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Lithium Outlook Includes DLE Uncertainties

Commodities | Jul 04 2023

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Brokers update lithium price forecasts and weigh the longer-term impact on supply from direct lithium extraction technology.

-Brokers update forecasts and preferred lithium stocks
-UBS highlights opaque lithium pricing
-Near-term EV sales in China vital for the outlook
-Long-term supply impact from direct lithium extraction 

By Mark Woodruff 

As analysts weigh longer-term lithium supply impacts from new brine extraction technologies, shorter-term price signals alter broker price targets and stock preferences.

Last week, UBS raised its FY24 and FY25 earnings forecasts by around 30% across lithium stocks under coverage as chemical prices had risen by circa 50% from April lows. Lagging spodumene prices are expected to stabilise and then catch-up.

For now, the China domestic chemical price leads the broader market if only on a relative basis, observed the broker, which conceded the interplay between the various lithium prices (compound, hard rock, China, seaborne etc) adds to the complexity of the lithium market. 

Amplifying the general confusion, the analyst pointed to a wide discrepancy between various price reporters.

Morgan Stanley sees modest downward price pressures leading into year-end, following the recent bounce.

The China lithium carbonate price started the year at US$67k/t, fell to a low of US$21k/t, and has now settled in the middle of the range at around US$39k/t. 

The broker forecasts a US$37.5k/t price on rising supply into the year’s end and the beginning of 2024 as ramp-ups and new projects come through.

Higher demand for lithium in China is being reflected in the closing of the lithium hydroxide premium versus carbonate, explain the analysts, with China batteries more carbonate-heavy than other regions due to a high lithium iron phosphate battery (LFP) share.

Macquarie points out lithium prices have increased across the board, expects the market to remain in deficit and sees valuation upside for all lithium miners under its coverage. 

Current share prices imply to the analyst a lithium carbonate equivalent (LCE) price of circa US$20,000/t (equivalent to US$1,600/t spodumene) for Pilbara Minerals ((PLS)), IGO Ltd ((IGO)) and Allkem ((AKE)), while the Mineral Resources ((MIN)) share price implies a LCE price below US$20,000/t. 

This broker has Outperform recommendations on all four companies.

According to Morgan Stanley, European electric vehicle (EV) sales are holding up well, though car maker Volkswagen has been flagging softer demand, and China non-integrated converter margins are positive again, which is boosting supply. It's noted these producers typically sit at the top of both the carbonate and hydroxide cost curves.

On balance, UBS is sceptical supply will be able to keep up with lithium demand and the EV thematic, and expects the market to remain in structural deficit over the medium-term.

Accordingly, this broker remains positive on the sector with a Buy rating for IGO and a Neutral recommendation for both Liontown Resources ((LTR)) and Pilbara Resources. The latter was downgraded to Neutral from Buy last week, after a strong share price performance, while its 12-month target was raised by 15%.

Mineral Resources is least preferred; UBS downgraded its rating to Sell from Neutral. This stock is considered expensive relative to lithium peers and the company has a large capital expenditure program which is expected to place pressure on free cash flow. 

With China still representing 60% of the global EV market, UBS suggests second half 2023 sales for the region are crucially important for the broader thematic and the lithium price.

For full coverage of target price changes please refer to the FNArena website under Stock Analysis or the Australian Broker Call Report.

Direct lithium extraction 

More of the potential supply growth beyond this year will start to rely on as yet commercially unproven technologies such as direct lithium extraction (DLE). 

Morgan Stanley sees potential for this method to almost double recovery rates to 80-90% versus traditional brine evaporation.

To investigate this claim further let's turn to last week’s research by UBS, which highlighted a base-level knowledge is crucial to better understanding the opportunity, challenges and misconceptions around DLE.

UBS noted potential for the technology to add incremental volume to market yet cautioned a lot of issues remain to be de-risked. DLE may in time add significant volume to the market, though it’s not considered relevant to meeting short/medium-term demand. Overall, it’s felt the market is overweighting the likely success of DLE in the near-term. 

While most brine deposits adopt the traditional brine evaporative process to produce an intermediate/final product, DLE is an umbrella term aiming to capture a variety of different (usually chemical) processes aiming to speed up and/or improve the extraction process, explains the broker.

With French-based Eramet’s 24kt Centenario-Ratones project under construction in Argentina and at least 10 other projects in pilot phase, UBS noted potential for greenfield DLE projects to produce more than 300ktpa LCE by 2030.

Regarding Eramet’s project, Morgan Stanley suggests market participants will be monitoring progress closely, with production set to commence in the second quarter of 2024.

While UBS acknowledged the potential for DLE projects to deliver incremental volume to the market and cut time-to- market (compared to evaporative processing), and provide an answer for previously uneconomic resources, the broker remained wary on capex, which could be significantly higher than for traditional brine projects.

Energy use for DLE is far more intensive than the evaporative process, explained the broker, and complicates matters for remote asset locations. Also, brine reinjection is used as part of the process, which raises questions around regulatory/environmental monitoring around impacts on existing/adjacent resources.

Moreover, environmental monitoring of salars needs to evolve to take into account not just brine use but freshwater requirements, pointed out the analysts.

The broker also highlighted the problem of meeting timelines when a new technology is involved, as evidenced by Lake Resources' ((LKE)) recent disclosure of a three year delay for first production at its Kachi Brine project in the remote Catamarca Province within Argentina’s lithium triangle.

Typically, the DLE technology is separated into three main methods.

Absorption is a method whereby sorbents are used to physically adhere to the lithium for selective removal. Many different sorbent materials are being trialed by a variety of players.

Unlike adsorption, which uses fresh water, acid is used to flush out the lithium chloride in the Ion Exchange method. Lithium-ions in the brine water are absorbed into solid ion material and then swapped for another positive ion.

The third alternative, solvent extraction, works through a liquid phase with either adsorptive (having a tendency to absorb) or ion-exchange properties to remove lithium from brine.

Critical minerals strategy 

Last week, the Australian government released its Critical Minerals Strategy, aimed at bolstering sovereign capability in the extraction and downstream processing of Australia’s strategic resources. 

The plan includes a $500m commitment through the Northern Australia Infrastructure Facility (NAIF), and a review of the critical minerals list essential for modern technologies and national security. 

Federal Resources Minister Madeleine King reportedly re-iterated the Government’s ambitions to advance domestic lithium hydroxide conversion capacity, highlights Bell Potter.

Managing Director of Mineral Resources, Chris Ellison recently suggested tax incentives and fast-tracked approvals should be included in the strategy to compete with the likes of the Inflation Reduction Act in the US.

The government has ambitions to advance domestic lithium hydroxide conversion capacity, and noted all future foreign investment in the critical minerals space will be referred to the Foreign Investment Review Board.

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