The lithium/graphite and cobalt space was one of the hottest sectors in 2017, along with marijuana and block chain technology. The lithium ion battery (LIB) for electric cars (EVs) and grid storage is coming of age and the technology has reached the acceptance level and is now headed for its strongest growth phase in the typical "S curve" of innovation. There is going to be a lot of new lithium, graphite and cobalt mines found and developed in the next few years and those that are successful will make a lot of money for their shareholders.
I seen it explained this way that I thought was quite good: We are in a generational shift 2 to 7,000: 2 is the number of the batteries in your father's remote control, more than 7,000 is the number of lithium batteries in Tesla Model S. It takes 63 kg of LCE (Lithium Carbonate Equivalent) to build a Tesla Model S 70 kWh battery.
This new technology wave in the auto industry is going to create huge demand for a handful of different metals, in particular for the LIBs. This next chart from Bloomberg shows the projected demand and makes today's consumption of these metals minuscule.
All of us here in North America hear about Tesla, but it is just the tip of the iceberg. The move to EVs is moving much faster in the world's largest auto market, China. It became the largest in 2009, and has remained the largest ever since. In 2015, automakers sold 21.1 million passenger cars, up 7.3% from 2014. The number in 2016 was 24.38 million up a whopping 16% from 2015. The growth alone (3.28 million) is almost three times as the entire Australian car market (1.18 million). In 2017 the number is expected to come in around 29.4 million.
For some interesting facts, a
The China Association of Automobile Manufacturers said that companies likely will sell 700,000 electric cars in China in 2017. which would be about 2.3% of total sales and about 40% growth over 2016. China is pushing for 8% of new cars to be EVs in 2018 and 12% by 2020, and that would be about 500% growth over 2017. To put in perspective 2020 projection would be around 3.5 million EV sales in China, over four times total world sales in 2016. You don't have to be a rocket scientist to figure out the demand on lithium is going to be enormous and those that have it will do better than Bitcoin.
This next graphic from Avicenne shows costs of $250/kWh on average for LIB production in 2012 to 2014 and a considerable reduction to just $150/kWh from 2014 to 2017. Tesla is investing heavily but this is somewhat dated and BYD (OTCPK:BYDDY) out of China is blowing right by Tesla. Panasonic and Tesla announced in 2014 their plans to build a “Gigafactory” capable of producing 35 gWh of LIBs every year and that was big news for most of us here in North America. Battery technology originated in Japan, was then further developed by companies in Korea, and is now shifting strongly toward China. A lot has changed since and led by China, LIB manufacturing capacity has more than doubled to 125 GWh and is projected to double again to over 250 GWh by 2020.
This UBS report is a must read. UBS tore down a Chevy Bolt and analyzed all the new and more or less materials that were used, who will benefit and who might be disrupted.
- LIB supply chain would be most disrupted, in particular lithium, cobalt and graphite.
- The Bolt is almost maintenance-free, so fewer parts to replace and no fluid changes, such as engine oil. The after-sales revenue pool could drop by ~60% or >$400 per vehicle per year.
- The Bolt has 6 to 10 times more semiconductor content than an ICE car, so current OEMs could be negatively affected and semiconductor companies positively.
This next graphic from UBS focuses on the commodity demand that will be asserted by LIBs.
Finding the price of lithium is not cut and dried. There are prices for lithium carbonate or hydroxide and spodumene. Some prices are quoted in Kg and others per tonne. There are China prices and prices depend on what grade of lithium. No matter how or what you measure the price, they are all way up and achieved new record highs in 2017. It is also hard to source current charts, but below is one of the better charts I found and a good source, Benchmark Minerals. It only has data to 2016, so I marked with 'X' the current price and you can see the strong uptrend and prices are still intact.
Benchmark Minerals also has its own price index that combines the various types of lithium, and prices look to be heading higher.
A very good picture of the lithium market and investor demand is the Lithium ETF (LIT). You can see the price rose steadily all year, and come September the retail investment crowd started to pour in.
