Barry FitzGerald: As lithium prices plummet, this US play looks better value by the day

It has got to be wondered if the absolute caning endured by ASX-listed lithium stocks in recent times has taken them into bargain basement territory.

Garimpeiro reckons that is the case, but on a selective basis, and on the assumption that lithium prices are now bottoming ahead of a steady rebuild as the widely forecast supply deficit around 2028 takes shape.

The supply deficit is more certain than it was because the crash in lithium prices is already knocking out higher cost production. The slump in prices also means new projects will have to be top echelon to attract financing and offtake agreements.

So until there is confirmation lithium prices have turned, Garimpeiro will be steering clear of lithium explorers without a resource under their belt. Many won’t be able to ride out the current downturn and will have to reinvent themselves as uranium or gold explorers.

It could be a different story with the lithium developers, particularly those with established large-scale resources. The 30%-plus growth in electric vehicles last year to 14% of the market suggests the current lithium over-supply will indeed being a passing thing.

New large-scale and long-life lithium projects will be needed. They are the ones that will attract financial and offtake support from the lithium chemical makers and the global auto industry while small projects will fall by the wayside.

We’ve seen it before in iron ore. In the original China boom that petered out in 2011, there were a couple of hundred junior iron explorers and would-be developers on the ASX. They had a merry few years. But only a handful became producers.

The rest were left to reinvent themselves and in some cases, billion-dollar market caps were wiped.

It is a process that will pan out in the junior lithium sector in 2024. Only those that have large-scale deposits will survive, indeed thrive. Liontown (ASX:LTR) and Azure (ASX:AZS) are the two local standouts.

On the back of their Tier 1 discoveries in Western Australia, beaten up Liontown still has a $3.3 billion market cap while Azure’s more recent and 60% owned Andover discovery has an imputed 100% value of $2.86 billion, even if it is yet to post a maiden resource.

Given both had sub $100m market caps before their respective discoveries, the reward for Tier 1 discoveries remains massive. And notably, Gina Rinehart is now calling the shots at both of them.

Australia’s richest person clearly does not have any fears about lithium prices remaining in the dumps. Because Azure is the subject of bid from a Rinehart-SQM combo and Rinehart’s share sits at just under 20% at Liontown, Garimpeiro reckons both sit outside the bargain basement category.

That cannot be said for the dual-listed Patriot Battery Metals (ASX:PMT), owner of the Corvette discovery in northern Quebec. Its market cap has halved in the lithium market shakedown to a little more than $1 billion.

The December 2021 discovery has become the biggest lithium find in North America and the eighth biggest in the world with a maiden (inferred) resource of 109 million tonnes grading 1.42% lithium.

There is more to come with Patriot working on a resource upgrade later this year which will include assay results from 125 holes drilled last year. This year’s winter program involving 10 rigs and a planned 45,000m of drilling has just kicked off.

US lithium giant Albermarle took up a strategic 4.9% (fully diluted stake) stake in Patriot in August last year at around the same time its planned $6.6 billion-plus bid for Liontown was thwarted by Ms Rinehart.

It is an obvious bidder for Patriot at some point as Corvette’s scale and location plugs it in to the support the US and Canadian governments are throwing at the lithium sector to protect the North American car industry from the China challenge.

What’s more, Albemarle paid $C15.29 a share for its initial Patriot stake. Patriot was trading at a somewhat more modest $C7.66 a share during the week in the Canadian market or 82c locally.

So certainly from Albemarle’s perspective, it is a better bargain than it was last August.

This story does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.

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