Mining: Short-term rally could run out of steam

About the author:

Author name:

By Max Vickerson

Job title:

Analyst

Date posted:

07 June 2023, 7:00 AM

Sectors Covered:

Industrials, New Energy

• Spot prices for lithium chemicals have stabilised after rebounding. Industry sources are providing mixed outlooks with some questioning the strength of electric vehicle (EV) driven demand growth.
• Pure play names like Allkem Ltd (ASX:AKE) and Pilbara Minerals Ltd (ASX:PLS) have rallied since AKE’s merger announcement. We maintain our HOLD rating on AKE and also our ADD on PLS with some valuation upside from recent share price weakness.
• Mineral Resources Ltd (ASX:MIN) continues to offer the largest upside to valuation and we retain our ADD rating.

EV demand needs to grow much faster to keep prices high

Chinese installations of new battery manufacturing plants continue but at a slower rate compared to last year. EV sales picked up in late March but have been steady since then. Some battery producers have reportedly been incrementally restocking.

Despite how quickly prices fell, our forecasts for FY24 EBITDA margins range between 60% and 80% for established producers. This is more than enough to incentivise supply.

Our view is that unless demand growth accelerates rapidly, lithium prices will not make meaningfully larger gains and, in fact, they may soften further as production capacity increases in FY24.

We expect prices to moderate

We have updated all of our models with our price assumptions for carbonate, hydroxide and spodumene. Our expectation is that prices will continue to progressively moderate downwards towards our long-term price assumptions.

Our expectations for carbonate prices are slightly lower than late May futures prices traded on the Wuxi futures exchange. We remain near consensus across our coverage. We expect there will be a continuing premium for Asian hydroxide contracts over carbonate which will slow falls in the spodumene price.

Acquisition speculation cooling

With the time taken to resolve the Liontown Resources bid there is an increasing risk the deal may not proceed and the share price has been weakening after reaching an all-time high in mid-May. Likewise, the price of PLS, another potential acquisition target has also weakened. Volatility in the commodity price may lead acquirers to defer aggressive moves in the hopes of getting better value from future bids. 

We think the AKE merger is likely to go ahead and the chance of a third party competing to peel off one of the companies is low. Cost synergies will improve value and Direct Lithium Extraction (DLE) offers a lot of promise. Our expectation is that this will take some time to apply the technology successfully to AKE’s assets.

Figure 1: Relative sector performance

Source:  Morgans Financial, Factset

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