Technical view: Two lithium stocks on the verge of a breakout

Highlights:

• According to the Resources and Energy Quarterly June report, the world demand for lithium is expected to rise around 24% to reach 947,000 tonnes by 2024.  
• Global Lithium Resources Limited (ASX:GL1) stock rallied over 370% in one year, outperforming the S&P/ASX 200 Materials (XMJ) index, which is down over 4% in one year.
• Vulcan Energy Resources Ltd (ASX:VUL) shares fell nearly 40% in one year, underperforming its industry benchmark XMJ, which is down over 5%. 

According to the Australian government’s Resources and Energy Quarterly report in June 2022, the world demand for lithium is expected to increase to 677,000 tonnes of lithium carbonate equivalent (LCE) in 2022. The demand is expected to rise further by around 24% to reach 947,000 tonnes by 2024.  

The stronger demand for the chemical element (Lithium - Li) has made lithium mining companies popular over the last few years. 

The Benchmark Mineral Intelligence estimates suggest an investment of as much as US$42 billion by 2030 to meet the growing demand for lithium.

So far, China has been a dominant player in lithium production. However, now the US and Europe seek to produce lithium to reduce their dependency on China.

The quarterly report forecasts the world output to reach 655,000 tonnes LCE in 2022 and 944,000 tonnes by 2024. 

The demand is huge, and how can it be met? The report says that three geographies, Australia, Chile, and Argentina, may grow their output and expand existing mining operations in future.   

The focus on the electric vehicle (EV) industry lately has put the batteries and related raw materials to produce EV batteries in demand. The whopping requirement has made Western Australian deserts look more rewarding suddenly. 

Why is lithium used in EV batteries?

Lithium has various uses. It is used majorly in rechargeable batteries with other uses in Greases & Polymers, Ceramics & Glasses etc. 

The lithium-ion batteries are in huge demand due to technological advancements where portable items such as laptops and cell phones and bigger consumer durable items like EVs are growing in numbers with each passing day. 

Lithium's preference in these items is its high energy per unit mass compared to other systems of storing electrical energy, according to the US Department of Energy.

The growing push for EVs is a major factor behind the sudden rise in lithium demand.

The global market share for passenger EVs has quadrupled since 2019. In 2021, EV sales were nearly 9% of the global car market. But, given the strong underlying demand and EV manufacturers' pledge to increase production, EV sales are expected to grow to 40% of annual vehicle sales worldwide by 2030. 

The importance of the transition to EVs is evident when Honda announced in April to invest US$40 billion to develop 30 EV models over the next decade with a goal of 100% electric sales by 2040.  

Image Source: © 2022 Kalkine ®; © Rizelle Anne Galvez via Canva.com

Where does Australia stand in lithium mining and exports?

As per the report, lithium production in Australia is projected to grow more than half of lithium carbonate equivalent (LCE) from 278,000 tonnes in 2021-22 to 438,000 tonnes of LCE in 2023-24.

The quarterly report says price of spodumene, a source of lithium, is expected to rise to US$2,235 a tonne in 2022 before coming down to US$1,800 a tonne in 2024.

And the export earnings from lithium are anticipated to more than double in 2023-24 from 2021-22 levels. 

Image Source: © 2022 Kalkine ®; © Stediaco Anne Galvez via Canva.com

Amid the continuous demand for the chemical mineral, this article will discuss shares of two Australia-based lithium exploration companies based on their technical charts.    

Global Lithium Resources Limited (ASX: GL1)

This Australia-based lithium exploration company is focused on two prospective Western Australian (WA) projects-- the 100% owned Marble Bar Lithium Project (MBLP) in the Pilbara region and Manna Lithium Project (80% owned) in the Goldfields region. Global Lithium Resources focuses on exploring the Archer deposit, which comprises a swarm of spodumene-bearing pegmatites spread over approximately a three by one kilometres zone.