For those of you that missed out on my last lithium pick, Quantum Minerals Corp. (QMC:TSX.V; QMCQF:OTC; 3LQ:FSE) of up to 700% gains, I found a second lithium opportunity. This is pretty much an identical investment opportunity as Quantum, but actually better because of stronger management and better property location.
Redzone Resources Ltd. (REZ:TSX.V; REZZF:OTC): Shares outstanding: 23.2 million
Redzone is run by Mike Murphy who from 2007 ran Gleichen Resources, which acquired the Morelos gold project in Mexico from Teck Resources in 2009. The stock moved from under $0.20 to $1.50 after the acquisition; Mike stepped aside as CEO in 2009 but still remains a director. Gleichen's first raise was $240 million, and the company changed its name in 2010 to Torex Gold that many of you probably know. Torex hit a high of $35 in 2016 (considering a 10 to 1 consolidation relates to $3.50), but has run into some labor problems at the mine of late.
Gary Brown, Senior VP and CFO of Wheaton Precious Metals, is a director of Redzone along with two seasoned mining engineers/geos, Alan F Matthews and Craig Roberts along with Jean-Phillippe Paiement who did the 43-101 report. They have over 70 years of combined experience.
Recently Cameron Bell M.Sc P. Geo joined the board. He has over 30 years of experience working as a geologist and exploration manager. He was a Regional Exploration Manager for Vale from 2007 to 2016, with periods as North American manager and Australasia manager. Prior to that, he worked with Inco Technical Services where he was responsible for project generation and managing the company's grassroots nickel exploration in North America. Additionally, he held the role of Senior Geologist at Voisey’s Bay and Sudbury. This is the first project he has become involved with since his retirement.
Management of this caliber do not get involved in junior companies unless they believe the odds of discovery and success are very high. Besides the success of Mike Murphy, another attractive aspect is the location and quality of it lithium project in Arizona in the U.S.
Projects
Redzone has been advancing its Lara Socos (Lara) Porphyry Copper Molybdenum Property in Peru, but for this report and the company's current focus is a new lithium project.
Fortner Boyd Lithium: 100% earn in option, approx. 500 acres
The property is located in the Maricopa County, Arizona, approximately 10 km southwest of the city of Wickenburg. The area is easily accessible through the public road network and favorable to work year round. Geological a good location at the junction of the Mexican Highland and the Sonora Desert and is part of the Arizona Pegmatite Belt.
The project has seen historic work since the 1950s that gives us a very good indication that there are lithium-bearing dykes on the project and could be of size and grade to be economic. From the 1950s to 1980s, there was trenching, 75 shallow drill holes and a 10-meter shaft sunk. Watt, Griffis & McQuad from 1980—The Vulture Pegmatite is a very large, nearly continuous group of pegmatite bodies which trend north-south for 1,350 feet. The bodies range in width from 10 feet to 50 feet. The Vulture Pegmatite is lithium-rich, containing spodumene, lepidolite, and possibly amblygonite. This slide from the company's presentation highlights the historical findings.
In December 2016, Redzone retained SGS Canada Inc. (SGS) to complete a 43-101 Technical Report on the project. The historic work outlined above was only done on the Lucky Mica dyke. In the limited 2017 field exploration program 10 new pegmatite outcrops were identified and 35 samples assayed with better results ranging from 0.69 to 7.5% lithium oxide.
Financial
Cash position at November 30 was $540,000. Since then Redzone closed a $1.2 million financing priced at 16 cents per share with ˝ warrant at 24 cents. This will give the company ample funds for first round of exploration that includes mapping and sampling, trenching and a first phase drill program.
Summary
The project has seen very limited work, but based on historic data, we have very good evidence that the one explored dyke is mineralized and some good odds of being economic. With just a small exploration program the company was able to demonstrate much more potential on the property with several new dykes discovered. With limited assay work thus far, seven of the dykes are mineralized.
