Lithium: Consolidation potential dispelling the China blues

About the author:

Max Vickerson
Author name:
By Max Vickerson
Job title:
Date posted:
31 March 2023, 7:00 AM
Sectors Covered:
Industrials, New Energy

  • Following Liontown Resources' (ASX:LTR) announcement of a rebuffed bid from Albemarle (NYSE:ALB), the sector has rallied to near the levels seen in late February.
  • We see potential for both Pilbara Minerals (ASX:PLS) and Allkem (ASX:AKE) to also be considered attractive targets. PLS offers exposure to high quality hard rock while AKE is much cheaper on a resource multiple.
  • Meanwhile, price weakness continues particularly in Chinese carbonate prices. We still see value here but short-term traders should keep in mind that quarterly updates in April could lead to a resumed focus on the price outlook.

Mixed sector performance outside of LTR

LTR is the clear outperformer in March, up 90% as the company disclosed the multiple approaches from Albemarle, most recently at $2.50ps.

Amongst the other pure plays, AKE stood out with a month to date (MTD) 5% increase in its stock while PLS was down 6%. Both stocks were down significantly more though prior to the LTR offer.

M&A potential doesn’t end with LTR

We’d flagged LTR as a potential target but it’s not the only one. PLS remains one of the few independent lithium producers with a globally significant resource. With assets in operation it would offer an acquirer immediate exposure to spodumene and hydroxide.

AKE is also potentially a target and holds a much larger resource base than PLS. However, the majority of its resource is in Argentina in lithium brines which are typically used for carbonate rather than hydroxide.

We think both chemicals will be important over the long run but potential acquirers with pre-existing South American brine exposure may see fewer diversification benefits.

China price weakness continues

While share prices have rallied, investors shouldn’t forget that weakness continues in the Chinese EV sector. Benchmark Minerals reports that cathode manufacturers’ inventories are still quite lean despite an increase in New Energy Vehicle (NEV) production in February.

Our expectation is that Australian spodumene and ex-China contract carbonate prices will soften next quarter, lowering our expectations for revenue and earnings across the sector.

Investment view

We shift our key pick of the pure plays to PLS given the relatively strong performance of AKE this month, and the potential for PLS to regain ground quickly as the Chinese EV industry takes up slack next half.

Our key pick of the diversified large caps remains MIN, which we expect to gain support as it executes on its growth in lithium, iron ore and mining services.

Figure 1: MTD performance of lithium producer equity prices

Growth stocks have had a choppy ride since the onset of the pandemicSource: Morgans Financial, Factset

Find out more

Download full research note

If you would like more information, please contact your adviser or nearest Morgans office. 

Request a call Find local branch

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.

  • Print this page
  • Copy Link