Battery frenzy sparks oversupply worries

Prashant Mehra
(Australian Associated Press)


Excitement over the global battery market is fuelling a scramble in Australia to invest in projects to mine minerals essential to the new growth sector.

That excitement has been on show this week at the annual Diggers and Dealers mining conference in Kalgoorlie, Western Australia, where minerals such as lithium, graphite and cobalt – essential for electric vehicles and batteries being developed by the likes of Tesla – enjoyed plenty of attention.

While a huge potential demand-supply gap is leading to development of large projects based on solid fundamentals, it is also supporting ventures that some worry could lead to headaches down the line.

The upbeat sentiment is based on forecasts of a massive shortage of raw materials, based on substantial investments into battery production by Chinese companies and Tesla.

That has prompted a wave of investments at both the top and bottom ends of the market.

David Flanagan, executive chairman at upcoming graphite explorer Battery Minerals and a presenter at Diggers and Dealers, says people “are now getting the battery space”.

“You are seeing roomfuls of people for lithium, but people are also realising you need graphite to make batteries,” Mr Flanagan said.

There are more than $2 billion worth of lithium projects in the pipeline in WA, despite the state already accounting for one-third of the world’s supply.

Ken Brinsden is managing director of Pilbara Minerals, whose $234 million Pilgangoora lithium-tantalum project is one of three major lithium projects under development in WA.

“The growth going on in China is just extraordinary and is putting a lot of pressure on the supply base to continue to keep expanding,” Mr Brinsden said.

While that may be true, the sector is also attracting cash into projects that may not materialise or may only come online in an oversupplied market.

“Look, its reasonable to have that fear but in iron ore, for example, it took 10 years for demand to catch up,” said Mr Brinsden, who previously headed iron ore miner Atlas Iron.

Battery manufacturing has affected small-cap mining company listings, with a quarter of the 57 companies joining the ASX in the first six months of 2017 being miners and three commodities – gold, cobalt and lithium – dominating, business advisory firm HLB Mann Judd reported recently.

Battery Minerals’ David Flanagan remains confident about shipping graphite concentrate from Mozambique by early 2019, despite not having locked-in funding or signing offtake agreements so far.

He has already had discussions with electric vehicle manufacturers, industrial suppliers and other mining companies, as well as strategic investors from China.

“In Mozambique, we are still bumping into people from China pegging tenements, so just like every cycle, we are in the position where demand is starting to run,” he said.

The competition could get tough, with nearly 30 potential graphite projects being marketed currently but Mr Flanagan is sure not all of them will materialise.

Demand for battery minerals has certainly surprised most people, says Romano Sala Tenna, portfolio manager at Perth-based Katana Asset Management, but he warns that production will come online quickly.

“”Before this cycle is out, I have no doubt we are going to see excesses on the supply side,” he said.

A senior investment banker attending the Diggers conference, and speaking on condition of anonymity, said the sector is what many people would call “frothy”.

“Some projects may not have the requisite strength to succeed but are still getting support and that usually means a few headaches to follow,” the executive said.

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