Treasure Chest: Significant Lithium Potential For Penny Stock Reed

This story features MINERAL RESOURCES LIMITED. For more info SHARE ANALYSIS: MIN

By Greg Peel

Lithium grabbed the world’s attention in a big way in 2008 and interest soared in 2009 as talk of battery-powered electric cars replacing gas guzzlers reached a crescendo. This interest was never quite matched by a surge in the price of lithium, but the share prices of lithium producers or potential producers certainly enjoyed a run. Gold then began to steal the spotlight, and suddenly the rare earth metal space took off, leaving lithium in the dust.

During lithium’s celebrity period the focus was on Canada, and that space suddenly became rather crowded. No one paid much attention to potential in Australia which, according to resource analysts Hallgarten & Co, offered an “arguably more serious” proposition. Two Australian producers of note merged before being bought out by the Chinese, while Orocobre ((ORE)), which boasts lithium brine lakes in Argentina, has secured the backing of Toyota. Galaxy Resources ((GXY)) had some time in the sun after building a lithium mine in WA and a processing plant in China, but quickly closed down the mine and sold the plant to the Chinese.

Reed Resources ((RDR)) joined the action in 2009 by acquiring a lithium asset at Mount Marion near Kalgoorlie in WA. Western Mining, now absorbed into BHP Billiton, carried out extensive exploration at Mount Marion in the eighties while a smaller company completed pre-feasibility studies for the production of  lithium and potassium in the nineties. Until Reed’s acquisition, the asset was held by an individual who had taken the resource no further.

Outside of the Mount Marion lithium asset, Reed owns a titanium/vanadium project at Barrambie and a nickel/iron ore project at Mt Finnerty, and is a joint venture partner in a nickel project at Lake Johnston. The company has long appeared to be a cross between a project generator and supposed producer, suggests Hallgarten, but now its real aim is becoming more clear. Reed has sold out of its two gold assets, at Meekatharra and Comet Vale, ridding itself of gold price downside risk, has put its iron ore project at Mt Finnerty up for sale, and intends to push forward with the development of Mount Marion.

Barrambie is the much larger of the remaining projects but is more complex, Hallgarten notes, hence Reed intends to exploit Mount Marion first before looking toward expected future supply deficiencies in the titanium market.

Mount Marion’s low capital expenditure requirement of US$30-40m “outcompetes all other proposals we have seen in the industry,” says Hallgarten. All mine construction capex falls on the substantial contractor, Mineral Resources ((MIN)), on a build-operate-own basis.

Renewed interest in nickel has provided Reed’s Mt Finnerty project with greater impetus and the company has US$7m in cash on hand and another US$6.2m in term deposits.

There is a risk in that many of the principal consumers of lithium, such as Toyota, have already secured offtake agreements leaving Reed with a more limited pool. However, Hallgarten has set a 12-month target price of 17c on the stock, which is currently trading at 3c.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms