Investing in ASX lithium shares? Here’s what you need to know


Leading ASX lithium shares have offered investors some of the best gains on the index over the past 12 months.

Now, not every lithium producer and explorer has shot the lights out amid fast-rising lithium prices. But plenty have.

Just have a look at these numbers.

While the All Ordinaries Index (ASX: XAO) has gained just under 4% since this time last year the Liontown Resources Limited (ASX: LTR) share price is up 257%; Core Lithium Ltd (ASX: CXO) shares have gained 402%; Pilbara Minerals Ltd (ASX: PLS) is up 139%; and shares in Lake Resources NL (ASX: LKE) have rocketed 606%.

We could go on.

With Australia currently ranked as the world’s fifth-biggest lithium producer, it’s little wonder investors are turning to ASX lithium shares as the price of the lightweight, conductive metal has been rocketing.

With that in mind, the Motley Fool asked Josh Gilbert, market analyst at multi-asset investment platform eToro, what’s been driving lithium demand and what the outlook is for prices heading forward.

Supply is still playing catch-up

“Lithium is the primary component of a lithium-ion battery,” Gilbert told us. “Demand for these batteries has skyrocketed in the last 15 months, resulting in its price rising over 400% in recent times.”

While lithium has other uses, most of the rocketing demand is coming from the rapid growth of electric vehicles (EVs), whose batteries rely on lithium to hold a charge.

“All electric vehicles available in the market – both now and for the foreseeable future – are based on lithium-ion batteries,” Gilbert said. “Their availability will affect EV prices and our progress in decarbonising transportation. Ultimately, lithium is the main element that the energy storage revolution depends on.”

As for why there’s a supply and demand imbalance driving lithium prices – and ASX lithium shares – skywards, Gilbert said:

Due to a lack of investment in the 2010s, lithium’s supply is still playing catch-up. It takes up to 5-7 years to establish a lithium mining operation from the ground up. We’re starting to see increased production in Australia and Argentina, but it’s still not enough.

Lithium is not rare. It can be found everywhere. However, extracting the raw material from the ground in commercial amounts for battery-grade use can be challenging. This means that for the immediate future, lithium is facing a significant supply and demand issue. With demand currently outweighing supply, investors should expect prices to continue on the upward trajectory and stay elevated.

Now that we have a better understanding of the supply and demand dynamics facing the market, what should investors consider before buying ASX lithium shares?

The research can be tricky as many of these companies are smaller. And even some of the bigger names – like Core Lithium and Lake Resources – were only recently added to the ASX 300. Which can mean “there is very little information available publicly”, Jessica Amir, Australian market strategist at Saxo Markets said.

Amir recommends starting your research by answering five core questions.

First, visit the company’s website to find out where it’s mining.

Second, find out if there are any successful lithium mines in the area.

“Maybe the company is mining in Australia’s Pilbara Region, for instance, home to some of the world’s largest and most lucrative diversified mines. Or maybe it’s mining in the ‘lithium triangle’ in Argentina or Bolivia – home to the world’s largest lithium deposits,” she said.

“You can typically de-risk your investments, by backing a company operating in close proximity to a global major mining company – like BHP Group Ltd (ASX: BHP) or Ganfeng Lithium Co – as there is a higher probability of operational success,” Amir added.

The third question Amir recommends answering is whether the prospective ASX lithium share is close to businesses that need its product.

“An electric car manufacturer based in the United States would typically be more likely to buy lithium from a mine that’s in Argentina over Africa, for example. That’s because they’d only have to pay for 8,300 kilometres of haulage versus 14,000 kilometres from an African lithium miner,” she said.

Next, she recommends asking whether the prospective ASX lithium share is booking sales agreements for future production.

“If the company is not making money yet, look at the company outlook and determine when they will go into production,” she said.

Amir continued:

You want to be backing a company that will start to see money rolling in the door, as cashflow growth drives share price growth. So, ask if the company has signed an offtake deal. That’s a sales agreement where the miner sells a certain number of tonnes to another company.

Ideally the more of their future production that’s sold, the better, as that de-risks your investment. You always want the offtake agreement to be binding. This makes the sales contract agreement harder to tear up. If it’s not binding, there is more risk at hand, as the sales agreement offtake is usually subject to conditions being met.

Lastly, Amir recommends investors keen on ASX lithium shares find out whether their projects are located in a province likely to be supported by local government.

“For example, is it a critical mineral in the American regions that will likely be supported by [President Joe] Biden’s new potential stimulus?” she said. “Or, if it’s in Australia, will it be likely to receive Australian government support as paved out in the Federal Budget?”

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