SINGAPORE (Oct 21): The replacement of the internal combustion engine with the electric motor makes the lithium-ion battery arguably the most crucial component in an electric vehicle (EV). This has drawn many companies to jump into the manufacturing of lithium-ion batteries, as well as the mining and production of lithium and other related materials. Unfortunately, not every company in the lithium space has done well.
The reason lithium players are suffering can be attributed to basic economics: the law of supply and demand. The number of electric vehicles is seen to increase, driving up demand for and prices of lithium, thereby spurring lithium miners to dig harder and deeper. Lithium exists in abundance in nature, but mining it requires investment. When output increases, prices naturally drop. Between mid-2015 and mid-2018, the price of lithium nearly tripled but it has since dropped more than a third.
Morgan Stanley forecasts that new supply from Argentina, Australia and Chile — the three main lithium producers — could add 500,000 tonnes to the market annually by 2025 — more than twice as much as the 2018 supply of 215,000 tonnes.
Analysts at Benchmark Mineral Intelligence, however, believe investors need to take a longer-term view and that the market will reverse and pick up soon. “Spectators that flocked to the market in 2016 on the promise of an EV super-cycle have left before the warm-up, let alone the main event. While a downturn in prices has reflected a necessary correction towards near-term market fundamentals, it fails to represent the increasing possibility of another major deficit in the market by the early 2020s, creating a deceptive narrative in both share prices and surrounding markets,” BMI adds.
Mining pitfalls
Unfortunately, for some investors of lithium plays, the turn for the worse came too abruptly, leaving them stuck. On the Singapore Exchange, Catalist-listed lithium miner Alita Resources — previously known as Alliance Mineral Assets (AMA) — was placed under administration on Aug 28 by its creditors after it reached a standstill with the secured lenders in respect of a A$40 million ($37 million) secured loan facility.
The administrators, Richard Scott Tucker and John Allan Bumbak of KordaMentha, have commenced a “process to sell and/or recapitalise the company” and are seeking “urgent expressions of interest from interested parties”, according to an Oct 8 filing.
Alita is the product of a merger late last year between AMA and Australian Securities Exchange-listed lithium producer Tawana Resources. The company has yet to file its financial statements for FY2019 ended June 30. For the 15-month period ended March 31, 2019, it recorded revenue of A$72.6 million. It recorded no revenue in the 12-month period ended Dec 31, 2017. It registered a wider net loss of A$51.4 million in the 15-month period compared with A$8.1 million in the 12-month period. The difference in reporting periods is due to the different financial year-ends of AMA and Tawana. As at March 31, 2019, Alita had a net debt position of A$25.3 million.
Trading of the stock was suspended on Sept 3. Alita has a negative 12-month trailing earnings margin of 60.6% and negative return on equity (ROE) of 38%.
Alita’s largest shareholder is another ASX-listed lithium miner Galaxy Resources, which is not doing well either. In fact, it is among the worst performers of the various lithium mining stocks tracked by Bloomberg, giving a negative total return of 56%.
On Aug 27, Galaxy Resources bought over a US$28.8 million loan from a group of Alita creditors, thereby becoming both Alita’s largest shareholder and creditor. The loan is due in July 2020 and carries an interest rate of Libor plus 13%. “As the senior secured creditor, Galaxy can work directly with all stakeholders to examine the best-possible reorganisation options,” says its CEO Simon Hays.
While Galaxy Resources has been profitable over the last few years, its earnings are volatile. More worryingly, it recorded a negative 12-month trailing earnings margin of 35.5%. As a result, it registered a negative ROE of 8%. Still, its net cash position of US$176.3 million makes it a rarity among lithium miners.
Galaxy Resources owns and operates the James Bay lithium pegmatite project in Quebec, Canada and the Mount Cattlin mine in Ravensthorpe, Western Australia, which is currently producing spodumene and tantalum concentrate. The company is also advancing plans to develop the Sal de Vida lithium and potash brine project in Argentina.
During the half-year period ended June 30, 2019, Galaxy Resources sold 44,630 dry metric tonnes of lithium concentrate, or about half the lithium concentrate it sold in the same period last year. As a result, the company reported a y-o-y revenue decline of 68.4% to US$27.9 million ($38.3 million) and a net loss of US$171.9 million versus earnings of US$11.5 million a year ago, as it had to write down the value of its assets.
Incidentally, Alita’s largest shareholder was not always Galaxy Resources. When Alita was still AMA, the company’s largest shareholder was Hong Kong-listed iron and lithium trader Burwill Holdings, which had an offtake agreement with the company. Burwill ceded its largest shareholder position to Galaxy Resources upon a placement exercise in May this year.
When the placement took place, Burwill was already under financial strain. For the six months ended June 30, it reported revenue of HK$932.8 million ($163.2 million), down 8% y-o-y. From earnings of HK$42.8 million a year ago, it sank into losses of HK$181.9 million, as it suffered from lower operating numbers and also had to take a HK$55 million impairment on assets.
In 2017, to fulfil its offtake agreement with AMA, Burwill borrowed from various lenders and investors to buy AMA shares, and also to give AMA advance payment for lithium ore to be shipped at a later date.
On Aug 21, Burwill said it had defaulted on a loan of HK$70 million. The creditor is Haitong International Financial Products (Singapore), part of Haitong Securities, one of the largest brokers in China. Burwill notes that lithium prices have dropped about 60% from their recent peak and that its business is “adversely impacted”. The default by Burwill triggered a series of cross-defaults with other creditors and investors, and it is on the hook for a total of about HK$300 million. Year to date, Burwill shares have lost half their value. It last traded at seven Hong Kong cents and trading has since been suspended.
On Sept 4, Strong Petrochemical Holdings filed a winding-up application in a Hong Kong court in a bid to recover HK$21 million from Burwill. The case will be heard on Oct 30.
Safe batteries
Interestingly, many manufacturers of lithium-ion batteries are doing well so far this year, according to Bloomberg data. This is largely because many of them have other businesses and drivers and are not solely dependent on EV trends.
An example is special chemicals and sustainable technologies company Johnson Matthey. Apart from lithium-ion batteries, the company manufactures catalysts, pharmaceutical materials and pollution control systems. It also refines platinum, gold and silver, and produces colour and coating materials for various industries. The London Stock Exchange-listed company has registered a total return of 8.6%, 12-month trailing earnings margin of 3.8% and ROE of 16.6%.
Johnson Matthey’s alternative powertrain business provides battery systems for a range of applications, such as fuel cell technologies and battery materials for automotive applications. Its battery materials business provides lithium iron phosphate materials and eLNO, its trademarked high nickel cathode material. The company says alternative powertrain sales grew more than 30%, driven by significant growth in battery systems for e-bikes and continued momentum in fuel cells.
For FY2019 ended March 31, Johnson Matthey reported y-o-y revenue growth of 4.6% to £10.75 billion ($18.83 billion) from £10.27 billion. Earnings leapt 38.6% y-o-y to £413 million from £298 million. The company had a net debt position of £866 million as at March 31.
Similarly, Samsung SDI Co, an associate company of Samsung Electronics, recorded a total return of 3.7% so far this year. The Korea Exchange-listed company registered a 12-month trailing earnings margin of 6.9% and ROE of 5.5%.
Samsung SDI manufactures mainly lithium-ion batteries and also liquid crystal display components and cathode ray tubes. For FY2018 ended Dec 31, the company reported y-o-y revenue growth of 44% to KRW9.16 trillion ($10.57 billion) from KRW6.35 trillion. Earnings rose 6.7% y-o-y to KRW701.17 billion from KRW657.24 billion. The company has a net debt position of KRW1.64 trillion.
