Treasure Chest: A Bottom For Lithium?

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FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Can lithium prices fall any further?

Whose Idea Is It?

Morgans and Wilsons

The subject:

Lithium prices

More info:

Spot lithium spodumene is now trading at US$850/t, Morgans noted last week, down a “staggering” -86% year on year, with lithium carbonate at US$14,500/t down -82% and lithium hydroxide at US$14,750/t down -82%.

The bottom line is the rush to jump on the battery bandwagon has far exceeded battery demand in the near term. Lithium supply has been significantly increased ahead of end-demand catching up. Lithium is not a rare element, and is not prohibitively expensive to mine.

Lithium is not new to boom & bust cycles. The metal went through a similar phase back in the noughties, driven simply by growing global awareness of climate change and its implications, and the need to transition to “green” energy, with electricity provided by lithium batteries an obvious winner in such a scenario.

Back then, demand expectations ran way ahead of demand reality. Tesla was founded in 2003, and launched its first EV in 2008. Less than 2,500 were produced, and cost over US$100,000.

EVs are still considered expensive today compared to internal combustion vehicles, irrespective of make, and not all governments have been quick to provide the necessary charging infrastructure (particularly the US and Australia). This has led in a recent decline in EV demand growth and an uptick in hybrid demand (combination EV-ICE motors, self-charging).

This trend has not done lithium prices any favours, but the major issue has been a rush of new supply far outstripping demand, even if the EV demand trend remained healthy.

Of course, lithium battery demand is not solely driven by EVs, but the world’s transition towards green energy has been very slow at best.

Metal/mineral prices undergo constant cycles, but lithium’s crash has been more pronounced than most. Prices reach a point low enough to force suspension of production, shelving of development projects, and maybe fringe-dwelling miners giving it away. Then suddenly, demand exceeds supply, and the cycle begins again.

Realistically, suggests Morgans, it will take years for the lithium market to mature to the point where the market has a better grip on what typical cycles will look like. What is known include the cost base of existing/new producers and the long-term structural demand growth which will eventually return.

The downgrade cycle might be continuing in lithium, Morgans notes, but ultimately the lower spot prices push, the more severe the resulting supply response will become. And as a further consequence, the stronger the future recovery will have to be once demand conditions recover in order to induce new supply from a heavily damaged lithium industry. The broker’s base case is nowhere near that severe, instead expecting lithium prices are nearing a floor, with the current rapid decline likely to moderate this half.

Thus far in 2024, we have seen a swathe of negative announcements from a number of lithium producers and developers, Wilsons notes, who are feeling the pinch as the low-price environment begins to bite hard on the supply side.

Despite all the recent “doom and gloom”, Wilsons believes the fundamental/structural outlook remains robust, and argues that much of the recent news flow is symptomatic of a cyclical bottom in a typical commodity price cycle (ie low prices seeing production cuts and development deferrals; and sowing the seeds of the next price cycle).

Notably, the broker’s proprietary spodumene incentive price curve suggests more than 50% of potential new global spodumene supply does not get developed at current spodumene pricing.

Brokers in general have been rushing to cut their lithium price forecasts and their listed lithium miner valuations. Consensus still has lithium prices falling further, or at least at risk of falling further, before a bottom is found.

There is a growing feeling now is the time for the bolder investor to look at quality names ahead of an eventual recovery.

To that end, Morgans’ preferred exposures are Mineral Resources ((MIN)), which comes with a buffer of diversification (iron ore, mineral services), and Pilbara Minerals ((PLS)).

Among the developers, Wilsons’ top pick is Atlantic Lithium ((A11)), which boasts strong government support in the “low-risk” jurisdiction of Ghana. This broker expects Atlantic’s Ewoyaa project to be a lithium producer within toweor so years now that the mining license is confirmed and the funding is largely in place.

Wilsons also believes ongoing exploration success is likely, and anticipates the resource base will continue to grow after nearly tripling over the past couple of years.

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