Allkem: Contract prices are catching up to the spot market

About the author:

Max Vickerson
Author name:
By Max Vickerson
Job title:
Analyst
Date posted:
05 April 2022, 8:30 AM
Sectors Covered:
Industrials, New Energy

  • Allkem upgraded guidance for lithium prices by 40% for carbonate and doubled our expectations for spodumene in the June quarter.
  • We have lifted our revenue assumptions accordingly but we’re allowing for moderation in long term prices as well as allowing for increased growth capital.
  • We maintain our ADD rating and update our price target to (login to view).

Lithium carbonate and spodumene prices to lift in 4Q

AKE’s updated carbonate guidance is for June quarter prices of USD35k/t on volumes of approximately 3.5kt and preliminary guidance of ~USD27.2k/t in the March quarter. Management had been guiding towards USD25k/t previously.

Expectations are for Mt Cattlin’s spodumene benchmark to be USD5k/t (SC6 CIF) on sales of 50kt. Prices in the March quarter at USD2.2k/t, including some delayed volumes from the December quarter.

Analysis

Trading Economics reports battery grade lithium carbonate spot prices in China of over USD75k/t in late March. Clearly there is still significant short term upside potential for brine pricing in the short term.

Materials price increases are starting to be reflected in higher EV pricing. We don’t think it is significant enough to materially limit demand yet but we think it is unrealistic to expect spot prices at these levels in the long term.

Forecast and valuation update

We increase our pricing assumptions and revenue forecast for FY22 – 23. From FY24 we revert back to our long-term pricing assumptions of USD27.5k/t for battery grade carbonate and USD22.5k/t for technical grade.

Similarly for spodumene concentrate we are allowing for a pricing increase in FY22 – 23 before falling back to our previous assumption of USD2.5k/t.

We have not significantly adjusted our lithium hydroxide price assumptions however which reduces the profitability of the Naraha plant and offsets some of the benefits of the higher carbonate prices.

We understand that Olaroz is effectively selling the battery grade carbonate from the stage 2 expansion at market prices and that Naraha’s output will be sold under long term offtakes. We may be being too conservative with our assumptions here but we will look for more detail at the investor day on the expected implications for Naraha.

We have also allowed for capital cost inflation for James Bay and Sal de Vida of 15 and 30% respectively from our previous assumptions.

After including all changes our updated valuation is (login to view).

Investment view

We maintain our ADD rating on AKE and we see potential 12-m upside of 23% given the ongoing tight conditions in the lithium market.

AKE is a lithium pure play but is diversified geographically and in the various forms of lithium that it produces (spodumene concentrate, lithium carbonate and soon to be lithium hydroxide from Naraha).

The majority of its ASX listed peers only produce one form and usually from one region which could expose them to more severe production risk.

Price catalysts

We expect that the AKE investor day on Tuesday will provide more detail on the outlook for the company and could give the market increased confidence in the sector and the company to further close the valuation gap.

Risks

  • Lithium prices.
  • Increasing EV demand to continue to drive battery material demand.
  • AKE’s ability to deliver its growth projects on time and on budget.
  • Operational performance at Olaroz and Mt Cattlin.
  • Exploration and construction risk for growth projects.
  • Interest rates, foreign exchange and tax regimes.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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