Earlier this month, the company reported positive results from preliminary metallurgical test work carried out on diamond core samples from MBLP. It also said that the RC drilling programme at the Manna Lithium Project returned the largest single intercept of a lithium-bearing pegmatite in the project's history.

Financials

The company is yet to generate any revenues from its operations, and its bottom line is still in the red. For the half year ended 31 December 2021, the company reported only interest income of AU$9,327 as against zero revenue in the year-ago period. Its total expenses ballooned to AU$2.41 million, including share-based payments of AU$1.69 million, in the reporting period compared to a net loss of AU$532,387 in the half year ended 31 December 2022.

Share price performance

Global Lithium Resources shares have rallied over 370% in the last one year (as on 31 Aug 2022) outperforming the S&P/ASX 200 Materials (XMJ) index--which is down over 4% in one year--by a wider margin. On a year-to-date (YTD) basis, the stock has returned nearly 83% against a more than 5% fall in the industry benchmark.

As shown in the technical chart below, GL1 shares are now getting the support of an upward-sloping trend line and are trading above their 21-period and 50-period simple moving average (SMA) on the weekly chart. This indicates that the stock may get technical support on the downside if a correction happens.

Image Source: Refinitiv (This image was captured at 1:10 pm AEST on 31 Aug 2022)

Also, the Relative Strength Index (RSI) (14-period) reading of nearly 55.72 on the weekly chart indicates the stock is far from being in the overbought territory.

On the downside, GL1 shares may find support at AU$1.48 and AU$1.348 levels, while on the upside, levels of AU$2.00 and AU$2.16 are likely to act as resistance. GL1 shares closed at AU$1.72 apiece on Wednesday (31 Aug 2022).

Vulcan Energy Resources Ltd (ASX: VUL)

This Australia-based company focuses on the exploration of energy metals. Vulcan is engaged in developing a combined geothermal and lithium extraction project in the Upper Rhine Valley of Germany. It is known for its zero-carbon lithium extraction process that uses renewable geothermal energy to power the lithium extraction process and create a renewable energy by-product. Zero Carbon Lithium Project seeks to produce a battery lithium hydroxide chemical product from its combined geothermal energy and lithium resource.

The company hopes to produce and supply high-purity lithium hydroxide to European EV makers.

In June this year, Vulcan Energy Resources received an AU$76 million investment from global automaker Stellantis for around 8% stake in the company. Stellantis is now the second-largest shareholder of Vulcan.

The investment from Stellantis will be used for the expansion of production in its Upper Rhine Valley Brine Field in Germany.

Financials

For the half year ended 31 December 2021, Vulcan reported a net loss of €6.28 million on revenues of €0.69 million. In comparison, for the half year ended 30 June 2021, the company had reported a net loss of €5.07 million while it had nil revenue from operations.

Share price performance

Vulcan shares are down nearly 40% in the last one year, underperforming its industry benchmark XMJ, which is down over 5%. But the stock is on the verge of a course correction as its prices broke above a downward sloping trend line on the weekly chart as shown below and are sustaining above the breakout point for the past four weeks.

This may give strength to the rebound witnessed in the stock. Also, Vulcan stock price is taking support of its 21-period SMA on the weekly chart, which indicates likely support for the stock in the near term.  

Image Source: Refinitiv (This image was captured at 1:10 pm AEST on 31 Aug 2022)

Meanwhile, the RSI (14-period) has come off an oversold region to around 50.68 levels, indicating the stock is on upside momentum. VUL shares will likely find support at AU$7.411 and AU$6.600 levels on the downside. On the upside, levels of AU$9.246 and AU$11.040 are likely to act as resistance.

Vulcan shares closed at AU$8.250 apiece on Wednesday (31 Aug 2022).

Bottom Line

The above analysis should not be construed as investment advice. It may be noted that both Vulcan Energy Resources Ltd and Global Lithium Resources Limited are yet to generate any revenue from their operating activities and are loss-making companies. Shares of these companies are moving only on the basis of future expectations. So potential investors are advised to exercise extreme caution while considering these stocks for investment.