In Brief: Lithium, Brazilian Rare Earths & Fineos

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Potential lithium stock targets for M&A; Brazilian Rare Earths in focus and Fineos’ second major client a possible  game changer.

-Have lithium prices bottomed?
-A rare earth minnow showing upside potential
-Fineos looks to emulate a winning strategy

By Danielle Ecuyer

Quote of the week is from Professor James Lovelock’s 2006 book The Revenge of Gaia due to the global interest in uranium stocks and nuclear energy.

“We have no time to experiment with visionary energy sources; civilisation is in imminent danger and has to use nuclear the one safe, available, energy source now or suffer the pain soon to be inflicted by our outraged planet”

Lithium stocks, more to go?

The on-again-off-again China stimulus rally has Evans and Partners examining the outlook for lithium cross border globally with a catchy title “Under the hood on EVs – Can the lithium sector trade higher from here?”

Taking a top-down macro approach, the work on EV demand from Wood Mackenzie was highlighted, revealing a shifting global landscape due to geopolitics.

US/European EV demand forecasts have fallen because of Chinese tariffs and a lack of competition from western EV producers.

China, by contrast, is expected to experience higher growth rates as EV market share has already reached 50%.

US/Europe are experiencing growth in demand for plug-in EVs which are forecast by Wood Mackenzie to hold a 37% market share in 2030 and 55% in 2050, against 16% in 2023. This translates to a 16% compound average growth rate pre-2030 and 6% post 2030.

The consultant envisages plug-in EVs as a “stop-gap” for electrification of vehicles as the companies work through supply chain and other issues, such as cost of production and affordability. Evans and Partners confirmed expectations from meetings with OEMs, lithium producers and industry experts, that lower cost western EVs are unlikely before 2026.

Battery electric vehicles growth in terms of global market share is forecast to increase from 11% in 2023 to 28% in 2030 and 48% in 2040.

The Arcadium Lithium ((LTM)) deal with Rio Tinto ((RIO)) is observed as marking the bottom of the cycle for lithium M&A and prices.

Casting an eye over the Australian lithium sector, the broker poses the question “who else could be an M&A target?” 

Pilbara Minerals ((PLS)) and Liontown Resources ((LTR)) are quoted as possibilities with Hancock needing to give the nod of approval in the case of Liontown.

Industrial companies and large mining companies may prefer the hard-rock sector while global energy would tilt more towards brine operations with expertise in chemicals/liquid know-how.

Evans and Partners prefers Pilbara due to the balance sheet with $1.6bn in cash, alongside a competitive cost structure and growth options when prices recover.

The broker has a Positive view on the company with a $4 valuation.

Mineral Resources also carries a Positive View with a $67 valuation. The broker anticipates higher grade at Mt Marion. Some explanation on recent cost out targets is expected from management. Train 3 at Wodgina is unlikely to be placed into care and maintenance with the “optionality” it offers alongside an eventual recovery in prices.

Rare earths under appreciated

Sticking in the mining space, Petra Capital focused on Brazilian Rare Earths ((BRE)) with the broker reiterating a Buy rating on the stock.

Why so positive? 

Well, that comes down to the quality of the grades reported by the company. Petra stresses it has “some of the highest rare earth grades ever reported”. 

The analyst notes magnet rare earths represent 68% of the in-situ value per tonne at Monte Alto, which has 18 of 50 minerals outlined as critical by the US government.

As well as the rare earths, there are concentrations of uranium, niobium, scandium and tantalum with the analyst’s estimates only including revenue from magnet rare earths such as Nd, Pr, Dy and Tb.

Petra estimates using the weighted average grades of drilling at Monte Alto hard rock zone generates a basket value of US$3,051/t. At current gold spot prices that is equivalent to 35.9g/t at a time when the gold price is at a record high and critical mineral prices at a cyclical low.

Although processing rare earths is more challenging than gold, you get the gist about the potential value upside.

Petra expects Brazilian Rare Earths to sell concentrate to start with an estimated 44% price achievement and be equivalent to gold grade of 10.8g/t.

The icing on the cake is Monte Alto has higher uranium grades than most stand-alone uranium projects on the ASX.

The analyst expects the company to start generating revenue and earnings by 2028. Target price $4.55.

Fineos takes a leaf from a US$15bn SaaS giant

Changing industries, Moelis examined the recent takeouts form Guidewire Software Inc’s Investor Day, a US based insurance technology company that is often compared to ASX-listed Fineos Corp ((FCL)).

The broker observes a similar strategy to Fineos with the transfer of legacy on premise software to a cloud-based SaaS model. The two companies do not directly compete, but both are offering SaaS based solutions to assist insurance companies with improving efficiency and flexibility.

Moelis emphasises many insurers are still on decadal old systems including mainframe infrastructure which uses older languages such as COBOL.

In a panel discussion at Guidewire’s Investor Day, customers explained the benefits of transitioning to the cloud, although there has been strong resistance from insurers in the property and casualty sector.

Part of the strategy for migration has been to build partnerships with Systems Integrators with a robust understanding of Guidewire to help develop confidence in the customers and help the implementation strategy.

Similarities exist with Fineos as the company needs to “support” higher costs to roll out its strategy, while showcasing reference customers post transition. Moelis points to the company’s second client AdminSuite which started a “soft go live” in September.

The stock is Buy rated with a $1.80 target price. 

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