Wonder metal 

While most commodity prices have taken a hit in 2022, lithium is still trading close to all-time highs of US$70,000/ tonne. And analysts expect lithium prices to rise anywhere between 150% and 250% year over year until 2028. 

To put the current inflation in lithium prices in perspective, let us look at the price action across 2022. In January, lithium cost $10,000 per tonne. Right now, it is trading close to $68,000. This 580% jump in seven months has made it one of the fastest growing commodities in history. 

And with European EV sales at an all-time high, I think this is the perfect time for me to look at lithium shares in the UK.

Two top UK shares I’m watching

To cut out crude oil, the first step is to develop the battery tech to power our machines. And Ilika (LSE:IKA) is a British battery manufacturer with a focus on lithium-based batteries for EVs and medical devices. 

The firm is working on its ‘Goliath’ battery line, which could become a premium option for the automobile belt in Europe. After years of research, Ilika is finally looking to scale up manufacturing efforts to meet this sudden spike in demand. 

The company is already working with the UK Battery Industrialisation Centre (UKBIC) to create a dedicated 100 MWh manufacturing line. Also, Ilika’s tech was recently accepted into the coveted APC programme to help the UK automotive industry reach net-zero emissions.

The next UK share on my list, Rio Tinto (LSE:RIO). The FTSE 100-listed mining giant has actively been securing lithium reserves across the world. These include the Rincon lithium project in Argentina for $825m and the highly promising $2.4bn Jadar lithium project in Serbia. 

The Serbian government recently revoked the license for the Jadar project, citing environmental concerns. This forced Rio Tinto to propose a new plan that promises a 15% reduction in emissions. According to estimates, lithium from Jadar would meet 90% of Europe’s current needs. And Rio’s board is confident that a resolution can be reached.

Concerns and verdict

Despite the estimated demand for batteries, projects like Ilika could meet huge roadblocks. The company is yet to become cash-positive given its high R&D budget. And the journey to being a new product to the market is tough, especially for smaller firms.

Miners like Rio always run the risk of government interventions that could affect operations. Also, with lithium prices skyrocketing, some analysts are wary of the instability. If the demand from China cools down, lithium prices could drop again, effectively ending the surge. 

However, the EV industry looks unstoppable right now. Even Elon Musk has stated that Tesla could enter the lithium mining market to cut costs. And the two UK shares on my watchlist can help address this demand. If the demand for EVs extends into 2022, I would be tempted to make an investment in both to cash in.

Evolving business opportunity

Yet while the share price action has been negative, the noise coming from the battery industry has been increasingly positive.

Consider Ilika as an example. It has leased a factory and installed a clean room for production of its flagship Stereax battery line. The company said in its final results this month that it expects to start shipping Stereax batteries early next year.

In other words, we may only be months away from commercial production of Stereax at scale after years of waiting. The company was touting Stereax by name as far back as 2016 and developing the technology even before that.

Meanwhile, Ilika is also making progress on its Goliath product line. It is in the process of designing the manufacturing process for these batteries. It anticipates the product reaching manufacturing readiness in 2023 and then the company wants to ramp up production to what it calls “mega-factory scale”.

Has anything changed?

On one hand, Ilika looks much the same as it used to. Revenues are small and the business consistently burns through cash.

But it seems finally to be on the cusp of moving up to commercial levels of production. That should be transformative for revenues and could lay the foundation for future profitability.

Meanwhile, solid state batteries are also seeing growing momentum on the demand side. The campaign group Transport & Environment released a report last week on new research that showed solid state batteries can reduce the carbon footprint of an electric vehicle by 24%. That is a large difference and I expect soaring demand for solid state batteries in coming years. Toyota plans to release its own solid state battery in 2025 and rival carmakers are planning vehicles powered by the technology.

Is now the moment to buy battery shares?

The size of the future opportunity for solid state batteries seems to be growing. Large scale commercialisation is also getting closer to reality. What might that mean for solid state battery shares?

For years producers have been in a development phase, with funds needed for research and development. Commercialisation will also bring costs, such as building production facilities and spending on sales efforts. But revenues should start to increase significantly. Hopefully, eventually, profits may follow.

For me, though, it is still not the perfect moment to buy battery shares. There is a lot left to prove about the business model, not least that it will be profitable. That applies to the industry overall and it certainly applies to specific battery companies in my view. Brand new technologies can produce winners, but also a lot of losers.

That is why I usually prefer to wait until a company proves its business model before investing. I think now is an exciting time for solid state battery companies. But I am not yet buying battery shares for my portfolio.

