Lithium: Consolidation potential dispelling the China blues

About the author:

Author name:

By Max Vickerson

Job title:

Analyst

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

Source: Morgans Financial, Factset

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