Australia’s largest pension fund plans to double its exposure to local lithium stocks over the next five years, after a price rout made producers of the key battery material more affordable.

AustralianSuper, which oversees A$300-billion ($199-billion) in pension savings, is targeting lithium in a bid to benefit from the global shift toward electric vehicles — a demand trend that’s likely to play out for more than a decade, according to Senior Portfolio Manager Luke Smith.

“The biggest opportunities for us as investors at AustralianSuper is when the prices are at cycle bottoms,” Smith said, adding that he also sees “lots of opportunities” in nickel, cobalt and graphite as key materials in the energy transition. The lithium sector and the other critical minerals are likely to be “an attractive place to invest” over the next five years, he said.

The Melbourne-based fund raised its stake in Pilbara Minerals to 6.12% earlier this month as it aims to reduce its underweight position in lithium equities, Smith said. It now holds about A$1-billion in Australian producers of the EV material, which Smith expects to increase to between A$2.5-billion and A$3-billion over the five-year period.

The ultra-light metal used in electric-vehicle batteries has had a bumpy ride in recent years. Prices on the Lithium Price Index have nosedived more than 80% from an early-2023 record, with the market whiplashed by fears of shortages to more recent warnings of massive near-term supply surpluses. Meanwhile, sales growth in China — the world’s top EV consumer — is expected to slow for a second year in a row.

Lithium’s prospects may deteriorate further as low prices make it harder for mine builders to raise money, at a time when the industry is also grappling with rampant inflation driving up the cost to build new projects. Australia’s Core Lithium said this month it would halt mining operations at its Grants open pit mine until conditions improve, and warned of an asset writedown.

“Through 2022 and in early ‘23, we took money off the table in lithium as the price spiked well beyond the cost curve,” said Smith, who works with a team of five looking at mining stocks as part of the fund’s broader Australian equities team of 20. “Clearly, we’re seeing now the opportunity become more attractive.”

Still, Smith is looking beyond short-term opportunism in the lithium sector. It can take years for mines to start producing, he said, meaning that supply shortages could re-emerge over the longer term. If the industry hit the pause button on projects today, it would be a challenge to meet even greater demand in the future.

The fund was taking a long term view on “what will happen over the remainder of the 2020s” rather than the next quarter or year, Smith said. AustralianSuper sees “momentum behind electric vehicles” from auto manufacturers across the board, Smith said. “They now know this will be the way of the future and that’s what they’re investing for.”

ENERGY TRANSITION
Last year, AustralianSuper — which holds 17% of Origin Energy Ltd. and is the company’s largest investor — blocked a $12.8-billion Brookfield Asset Management Ltd.-led takeover bid.

Smith said “there’s always a price” where a takeover is a good result for members. The fund backed Kirin Holdings Co.’s A$1.88-billion purchase of Australian vitamins maker Blackmores Ltd. last year.

“A lot was focused on what AustralianSuper did with Origin last year, but there was also other investments such as Blackmores, where we were a substantial shareholder on that and we were happy with that takeover,” Smith said, adding a similar situation to Origin “may come up again, but it’s not what we do all the time.”