World Consumption for Renewable Energy Promoting Demand for Lithium and Clean Energy Sector

Macro Factors Supporting the Lithium and Clean Energy Sector

Favourable Government Initiatives to Support Clean Energy

Market Potential of Lithium

Favourable Statistics on Lithium Demand

Constructive Movements in the Commodity Market Manifesting Outperformance

High International Competition and Availability Concerns May Affect Earnings Prospects:

Favourable Production, Export Earnings, and Capex Estimates Substantiates the Sector’s Growth Prospects

Investment theme and stocks under discussion (IGO, LTR, A4N)

After understanding the sector, let us now look at three companies listed on the ASX. The price potential of the companies under discussion has been analysed based on the ‘Price/Book Value’ multiple method.

1. ASX: IGO (IGO Limited)

(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$7.61 billion)

IGO is engaged in the mining and developing operating assets focused on metals to enable clean energy in Australia.

Valuation

The illustrative valuation model suggests that the stock has a potential upside of 17.89% on 30 June 2022. Moreover, the stock might trade at a slight premium compared to its peers, given the company's achievement in the first and consistent production of battery-grade lithium hydroxide. For valuation, peers such as Iluka Resources Ltd (ASX: ILU), Rio Tinto Ltd (ASX: RIO), Jervois Global Ltd (ASX: JRV), and others are considered. Given the financial inflows from TLEA, successful production of battery-grade lithium hydroxide, well-diversified business portfolio, current trading levels, and upside indicated by valuation, a "Buy" recommendation is given on the stock at the closing market price of $9.940, down by ~1.094% on 30 June 2022. In addition, the stock has delivered an annualised dividend yield of 1.49%.

2. ASX: LTR (Liontown Resources Limited)

(Recommendation: Speculative Buy, Potential Upside: Low Double-Digit, Mcap: A$2.45 billion)

LTR is a battery metals exploration and development company focused on developing its Kathleen Valley project at a standalone mine in Australia.

Valuation

The illustrative valuation model suggests that the stock has a potential upside of 18.58% on 30 June 2022. However, the stock might trade at a slight discount compared to its peers, given no revenue generation and potential exploration risks. For valuation, peers such as Strandline Resources Ltd (ASX: STA), Lake Resources NL (ASX: LKE), Chalice Mining Ltd (ASX: CHN), and others are considered. Given the active exploration activities in place, offtake binding term sheets signed with creditworthy players, positive results from the Buldania Project, current trading levels, upside indicated by valuation, and key risks associated with the business, a "Speculative Buy" recommendation is given on the stock at the closing market price of $1.055, down by ~5.803% on 30 June 2022.

3. ASX: A4N (Alpha HPA Limited)

(Recommendation: Speculative Buy, Potential Upside: Low Double-Digit, Mcap: A$318.19 million)

A4N is engaged in the exploration and development of specialty metals and technology. Its segments include HPA First Project and mineral exploration & evaluation.

Valuation

The illustrative valuation model suggests that the stock has a potential upside of 18.50% on 30 June 2022. Moreover, given high production prospects, the stock might trade at a slight premium compared to its peers. For valuation, peers such as Orica Ltd (ASX: ORI), Clover Corporation Ltd (ASX: CLV), Incitec Pivot Ltd (ASX: IPL), and others are considered. Given the high orders under manufacture, twelve test orders executed & shipped, current trading levels, upside indicated by valuation, and key risks associated with the business, a "Speculative Buy" recommendation is given on the stock at the closing market price of $0.415, up by ~3.750% on 30 June 2022.

Markets are trading in a highly volatile zone currently due to certain macroeconomic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing. 

Note: All the recommendations and the calculations are based on the closing price of 22 July 2021. The financial information has been retrieved from the respective company’s website and REFINITIV.  

Investment decisions should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting the stock if the Target Price mentioned per the valuation has been achieved and is subject to the abovementioned factors.

Disclaimer

Kalkine New Zealand Limited is authorised to provide general advice only. The information on this website does not take into account any of your investment objectives, financial situation or needs. Before you make a decision about whether to acquire a financial product, you should obtain the Product Disclosure Statement from the product issuer. You should consider the appropriateness of advice taking into account your own objectives, financial situation and needs and seek independent financial advice before making any financial decisions.