Barry FitzGerald: Even at half the current lithium price, this developer's potential is off the scale

ASX lithium stocks were star performers last year. But now it is more a case of them being the walking wounded.

Share price falls ranging from 30-60% are common among the “name’’ stocks and a 20m exploration hit of lithium-bearing spodumene here or there no longer fires up a junior explorer like it did back in the good old days of 2022.

Garimpeiro is wondering if the sell-off has been overdone.

There is a good reason for the sell-off, you would be led to believe. It’s the 45% fall in spot prices for lithium carbonate in China since November last year.

The fall from a super-fantastic $US87,000/t to $US48,000/t in response to Chinese battery destocking ahead of EV incentives falling away is alarming all right. But there is nothing wrong with $US48,000/t. It might not be super-fantastic but it is still fantastic.

Even then, the $US48,000/t price quoted above is a Shanghai price and is not truly reflective of where prices are at. Dare it be said that the Chinese, through their state-owned enterprises, are playing games.

For instance, leading market watcher, Fastmarkets, had the price pegged at $US60,500/t on Wednesday for carbonate material, $US70,500/t for hydroxide, and $US6,100/t for spodumene.

So when the shorthand explanation for the sell-off in lithium stocks is that prices are down by 45% since November, don’t believe it. Fastmarkets’ assessment takes in prices in Japan and Korea, in addition to China.

If you think all that is confusing, it is. Suffice to say the pullback in lithium prices is real, but nowhere near as severe as some headlines suggest.

To be honest, Garimpeiro would only get concerned if prices for lithium carbonate were to fall below $US10,000/t like they did a few years ago. But that is not going to happen.

And in support of that claim, Garimpeiro points to the latest battery capacity tracker data from Adamas Intelligence.

It found that a massive 488.3GWh of battery capacity was deployed onto roads globally in newly sold passenger EVs of all types in 2022 – 70.2% more than 2021, and despite ongoing supply chain struggles and economic headwinds in all major EV markets.

The EV revolution is a juggernaut that cannot be stopped. And as President Biden noted after the Inflation Reduction Act was signed into law last year (it effectively gives EVs a $US6,000-$7,000 cost advantage), the “future of vehicles is electric.’’

So Garimpeiro has no concerns about lithium pricing. The supply challenge is huge, and to make sure demand is met, incentive prices well north of $US20,000/t for carbonate/hydroxide, and $3,000/t plus for spodumene, are likely to be a permanent feature well into the next decade.

Hold your amazing horseless carriages

Take all that and Garimpeiro reckons that the sell-off in the ASX stocks has got a little bit insane. Value has returned in a big way for the producers and developers, with explorer valuations continuing to remain contingent on exploration results.

Take Ioneer (ASX:INR) as an example. The developer was trading mid-week at 30c a share for a market cap of $630 million. Back in April last year it had a $1.6 billion market cap at 77c, yet its story has got better, and better, in the interim.

Ioneer owns the Rhyolite Ridge lithium-boron project in Nevada which is the final stages of the US approvals process. Assuming the final approval comes through in the first quarter of next year, the project could be in production in 2026.

That would be about 10 years after Ioneer picked up the property. Timeline wise, that is about as good as things can be for a project with Rhyolite Ridge’s scale.

The presence of a relatively rare and endangered plant known as Tiehm’s buckwheat slowed things up a bit but Ioneer’s early commitment to make it the most pampered buckwheat in the world has smoothed things over.

A botanist is now growing the plant from seeds in a greenhouse and the mine was been designed to avoid sensitive areas. Introducing the plants elsewhere is also part of the plan.

The big recent news around Rhyolite Ridge was the US Department of Energy (DOE) stepping up with $US700m in conditional loan support.

That followed on from an earlier deal in which South Africa’s Sibanye-Stillwater become a 7% Ioneer shareholder, and an eventual 50% project partner by pumping in $US490m for its development.

Ioneer has not updated its 2020 feasibility study but it has got to be assumed that the combined $US1.2 billion lined up from the DOE and Sibanye-Stillwater has the development covered.

The dual production of lithium carbonate and boric acid makes for super low-cost production of lithium carbonate ($US2,510/t), with the boric acid covering around 70% of operating costs.

The price assumption in the feasibility study for lithium carbonate was $US11,740/t at which the project was said to be capable of generating annual earnings of $US288m over its multi-decade life.

Plug in current prices – or $US20,000/t for that matter – and earnings would be off the scale. Last year’s $1.6b market cap for Ioneer reflected that potential.

It hasn’t gone away, and as suggested earlier, the story has got better, and better, in the interim, notwithstanding the current noise around lithium prices.

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