Lithium: Tight lithium market looks to continue

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Max Vickerson
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By Max Vickerson
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Date posted:
28 February 2023, 6:30 AM
Sectors Covered:
Industrials, New Energy

  • Spot prices have softened but remain above contract prices. The Chinese EV market, still the world’s largest, has slowed recently for the Spring Festival but we expect activity to increase in the near future.
  • Meanwhile, lithium projects are taking longer to complete leaving the market tight. Decreasing lithium production but increasing demand reflected in analyst consensus of key Chinese companies points to tightness continuing.
  • We prefer Allkem Ltd (ASX:AKE) for pure-play exposure and Mineral Resources (ASX:MIN) amongst the diversified producers. In this note we initiate coverage of Liontown Resources Ltd (ASX:LTR) (SPECULATIVE BUY) and Core Lithium Ltd (ASX:CXO) (HOLD).

Spot prices, particularly carbonate, have been normalising

Spot prices for spodumene have softened slightly (BB’s SC6 CIF China index -3% in the last 3 months). Average realised prices are slightly below, but at similar levels.

Asian battery grade carbonate prices diverged over the last 12 months. The more closely watched Chinese prices are off >25% since the high in November last year. Other markets, which didn’t reach the same high levels, have fallen by ~10%.

AKE reiterated its guidance for third party realised carbonate prices this quarter which are expected to be similar to 2Q.

Consensus movements point to tight fundamentals in CY23

In our coverage, a number of companies are acknowledging delays to project schedules. For example, AKE has shifted its expected completion of Sal de Vida by 6 months to mid-2024. Similarly, PLS has not yet taken FID on its 1Mtpa expansion which was potentially going to happen in 1H FY23.

The outlook for key Chinese lithium producer, Ganfeng, shows consensus forecasts for lithium carbonate production has been cut by 13% - 7% from 2023 - 2025. At the same time, the consensus view has shifted higher for CATL’s demand with increases of 10% - 12% over the next three years.

Preferred exposures: AKE as a pure play, MIN for diversified producers

We continue to prefer AKE amongst the lithium pure plays as we see a longer growth runway for production and greater potential valuation upside.

PLS is generating strong cash flows and holds opportunities for more tactical trades given speculation about potential uses of the growing cash balance.

MIN has been more resilient than peers and offers more diversified commodity exposures. The potential upside is less than other lithium large caps but it has also shown less volatility and stronger potential dividend yield. We retain our ADD rating.

We initiate coverage of LTR (SPECULATIVE BUY) and CXO (HOLD). Both are near-term developers of Australian spodumene deposits.

We see upside for LTR if it can resolve its funding issues and avoid further significant cost increases. CXO’s smaller resource base appears to be close to fairly priced.

Figure 1: Analyst revisions to Ganfeng’s lithium production and CATL’s demand

Growth stocks have had a choppy ride since the onset of the pandemicSource: Morgans, Visible Alpha

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