Discovering value in the battery metals boom

The battery metals boom is primarily driven by commodity demand from present and predicted electric vehicle uptake.

Whilst we don't have a strong view on the likelihood of electric vehicle penetration reaching an arbitrary threshold within a certain time frame, it is impossible to ignore the definite trend towards greater electrification in society
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However, by focusing purely on battery metals, in many ways, some are missing the forest for the trees.

​Pure battery exposure is not without risks, given the plethora of competing battery technologies vying for dominance in a growing market. The reality is that electric vehicles require a range of associated technologies which require an assortment of materials; all of which supply is critical for the further adoption of electric vehicles.

Ultimately, investors need to ask themselves what they want to achieve and within which risk parameters?
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At Datt Capital, we think laterally in the way to achieve our objectives in the most appropriate manner; namely, achieve the highest return at the lowest possible risk ideally in sectors that are experiencing strong tailwinds.

Accordingly, we identified three core commodities that enjoy positive demand/supply dynamics, were critical to future electrification, and by proxy have exposure to rapidly developing future technologies. These three most critical elements to the future intensification of electrification are rare earths, tin and lithium.

We focused on the ASX-listed, sector leaders in each commodity identified which led us to Lynas Rare Earths (LYC:ASX), Metals X (MLX:ASX), and Pilbara Minerals (PLS:ASX). All companies are producing profitably in the current bullish environment, as would be expected for a sector leader.

Commodities as an asset class are highly cyclical, so it is important to have select exposure to low-cost, tier 1 producers at the right price. Risk can also be mitigated by taking a diversified, portfolio approach to commodity exposures in line with an investor's risk profile.

​Value is always relative, as such, we have compared these 3 sector leaders using some high-level, key factors namely:
Enterprise value (EV)
Net profit before tax (NPBT)
Return on fixed assets
fixed asset values
Project ownership
Estimated mine life
EV/NPBT multiple

The table above is derived from the latest half-year figures reported by all the companies.
 
This exercise ultimately identified that Metals X (MLX:ASX), despite enjoying superior business and industry fundamentals, is materially undervalued against its peer group of market-leading battery metals companies.

This value divergence between Metals X and its peer group is exceptionally puzzling, given that tin is the metal most affected by the adoption of new technologies, across the board.

Accordingly, we consider that Metals X is undervalued by some measure; trading at only a 6x EV/NPBT multiple relative to its comparables both trading at over 50x EV/NPBT multiples.

It is important to note that commodity spot prices for all 3 companies have strengthened considerably from the new calendar year, and all three are likely to continue to enjoy superb business returns in present market conditions.

We have previously examined the large supply constraints evident in the tin industry in a previous article that can be found via this link: https://bit.ly/Datt-MLX21
 

Disclaimer: This article does not take into account your investment objectives, particular needs or financial situation; and should not be construed as advice in any way. The author holds shares in all companies discussed