Although the price remains above the £1 level for now, Ilika has been moving closer to penny stock territory. Will it end up becoming a penny share?

Business momentum

At first glance, the share price slide may seem odd when set against the company’s business momentum. Ilika has set up a factory to produce its Stereax line of batteries. It is in the process of making sure the factory works as hoped. It should start commercial sales fairly soon.

On top of that, the company is also making progress with its Goliath line of products. It has continued to improve the design and is now planning how to manufacture the batteries at scale.

However, this progress with research and manufacturing has not yet translated to improved finances. In fact, revenue in the company’s first half fell to just a couple of hundred thousand pounds. But the loss before interest, tax, depreciation and amortisation increased to £2.7m from £1m in the prior year period. For now, Ilika has enough liquidity to tide it over even when making losses. Its last reported cash balance, at the end of October, was £27.7m.

The Ilika share price

Still, that cash balance has come at a cost to shareholders. The company raised around £25m last summer to prop up its finances, partly by diluting existing shareholders. If it keeps making losses, there is a risk it could dilute shareholders again in future.

I think the reason the Ilika share price has been falling is a revaluation of the firm’s prospects. Its technology is promising and progress towards commercial production is a positive step. But it has also meant that investors are no longer thinking of Ilika in purely theoretical terms when it comes to business potential. Instead they are starting to think about how the company can build its sales capability, how much more funding may be needed by the company to fund its growth plans and also whether increasing competition could put profit margins under pressure in future.

So while Ilika continues to have attractive technology and is moving closer to selling its products in large amounts, its financial model remains a matter of concern. The market capitalisation of £185m still looks high to me for a company at its stage of development.

Penny share

Based on that, I would not be surprised if the Ilika share price keeps falling. I could see it fall beneath £1 in the coming year, especially if there is bad news, like an unexpected delay to production or poor sales figures.

If Ilika becomes a penny share, it would simply put the price back where it used to be. Until 2020, it had traded as a penny share for most of the time it had been listed on the stock market. It still would not tempt me in, though. I do like its technology and reckon it has promise. But the company simply does not have the sort of proven business model I feel most comfortable with when buying new shares for my portfolio.

One problem, two solutions

Although both are alternative energy companies, they have different technical perspectives. Ilika is focussed on developing solid state battery technology. That can help store energy for users such as electric vehicle drivers. ITM Power is focussed on hydrogen as an energy source. So far its focus is more on industrial than consumer applications, although that could change down the line.

I see a wider variety of possible applications for solid state batteries, whereas hydrogen energy is just one more possible energy source among many. But I think it is too early to say with any confidence whether either of the two approaches is likely to end up with large, enduring market demand.

Valuation collapse

Ilika’s market capitalisation of £120m is less than a tenth that of ITM Power, which commands a valuation of £1.4bn. Ilika is also a much smaller business. In its interim results, it reported revenue of just £0.2m compared to £4.2m at ITM Power. Neither is a big number, especially when one considers the market capitalisations of the two firms. But that is not unusual among early stage companies. Initially, revenue can be low as the technology is perfected and commercialised. But hopefully down the line it ramps up. Both Ilika and ITM Power now have their own commercial scale factories and are working to build growing sales pipelines.

Over the past year, Ilika has seen its share price fall by 50% while ITM Power has dropped even more, tumbling 55%. I think these prices reflect valuation concerns among investors. Both companies have promising technology, but they still have a lot of work to do to scale them commercially. They also need to prove that they have a viable business model. For now, both are loss-making. If the technologies prove attractive, I expect competition to get fiercer. That could be bad for future profit margins at the companies. Losses could continue for years to come.

My move on the Ilika and ITM share prices

The share prices at each of these alternative energy companies has tumbled in the past year. Both have promising technologies that could yet form the basis of substantial businesses. But for now, revenues remain low and there are no profits in sight.

I feel it is too early to say whether either Ilika or ITM will make it into the big time as the alternative energy industry grows. So even after the share price falls, I continue to see both shares as too speculative for my portfolio at the moment. The two companies trade at a huge multiple to sales, let alone earnings. So I do not regard either share as a bargain. I will not be adding them to my portfolio.

But these types of batteries were originally developed for smaller devices such as mobile phones. EVs essentially use bigger versions, so there’s a lot that can be done to improve them.

I think Ilika (LSE: IKA) could be the British stock that advances EV battery technology. Let’s take a quick look at the benefits of a solid-state battery, and then see if Ilika is a buy for my portfolio.

