ALLIANCE MINERAL ASSETS: Another “Best World” in the making?

Lotustpsll contributed this article to NextInsight. He worked 32 years with a global banking group before retiring a few years ago.

AMAL -- Another “Best World” in the making?

I keep my investing strategy simple and if there are right ticks in the right places I will invest. It's a common-sense approach.

Best World (BW), my most profitable investment to-date, is a good example. My earlier view, posted in the NextInsight forum on 12 May 2016, on Best World as “a super growth stock” has panned out nicely.

After reading an article in NextInsight, I started accumulating Best World at about 32 cents.  I am still holding 80% of my position. Its move into direct-selling in China is just unfolding, so I am not getting off the saddle yet.

Barring unforeseen circumstances, the significant tailwinds supporting its push for market share in China and Taiwan means that BW will be in my portfolio for some time to come.

Alliance Mineral Assets is working fast to become the 4th lithium producer in Australia. Photo: Company I see similar parallels in Alliance Mineral Assets Limited (AMAL) – an equally enticing growth stock with significant potential. Bear in mind that AMAL operates in a vastly different industry which is more volatile in nature.

AMAL's business model is propelled by a strong industry outlook for lithium. There are strong tailwinds currently. However, views are conflicting over the supply- demand dynamics of this mineral in the longer term.

At the bottom of this article, I have posted links to some recent analysis on the dynamics of the lithium industry.

What is clear is that global demand for lithium is accelerating ahead of supply in the medium term. This brings several major implications for the industry: 

♦  Strategic positioning by major buyers to secure lithium supplies

♦  North Asian buyers are targeting lithium produced in Australia due to its proximity

♦   Increased production by major/established miners

♦  Rush by junior miners to commercially produce lithium (this is challenging)

Among junior miners in Australia, AMAL has a clear head-start in the race to be the fourth producer. In various announcements, the company has said production is planned to come on-stream in 4Q17. 

Based on exploration data, AMAL has 2 major advantages – lower operating cost (has 2 minerals – lithium and tantalum) and higher quality lithium (> 6% lithium oxide). These should translate into high operating margins and profitability.

As a guide on the demand side, Galaxy Resources last December signed binding agreements with its existing Chinese customers for 120,000 tonnes of lithium concentrate for delivery in 2017.

Galaxy Resources will be paid US$905 per tonne for 6% lithium oxide (peak price for 2016 was US$650). This is based on a price of US$830 per tonne for a minimum of 5.5% lithium oxide and an extra US$15 per tonne for each 0.1% improvement in grade of lithium oxide delivered.

According to an article in http://benchmarkminerals.com:

“Within China, the competition for lithium feedstock continues to be aggressive as lithium converters vie for ever increasing market share. Therefore, we continue to foresee a sellers’ market and strong prices despite increased spodumene competition.

The difference with lithium and other minerals and metals is that it is underpinned by a real demand story – the evolution of the lithium ion battery sector with force significant change in the raw materials we track at Benchmark Mineral Intelligence, especially lithium, graphite, cobalt and nickel.

Of the 14 lithium ion mega factories Benchmark is tracking under construction, 9 are based in China and the supply chain from mine to market is evolving to serve these operations. We expect this evolution to take place over the next four years and it will subject each link in the chain (raw materials, lithium chemicals, cathodes, cell manufacturers) to unprecedented volatility. Lithium’s price trend is evidence of this but just the start”.

Based on my review, the ticks on my “qualitative” checklist for AMAL are: 

♦  Experienced CEO and management

♦  Higher quality lithium ore (will mean higher off-take price)

♦  Partnership with Tawana Resources

♦  Projected low cost of production

♦  Production on-stream expected in 4Q17 

♦  Potentially huge lithium and tantalum reserve

♦  Positive lithium industry dynamics in medium term

♦  Strong pricing for high grade lithium

♦  Tantalum price is recovering

♦  North Asia buyers are keen to secure lithium supply from Australia

 ♦ Accounts are audited by Big 4 firm (Ernst & Young)

The investing thesis for the time being is driven exclusively by qualitative factors. The quantitative data will become clearer when further (imminent) announcements are made on the feasibility studies and off-take agreements to be inked.

Progress of exploration work done to-date on Bald Hill is proceeding well, and the data results achieved are real and tangible. This is no longer a wish list anymore; the data show that AMAL has hit huge pay dirt in the Bald Hill Project.    

Noteworthy are recent comments by Tawana’s Managing Director Mark Calderwood (an old hand in the mining industry) on the Bald Hill project  -

“Resource infill drilling is focusing on an initial block extending for 1,000m by 300m with multiple pegmatites extending from near surface to about 140m depth. This drilling will enable a significant resource upgrade. At recent pricing, the in-ground combined values of the lithium and tantalum mineralisation is significant, and tantalum by-product credits have the potential to cover a large share of mining costs.”

Based on my experience with Best World and given the current strong tailwinds for lithium, I will be committed to my position in AMAL.

♦ Lithium Market Booming From Rising EV Sales

♦ Demand for battery metals set to soar: analysts

♦ STRONG LITHIUM PRICE SIGNS FOR 2017 SHOW REAL DEMAND STORY

♦ The new OPEC: Who will supply the lithium needed to run the future’s electric cars?