In this week’s video insight, Scott Phillips our Head of Distribution joined Gary Rollo, Portfolio Manager for the Montgomery Small Companies Fund to discuss the difference between producers and developers in the electric vehicle (EV) sector and share some companies they think have bright prospects.

Transcript

Scott Phillips:

Welcome to this Montgomery video Insight. My name is Scott Phillips and with me I have Gary Rollo, the Portfolio Manager for the Montgomery Small Companies Fund.

Gary, talk to me about mergers and acquisitions (M&A) because it seems like there’s a bit going on in the electric vehicle (EV) space at the moment. You’ve told us before that there’s two areas in  EV lithium production. There’s the developers who are drilling holes and are finding deposits, but they need funding. Then there is the actual producers bringing out their lithium and selling it at record prices. What’s happening in the M&A space in these two areas and is that an opportunity for investors to get involved?

Gary Rollo:

We’ve recently seen Albemarle, which is a big U.S. lithium chemical producer, make a bid or proposal to acquire Liowntown Resources, which is a lithium mine developer here in Australia, so that’s a reference point for us. But the drivers for Albemarle’s bid and others that might look at the sector are really interesting.

The observations we have is that you’ve got industry participants, original equipment manufacturers (OEMs) in the EV space, the folks who’ve got the brands that are making the cars or their supply chain, and you might have big energy companies who want to decarbonise or get into renewables in a way, you’ve seen them do that in the portfolios, or just big miners. So, there’s three groups of potentially interested parties getting into lithium.

We think that the M&A in this space is likely to happen at the top end of town, not in the smaller developers, because each of those players needs to have a product that’s big enough in their portfolio to make a difference, so that would be our observation. Probably going to happen at the top end of town, not at the bottom.

Scott Phillips:

What type of average price do you need to make these numbers work for lithium, given this is a long-term theme, but we’re seeing a lot of volatility?

Gary Rollo:

You’re talking about the lithium price there, Scott, and the reference point I’ll give you is for spodumene 6 per cent concentrate. If you look at the implied price in the Liontown bid from Albemarle, it is around that 1,750 U.S. dollars a tonne for spodumene concentrate. If you look embedded in the long-term forecasts out there from all the analysts, they’re looking around 1,500 U.S. dollars a tonne.

And if you look embedded in the share prices, so Pilbara is probably discounting around 1,200 U.S. tonnes today at the current share price, for instance. So there’s value and if you go down into the developers, they will be discounting a lot less, as they should because their projects aren’t funded and they don’t have access to the markets to sell their product today. So, that’s what we see out there and there’s some value out there in the market for sure.

Scott Phillips:

The Montgomery Small Companies Fund has the ability to invest in resources unlike some other smaller companies’ managers out there. You’ve made some great money out of EV to date. What are your top picks in this space? What have you got in the Fund?

Gary Rollo:

We’ve got a couple of stocks that I will call-out now. We do favour the producers at the moment with the lithium price being soft, we think that brings uncertainty to the developers, so we don’t want to play there. We want to play in companies that can monetise the pricing environment and have got a purpose for that cash because they are generating lots of it.

And what we want to see is that cash being carried off to fund the growth in their portfolio. So Pilbara (ASX:PLS) and Allkem (ASX:AKE), two stocks that are generating heaps of cash and have very strong growth pipelines and I’ll throw in that Allkem has the best valuation framework. Actually, if I was looking from the outside, from an M&A point of view, that would be a very interesting portfolio to acquire as well.

Scott Phillips:

All right, thanks Gary. So producers over developers at the moment for Gary. That’s all we have time for with this EV them. It’s a long-term theme, it’s volatile, but definitely worth looking into. So with that, thanks for your time, and remember, follow us on Facebook and Twitter.

The Montgomery Small Companies Fund own shares in Allkem and Pilbara. This video was prepared 14 April 2023 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade these companies you should seek financial advice.