Allkem: Time to pause after a strong run

Author name:: By Max Vickerson
Job title:: Analyst
Date posted:: 09 September 2022, 7:00 AM
Sectors Covered:: Industrials, New Energy

Allkem's (ASX:AKE) share price soared 8% today and 26% in the last month.
The stock is trading very close to our (login to view) price target and we reduce our rating to HOLD while leaving our financial forecasts steady.

No news is good news?

There has been a strong rally across most lithium related stocks over the last week and AKE has been no exception.

This is despite no updates from the company on assets or pricing.

We have not seen major increases in spot pricing in the last week (Asian Metal reports ~2% increase, LME Hydroxide futures are flat).

We therefore make no changes to our financial forecasts, valuation or price target.

Investment view

We still think AKE is one of the best lithium pure plays on the market. However, after such a strong run since the full year result and with no additional announcements we think it’s time for investors to re-evaluate whether they continue to increase their position.

Given only 2% potential upside to our price target at today’s close we reduce our rating to HOLD.

It’s possible that contract prices for carbonate continue to increase but we think substantial increases are less likely.

Additionally, further information on options to increase the proportion of battery grade carbonate from Argentina or a life of mine extension to Mt Cattlin could push the share price higher but we are not yet pricing these events into our base case.

Despite the ongoing acute shortage of lithium products amid high demand for EVs we continue to expect that prices will moderate over the next 1-2 years. We have seen the market react quickly when it anticipates weaker commodity prices and AKE’s share price is highly sensitive to expectations for lithium pricing.

Price catalysts

Interim drilling results from Mt Cattlin appraisal later this quarter.
Price guidance in 1Q23 report (expected on 19 October).
Potential resource/reserve increase at Mt Cattlin later 1H23.
Ramp up of Olaroz S2 and Naraha.

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, inflation, 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.