Penny stocks abound in the lithium junior space, as fledgling explorers and developers jostle to supply the metal for the mid to late 2020s.
By the end of this decade, the booming electric vehicle and energy storage markets are forecast to be hungrily consuming the battery metal.
According to research by Rio Tinto, global lithium demand will be more than ten times higher in a decade if developed countries stick to their net zero carbon targets.
Ghanaian white gold
Ghana is Africa’s largest gold producer. Now, a UK-listed Australian miner, Atlantic Lithium (LSE:ALL), is trying to get the West African country on the map for the battery metal.
Atlantic’s advanced-stage Ewoyaa Project would be Ghana’s first lithium mine. The company has defined 30.1 metric tonnes of deposits at the site, estimated to contain 1.26% lithium oxide.
The site is near operational infrastructure. Atlantic is carrying out a pre-feasibility study to bring Ewoyaa to production by the end of 2024, and says the operation could generate $5bn in revenue over its 12.5-year life.
In July 2021, Atlantic – which has a market cap of $250m – sold 50% of the interest in the project to Piedmont Lithium in exchange for $103m in development funding. With a market cap of over $1bn, Piedmont Lithium is a big player in the lithium exploration space.
A new financier
Another injection into Atlantic’s coffers could come from a Ghanaian state-owned investment fund. The Minerals Income Investment Fund (MIIF) was set up by the Ghana’s government in 2018 with two objectives:
- To maximise the value of income that is due to the republic
- To raise local players in the mining sector
In mid-February, the MIIF announced it had entered into talks with Atlantic to provide up to $30m of funding. To me, this lends credibility to Atlantic that a government-run organisation in Ghana has publicly approached it.
Of course, bringing lithium mania to Ghana would benefit the west-African country as it seeks to diversify its exports away from gold and cocoa production.
Risks and catalysts
Investing in penny stocks – especially in the natural resources space – comes with a lot of risks. A large number of things can go wrong with the geology, licensing, or price of the commodity being produced.
The lithium price has bombed since November 2022, dropping by around 50%. Meanwhile, Goldman Sachs forecasts that lithium carbonate prices will be around one-fifth of what they are today by 2024, as more supply floods onto the market.
Atlantic’s share price is certainly jumpy, but lithium carbonate’s precipitous slide hasn’t obviously affected it. Today, it is trading at 37p, which is almost exactly where it was a year ago.
The company is moving closer and closer to its target production start date in late 2024. By summer this year, Atlantic plans to have completed its definitive feasibility study.
Still, Atlantic is not a bargain in my opinion.
Remember, Piedmont Lithium bought half of Atlantic’s flagship Ewoyaa Project for $103m in development funding. For a stake in the remaining half, I can buy shares that are trading at a market cap of £220m. That is more than twice the price.
At the current valuation, I won’t be buying shares in Atlantic. It is richly priced and there are too many risks.
