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Castillo Copper Decides To Drop Some Lithium Plans – A Good Idea?

Tim Worstall
Tim Worstall trader
Updated 14 Jan 2022

Key points:

  • Castillo Copper has provided an update where they report good cobalt numbers
  • Castillo is dropping certain of its plans to pursue lithium opportunities
  • This could be a good idea given the coming competition in lithium projects
  • The Best Copper Stocks To Buy

Castillo Copper Ltd (LON: CCZ) has dropped 6% this morning on news about its cobalt prospects. Given that the cobalt numbers are interesting this seems an odd reaction for the Castillo share price. It’s worth trying to examine what is going on here.

Castillo Copper has been aiming itself at the two metals thought to be in short supply for the electric vehicle revolution. That’s the cobalt and the lithium required for the batteries. While the two metals end up in the same place – or rather demand for them stems from the same technology – they pass through entirely different processing routes. Being in the one metal, cobalt, provides no advantages to being in the other, lithium. Those processing routes are simply too different for the end customer probably being the same person to make any difference.

Also Read: The Best Lithium Stocks To Buy

In the announcement this morning Castillo Copper says that their drilling program in Australia has found interesting amounts of cobalt. OK, that’s good, showing that there is a mineralisation worth pursuing is indeed good news for a junior miner. So why is there a fall in the Castillo share price as a result of the announcement?

It could be because of the associated announcement which is that Castillo is now going to drop some of its lithium plans. The company has really only enough resources to pursue one or the other, the cobalt looks better so concentrate on that. Well, OK, but that does mean dropping lithium and lithium is seen as a very sexy – sorry, likely to be profitable – target, thus the price drop.

The larger question though is is lithium actually that sexy target? For all junior miners face that problem with such minor metals. What really matters is how many other people are chasing that same target? With lithium, we’ve also been here before. There was a burst of exploration and investment back a few years. The result of which are that certain actually operating lithium mines have gone bust. Yes, the increase in demand was there but supply rose faster, prices declined below production and financing costs. It is possible – possible only – that this will happen again.

We’ve Atlantic Lithium (LON: ALL), Standard Lithium (NASDAQ: SLI), a list of lithium miners, unquoted operations like Cornish Lithium and Salton Sea experiments. Maybe that’s enough people chasing lithium already? And there’s certainly an argument that if all of those and the more out there do come to market with lithium production then the market will be in oversupply.

So it could be that Castillo Copper is making the wise choice to be out of the lithium market. Sure, it’s sexy, fashionable, but precisely because of that there are a lot of people in it. Lots of competition isn’t where a company wants to be so maybe a concentration on cobalt, as with Castillo, is a good idea?

Only time will tell but it’s possible that moving out of fashionable lithium is a good long-term decision even if it has short-term pains associated with it.

Tim Worstall
Tim Worstall is a freelance writer specialising in economics and the financial markets.