Redzone's project is early exploration but with historical work done in the past, so it is very comparable to QMC Quantum that you all know, Rock Tech, Frontier and Far Resources that I used as comparisons earlier.
Rock Tech Lithium Inc. (RCK:TSX.V; RCKTF:OTCPK; RJIA:FSE), valued at $60 million, is in the same area as Quantum and in 2017 did some sampling and started trenching in November, pretty much at the same stage as Quantum (QMC), valued at $58 million, which has done similar work.
Frontier Lithium Inc. (FL:TSX.V), valued at $83 million, is not far away in Ontario. In December, Frontier released results of one drill hole it completed and came back with very good results intersecting 118.9 meters of pegmatite averaging 2.47 per cent lithium oxide (Li2O)
Far Resources Ltd. (FAT:CSE; FRRSF:OTCPK ), valued at $87 million, also has a Manitoba lithium project. The Zoro I Claim covers a significant lithium pegmatite occurrence known as the "Principal Dyke." It contains an historic "reserve" based on 1956 drilling of 1.8 million tonnes grading 1.4% Li20, to a depth of 305 m. The company plans to drill this winter.
All four of these juniors are hard rock lithium showing similar grades and early exploration with no recent drilling other than one hole at Frontier. RockTech did drilling 5/6 years ago and has a small 3.19 million tonne resource at 1.10% Li20.
A lot of exploration in the U.S. is focused on brines in Nevada. Hard rock in lithium bearing spodumene has been mined for decades and has less processing time, higher recoveries and less capex compared to brine evaporation. Historically hard rock lithium projects were mostly in South Dakota, Colorado and some in New Mexico and Arizona. North/South Carolina had largest historical resources with known spodumene reserves in tkaim-gpodumeiie belt at the border of North and South Carolina near Kings Mountain.
An Australian company, Piedmont Lithium Ltd. (PLL:ASX), is exploring its 530 acre WPC project in North Carolina. The project had 19 historic drill holes for only 1,200 meters in 2009/10. Piedmont did a phase 1 drill program of 12 holes in 1,500 meters and found grades of 1% to 1.5% Li20. It just completed a phase 2 program of 90 holes and reported on 51 holes so far with similar grades of 1% to 1.5% over widths of 10 to 20 meters roughly. Piedmont has 454 million shares outstanding and market cap around CA$100 million.
I seriously doubt that Canadian and U.S. investors know about Piedmont in Australia. It is a little farther advanced but I think fair as the only U.S. property-based junior to use as a comparison.
Redzone will have to increase tenfold to $3.00 per share to have a similar valuation as its peers. I expect if the company can get some sampling and trenching done it would put it exactly where Quantum is and RedZone can work a lot easier in the winter months at its location. If we assume more dilution in 2018 to 30 million shares, a $75M market cap would be $2.50 per share. Quantum recently hit a high $1.80 and RCK is currently $1.82. I believe this is a realistic target especially considering stronger management at Redzone and a project in the U.S.
The stock woke up early December with the financing announcement that sold out in a day and since then consolidated in the mid-20s. It now appears that the stock has begun its next leg higher and in this current white-hot lithium market it could jump quite high before the next pause or consolidation. There should be plenty of news on the exploration front to move things along. Redzone is well cashed up and starting a very aggressive exploration program this month. The stock is my top lithium pick for 2018.
Ron Struthers founded Struthers' Resource Stock Report 23 years ago. The report covers senior and junior companies with ample trading liquidity. He started his Millennium Index of dividend stocks in 2003 - $1,000 invested then was worth over $4,000 end of 2014 and the index returned 26.8% in 2016. He retired from IBM after 30 years in customer service, systems and business analyst, also developing his own charting software. He has expertise in junior start-ups and was a co-founder of Paramount Gold and Silver.
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Disclosure:
1) Ron Struthers: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: Redzone Resources, QMC Quantum. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company currently has a financial relationship with the following companies mentioned in this article: Redzone and QMC Quantum are advertisers on playstocks.net. I determined which companies would be included in this article based on my research and understanding of the sector.
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