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Small cap starter kit for the next phase of the battery boom

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By Tim Treadgold - 
Battery metal stocks copper nickel BHP RIO

Battery metal stocks have outperformed the broader market for the past two years with the result being that most of the better-known companies are no longer small caps which is why a small-cap “starter kit” might be useful for the next phase of the battery boom.

Three stocks best demonstrate the problem for late arrivals at the battery party, Sandfire Resources (ASX: SFR), Nickel Industries (ASX: NIC) and Chalice Mining (ASX: CHN).

It’s not that long ago that they qualified as small caps with share prices to match.

Chalice, for example, was a 16c minnow less than three years ago but after a 3800% increase to $6.27 is valued at $2.4 billion and ranks as the 147th most valuable company on the ASX.

Palladium, a metal mainly consumed in internal combustion engines (ICE), is what launched Chalice but it’s future looks increasingly to be electric vehicle (EV) driven by the nickel and copper in the cocktail of elements in the Gonneville orebody it has discovered on the outskirts of Perth.

Rise of nickel and copper in the battery industry

Nickel Industries is true to its name, a pure nickel play with extensive interests in the Indonesian mining industry though, with a market value today of $2.65 billion, is no longer a small cap.

It’s the same with Sandfire Resources a company which started life as a copper miner and is largely sticking to its knitting with a big mine in Spain and a new copper mine being developed in Botswana, and a market cap of $2.7 billion.

Lithium, despite being the obvious entry battery business entry point is a sector where a novice investor is spoiled for choice with a possible long-term issue being the super-abundance of lithium in mining-friendly countries such as Canada and Australia.

Graphite also is a commodity which is relatively easy to find given its status as a form of up-market coal and a history of sometimes being burned for heat in cold countries such as Sweden despite difficulty in getting a graphite fire started.

BHP and Rio Tinto’s investment strategy

Another factor working against lithium and graphite is the lack of interest being shown in either by the world’s biggest mining company, BHP (ASX: BHP) despite it following a plan of investing in what it calls “future facing” commodities.

Often criticised for being a slow mover, BHP has got more of its investments right than those it has got wrong, and when it comes to battery metals BHP reckons copper and nickel are the places to be, which is why it snapped up OZ Minerals last year and is actively pursuing nickel assets around the world.

Shadowing BHP in the nickel hunt is its nemesis, iron ore billionaire Andrew Forrest who won the battle for Canadian nickel hopeful Noront Resources and is in the process of acquiring WA-based Mincor Resources (ASX: MCR)which sells its nickel ore to BHP.

Rio Tinto (ASX: RIO), the second biggest miner agrees with BHP, up to a point, having placed a couple of small bets on lithium in South America and Serbia, even as it pushes hard into copper with nickel high on its exploration list of exploration targets.

Five small caps which could form a battery metal starter kit are:

So, if you’re interested in starting to build a portfolio of next generation battery metal stocks it’s worth doing what BHP and Rio Tinto are doing and focus on the commodities they reckon will outperform in the long run, copper and nickel, because they are in short supply – and getting shorter.

Centaurus Metals

Once an iron ore hopeful with plans to develop the Jambreiro project in Brazil, Centaurus Metals (ASX: CTM) turned to nickel in a deal with Brazil’s mining giant, Vale.

Getting the Jaguar nickel project to the starters gate has been a struggle but as was reported last week the future looks bright with the way clear to raise development capital and/or attract a partner with deep pockets, as well as becoming a potential takeover target.

On the market, Centaurus has performed well over the past month, up 16c to 89c, but has weakened recently thanks to a slide in the nickel price.

At its latest share price Centaurus is value at an untaxing $366 million.

Carnaby Resources

A pure copper exploration and discovery story in one of the homes of Australian copper, the region around Mt Isa in north-west Queensland.

Plum asset in Carnaby Resources (ASX: CNB) is the Greater Duchess copper and gold project located about 70 kilometres south-east of Mt Isa with exploration on an extensive tenement holding revealing a large number of possible future mines.

The best recent result was a reading of 3.9% copper over a 47-metre intersection (using a hand-held XRF device).

On the market, Carnaby has weakened over the past month to $1.035 but Macquarie is tipping it as a buy with a price target of $1.70, valuing the company at $170 million.

Lunnon Metals

Operating in the home of Australian nickel, the region around Kambalda in WA, Lunnon Metals (ASX: LM8) is seen as the successor to Mincor which is disappearing inside the minerals empire of Andrew Forrest.

Like Mincor, Lunnon started life with the acquisition of nickel rights to two mines discovered decades ago by the former Western Mining Corporation, Silver Lake and Fisher.

But the new discovery which has caught the eye of investors is called Baker which has grown quickly to a resource of 48,000 tonnes of nickel metal, earning a place on the Macquarie recommended base metals list with a target price of $1.40, up 53% on last sales at 92.5c, valuing the company at $161 million.

Rex Minerals

Several false starts have hampered the plans of Rex Minerals (ASX: RXM) to become significant South Australian focused copper producer at the Hillside project near the town of Ardrossan on the Yorke Peninsula.

The resource at Hillside stands at 1.9 million tonnes of copper plus 1.5 million ounces of gold.

Plans to mine gold in the U.S. appear to have been shelved with the focus returning to Hillside which has government approval for a project producing a concentrate containing 42,000 tonnes of copper a year and 30,500 ounces of gold a year. Funding talks are underway.

On the market, Rex has slipped over the past month to 22.5c valuing the company at $133 million.

Panoramic Resources

A rare pure-play nickel stock Panoramic Resources (ASX: PAN) has struggled recently with equipment failures at its Savannah mine in the Kimberley region of WA but once back in production is confident of hitting a revised target of up to 5800 tonnes of nickel, 3400 tonnes of copper and 400 tonnes of cobalt.

The operational problems knocked Panoramic’s share price down from 16c in April to latest trades at 9.1c, valuing the company at $186 million.

Macquarie believes Panoramic will bounce back to 19c, a double-your-money forecast.