Solid-state batteries

Solid-state batteries are designed to replace the liquid lithium electrolyte in conventional battery cells with a solid. The very nature of the liquid means it limits the achievable specification of the battery.

Solid-state batteries have the potential to speed up charging times (solving a major limitation of current EVs), and boost capacity so cars can travel longer distances. They will also be smaller and lighter. What’s more, the liquid electrolyte is the flammable component of the battery, so replacing this with a solid will enhance the safety of EVs.

It’s no surprise that VW says this technology is the most promising for the future of e-mobility. The company is working with US-listed company Quantumscape to commercialise solid-state batteries by 2025.

Ilika’s business

This brings me to Ilika, the UK-listed company. The firm is a pioneer in solid-state battery technology for a wide range of applications in industrial IoT (Internet of Things), medical devices and EVs. It uses a ceramic-based lithium solid in its batteries.

Ilika’s Goliath division is its solid-state battery tech unit for EVs and for cordless consumer electronics. It says Goliath has the potential to replace liquid-based lithium batteries in EVs.

The limitation is just how long Ilika is from commercialising its solid-state battery from the Goliath division. Management has guided for another 18 months of development. So I do have some doubts here. Having worked in research & development myself, it’s one thing being able to develop a product in a controlled setting, but much more difficult to manufacture at high volume.

Ilika will have to figure this out if it wants to capitalise on the growing EV market. 

Should I invest?

The potential here is huge, in my view. But Ilika is only one of many companies developing in this space. Quantumscape is a much larger company, as an example.

Ilika is also loss-making, and only generated £2.3m in revenue in its last fiscal year. Of that revenue, £2m was actually grant income from seven projects it has ongoing with Innovate UK. The balance sheet looks fine, for now. But there’s been a series of capital raises, the last being in July, to enable continued investment in its ongoing development programmes.

The market value of Ilika is close to £220m, which seems high considering the level of revenue it generates. Though, if Goliath is able to capitalise on the growing EV market, then the company could be many multiples of this value in the future.

For now, I’m going to keep watching Ilika’s developments. I’m excited by the sector, but it’s a touch early for me to buy the shares.

The business

Ilika is a pioneering technology company looking to find a suitable replacement for lithium-ion batteries with its own solid-state batteries. The former type is currently in high demand due to the rising popularity of electric vehicles. However, such batteries suffer from some significant drawbacks, like the difficulty of recycling and having a relatively short lifespan.

The alternative that Ilika has designed overcomes these issues and provides a higher power density ratio. In other words, they can drive further and charge faster. That’s why the management team believes the technology will become the new standard by the end of the decade.

That certainly sounds exciting. And the technology is already being used on a smaller scale within medical devices and industrial wireless sensors. Ilika recently published a trading update that revealed good progress in its 70x expansion plan of small battery production. It’s also starting a new collaboration with Fiat to scale up its larger electric vehicle battery manufacturing capabilities. To me, this looks like encouraging progress, so why did the Ilika share price fall by 25% last Friday morning and why has it stayed low this week?

The falling share price

As exciting as this technology may be, the firm has yet to transform itself into a profitable organisation. That undoubtedly exposes investors to additional risks. Why? Because the management team has to find new ways to raise capital. And for a small, unprofitable business, debt financing isn’t a particularly viable option.

As a result, the company turned to shareholders to get its much-needed capital. Last Friday, Ilika announced a new share offer for investors to raise a total of £24.7m. But the vast majority of the newly issued shares were priced below the trading price at 140p. That’s roughly a 30% discount. I’m not surprised to see the Ilika share price fall by a similar amount.

The bottom line

Is the recent drop a buying opportunity? I’m not so sure. While the share price dropped by almost a third, the valuation remains quite rich. It currently has a market capitalisation of around £220m versus a revenue stream of only £2.3m. To me, it looks like the stock is being significantly elevated by expectations rather than fundamentals.

Forecasts suggest revenue will increase substantially in 2023/24 as its large battery production ramps up. But there’s a lot that can go wrong in the meantime. After all, Ilika is not the only business exploring solid-state battery technology. And there’s some evidence to suggest that with nano-technology, lithium-ion batteries could be superior in the future, making this venture ultimately obsolete.

Personally, I think it’s too soon to invest in this business. And so, for now, it’s staying on my watchlist.

However, not all UK shares are flattish today. Here’s why these British stocks are either powering ahead or plummeting in start-of-week business.

Senior soars on new offer

The Senior (LSE: SNR) share price has soared 11% in Monday business, taking total gains over the past year to 123%. The small-cap has soared to 169p after suitor LSF XI Investments returned with an increased offer price.

Senior — which has rebuffed LSF’s acquisition attempts four times prior to today — said the cash offer terms had been improved to 200p per share. This is up from LSF’s last bid of 185p, which was rejected last week.

UK defence share Senior is perhaps best known for building parts for the aerospace industry. It’s been hit hard by the impact of Covid-19 on the civil aviation sector and latest financials showed sales at its Aerospace division fell 25% year-on-year in the first quarter.

Ilika continues to lose power

Ilika’s (LSE: IKA) share price has, by contrast, sunk in start-of-week trade. Down 5% on the day at 147.5p, gains for the past 12 months have been trimmed to a still-mighty 173%. Investors have sent the UK electronics share to six-month lows following the release of fresh trading numbers.

The solid-state battery maker said revenues dropped 18% year-on-year to £2.3m during the financial year to April. This, in turn, prompted its adjusted EBITDA loss to widen to £2.3m, from £2.1m a year earlier.

Ilika also said cash and cash equivalents had fallen £5m year-on-year to £9.8m. The business will release full-year results on Tuesday 6 July, it said.

UK share Capita rises on trading and disposal news

The Capita (LSE: CPI) share price meanwhile has leapt 6% following the release of fresh financials. Though at 39.85p, the FTSE 250 share still trades 18% lower than it did a year ago.

The UK support services share said it has enjoyed “an improving trend in our trading performance in the first half of the year.”

As a consequence it expects to record its first annual sales rise for six years in 2021. Capita also said it’s won a number of significant contracts including The Royal Navy and Tesco Mobile. The outsourcing giant added that it continues to make “good progress” with its cost-reduction programme.

In other news, Capita said it has agreed to sell its 51% stake in AXELOS Limited to PeopleCert International. The best practice business — a joint venture established with the Cabinet Office in 2013 — will provide Capita with a total cash windfall of £183.6m.

Lithium-ion batteries are in high demand for EVs and for advancing electrification around the world. But they’re not easily recycled due to the toxic liquid inside. Solid-state batteries should have a longer life span and be more easily recycled, hence their appeal.

They also have a higher power density, so they charge more rapidly, which is hugely appealing to consumers and businesses alike. The company sees a transition over the next decade in which solid-state batteries will gradually replace lithium-ion cell equivalents.

Ilika financials

Ilika is a small-cap stock with a £252m market cap. Its share price is down 36% from its 52-week high and up 275% from its 52-week low. Earnings per share are negative, but reassuringly, its debt levels are low.

Exciting uses

Ilika’s unique thin-film Stereax solution is helping it miniaturise its battery tech to fit medical products. This is for use in devices such as hearing aids. Even more futuristic are the nerve simulators that can replace the consumption of opioids. Plus, Stereax is used to power industrial wireless sensors in hostile environments.

Ilika has made a few notable connections in the past year. Such as teaming up with a Fiat subsidiary to help scale its Goliath battery programme.

As it stands, the company is producing a small volume of large-format solid-state technology from its pre-pilot production line. It intends to ramp this up by automating the facility over the next 18 months, at which point it will move into a battery industrialisation centre in Coventry. This facility has a framework agreement in place with the UK Battery Industrialisation Centre (UKBIC) to produce Goliath solid-state pouch cells.

Shareholder risks

It’s all undeniably interesting. But Ilika is a business-facing several risks that I think shareholders should keep in mind. It’s a competitive industry dependent on technological advancements and curbed by regulatory restrictions. It’s also reliant on partners commercialising its end-products.

Meanwhile, Ilika relies on a small number of significant customers and partners, and profitability is still a distant dream with a history of operating losses. Ilika previously raised funds via share placings, which may happen again. As a growth stock, it’s unlikely to consider paying dividends in the next few years either.

Will I buy shares in Ilika?

Ilika is very much an early-stage company with the potential to grow significantly if its vision for the future plays out. As it’s in the speculative stage, I’m not planning on adding Ilika shares to my Stocks and Shares ISA, but I’ll keep it on my watch list. It’s an exciting development area, and I think it could very well have considerable scope to grow.

Here I look at why the Ilika share price is volatile before considering whether it can recover from its recent fall.

Ilika and UK battery shares

Ilika is not a well-known company, as it does not yet sell its products in large quantities. It has spent some years developing solid state battery technology. Specifically it is working on two types of batteries that it calls Stereax and Goliath.

Solid state batteries are expected to benefit from an upsurge in demand as the electric vehicle market grows. But this is not an easy technology to master. Few companies so far have a compelling product platform for such batteries. Ilika is one that does.

That is why the company has a market capitalisation in excess of a quarter of a billion pounds, despite having revenue last year of under £3m. The Ilika share price isn’t based on the company’s current business performance in my opinion. Rather, it represents the excitement of some investors about potential growth in the electric battery market overall and Ilika’s ability to tap into that.

Why has the Ilika share price fallen?

The company has had some good news over the past few months. For example, it announced a collaboration with a Fiat subsidiary to scale up the Goliath pre-pilot production line. It has also leased a manufacturing facility and has been making the tools it needs to produce Stereax at scale.

So why has the Ilika share price fallen despite it moving closer to commercialisation?

I think the answer lies in the difference between demand and supply improvements. Moving to scale up manufacturing operations could help the company’s ability to supply batteries. But it will still need to generate demand for those products. It has limited commercial experience in that regard.

Additionally, a lot of the share price is riding on the company’s technology. While many analysts think it has real potential, so far the applications of its technology have been at limited scale. Meanwhile, the battery sector has been a focus for many companies, including car manufacturers. The whole sector could become a lot more crowded, threatening the relative value of Ilika’s technology.

Will the Ilika share price recover?

There is an interesting product development story here, but also signs of speculative trading. I think the Ilika share price has gone up and down partly because many investors want to buy into solid state battery stories but few listed companies have such technology.

That could continue to be the case. I expect that the Ilika share price will continue to reflect a broad investment thesis about electric vehicle batteries more than a specific analysis of Ilika’s prospects. That suggests that the Ilika share price could recover fully. But equally, it could continue to fall – even if the company makes more positive moves on mass commercialisation.

That is why I won’t invest even after the recent fall in the Ilika share price. I don’t think I have the necessary expertise to assess how sustainable the company’s technological edge is. Additionally, I think the share price reflects enthusiasm for batteries overall, not just Ilika.

Fonix Mobile

Mobile payments and messaging firm Fonix Mobile (LSE:FNX) enables businesses from the media, charity, digital services and gaming sectors to charge users’ mobile bills. An example would when people donate to the BBC’s Children in Need campaign.

Right now, trading is good. Revenue and gross profit rose by 25% and 22% respectively over the second half of 2020. A pipeline of clients means more growth is expected in 2021.

In addition to being in a rapidly expanding area, Fonix also boasts staggeringly high returns on capital employed (ROCE). Companies that can do this consistently tend to create huge value for shareholders. No wonder star fund managers like Terry Smith and Nick Train pay so much attention to this metric. 

Naturally, investors need to be cautious. Fonix only arrived on the market last October so it’s still early days. I also question just how much of an ‘economic moat’ it really possesses. Still, the performance of the share price over the last year (+82%) does suggest investors are willing to give management the benefit of the doubt, for now.

tinyBuild

US-based video games company tinyBuild (LSE: TBLD) is another new AIM stock that could do well for investors over time. Its mission is to create long-term partnerships with developers and monetise popular titles across different forms of media. The puzzle game Hello Neighbour is one example of this.

Gaming remains a hot sector that should continue growing rapidly for the foreseeable future. Like all stocks however, there can be no guarantees tinyBuild will perform. Its shares also trade at 49 times forecast earnings. That kind of valuation will only seem reasonable to the most optimistic market participants.

A relatively small ‘free float’ (the number of shares available for investors to buy in the market) also implies the price may be volatile going forward.

On a positive note, tinyBuild’s founders still have big holdings, which should mean their interests are aligned with those of their investors.  The firm also boasts a strong balance sheet — one of the things I look for when buying small-cap shares.

Ilika

Ilika (LSE: IKA) is a final AIM stock I think has big potential. It’s focused on developing solid state batteries for applications such as the Internet of Things and electric vehicles. These have a number of benefits over traditional lithium-ion batteries, such as faster charging, longer life and non-flammability. As such, mass adoption seems to be a case of ‘when’ rather than ‘if’.

Notwithstanding this, Ilika is still loss-making. This probably makes it only suitable for risk-tolerant investors. Investors must also reflect on how well the shares have performed over the last year (+500%!) and whether a lot of hope is priced in.

Should markets shift into reverse gear as a result of ongoing concerns over inflation, blue sky stocks like Ilika could be hit harder than most. Then again, this might be the perfect time to begin building a position if buyers are content to be patient for the spoils that could lie ahead.