponder the real motives for Fortescue to buy a 19.9% blocking stake in the junior miner.
Atlas is under a takeover offer from Mineral Resources Limited (ASX: MIN) and Fortescue has said that it will oppose the current offer for Atlas.
Some might think the reason why Fortescue has gate crashed the party is for Atlas' iron ore tenements, which are conveniently located beside Fortescue's Pilbara operations.
But that rational doesn't quite gel with Fortescue's aim of becoming a higher-grade iron ore producer given that Atlas's ore is of the lower quality variety – similar to the reserves held by Fortescue, noted Credit Suisse.
The price discount on lower grade ore has widened considerably as Chinese mills prefer to use ore with at least 62% iron content due to China's crackdown on air pollution. This is the key reason why I am overweight on the high-quality ore producers BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) and hold no position in Fortescue.
For this reason, Credit Suisse thinks Fortescue might be coveting Atlas' lithium assets instead, as the takeover target has signed a deal to export low-cost lithium from Pilbara Minerals Ltd's (ASX: PLS) Pilgangoora project in Western Australia to China's Sinosteel.
"AGO also holds two prospective tenements in zones of known Li-Tantaulum deposits. The Cisco Prospect, which AGO sold down 51% to Pilbara Minerals for A$2.3 million (run by the former MD of AGO, Ken Brinsden) in March 2017, was flagged to host mapped pegmatites alongside tantalum," said the broker.
"The second prospect known as Pancho was also confirmed to contain lithium-caesium-tantalum (LCT) pegmatites via a first pass field reconnaissance."
This theory does make sense as Fortescue has said before that it is keen on diversifying into base metals and lithium. It is also a good way for the miner to win new fans given that I am not the only one put off by the economics of its lower-grade iron ore reserves – which are currently Fortescue's only asset of note.
This of course assumes that the price of lithium doesn't collapse. The jury is still out on this as lithium bears point to a flood of new supply hitting the market from around 2020.
Credit Suisse has an "outperform" recommendation on Fortescue with a price target of $5.75 a share.
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