Barry FitzGerald: Can lithium get its boom back after 2018’s annus horribilis?
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Last year was an annus horribilis for the formerly buzzing ASX-listed lithium sector, with leading stocks copping share price hits of 40-65 per cent.
The share price whack was a response to tumbling spot prices for lithium in the critical Chinese market for much of the year amid fears of approaching massive over-supply.
While the ins and outs of the price fall can be argued (spot prices aren’t necessarily reflective of prices being received by producers), there is no doubting that the lithium “boom” in ASX-listed stocks was abandoned as 2018 unfolded.
But what of 2019? Could it turn it all around and become an annus mirabilis for the ASX lithium stocks? Given the broad thematic that the electric vehicle revolution and the rise of battery storage of renewable energy remains intact, some are tipping happier days are ahead.
Get your bets in
Equity analysts at investment bank Citi are amongst them, saying this week that lithium prices are finally showing signs of stability after dropping by about 55 per cent (lithium carbonate) during the first three quarters of 2018.
“Prices have been relatively stable in the last quarter of 2018 and we believe there is strong cost-curve support at $US9,000/t levels, particularly from Chinese converters sourcing third-party spodumene,” Citi said.
“While lower Chinese subsidies and a strong supply response will likely keep pricing subdued during the first half of 2019, we expect the demand theme to regain focus in the second half of 2019 on continued strong ‘New Energy Vehicle’ demand from China.”
Oliver Heathman, mining research manager at UK-based consultancy Roskill, is also forecasting higher prices, saying in December that battery grade prices for lithium needed to be substantially higher than the incentive pricing range of $US7,500/t-$US12,00/t alone required to ensure the supply response to demand growth continues.
Roskill’s base case forecast has lithium demand growing at about 20 per cent on average over the next decade, and beyond.
“What that means is that by the mid-2020s we will be needing to add the equivalent of the entire 2015 mine production in a single year just to keep up with growing demand,” Heathman said.
He acknowledged that “on paper” at least, there was a risk supply could outpace demand, particularly in the near-term.
“But ultimately, longer term I think it is a bit naive (to ignore) some of the technical risks associated with these projects, particularly if you are looking at the brine projects,” Heathman said.
A long way to catch up
For this year to herald a second coming for the lithium stocks, they will have to regain everything they lost year, and some. That could well be possible in some of the key players according to mining analysts.
Citi has Galaxy Resources (GXY) as its preferred pick as it provides exposure to both carbonate and spodumene market dynamics, along with a value-add via the likely sale of a stake in its Sal de Vida project.
“The current share price is implying lithium carbonate/spodumene prices of $US5,600/t and $US440/t respectively, indicating a deep discount relative to the spot markets ($US9,000/t and $US725/t) and our long-term forecasts ($US7,500/t and $US550/t respectively),” Citi said.
More to point is that while Galaxy is trading at $2.38 a share, down 45 per cent on last year, Citi has a $4.30 price target on the stock.
Pilbara Minerals (PLS) is the preferred pick at Macquarie. It has a $1.20 price target on the stock which compares with its current 71c market price.
Macquarie’s price target on Galaxy is much lower than Citi’s at $2.70 a share and the firm has just lowered its target price for Altura (AJM) from 20c to 16c (its current market price) on ramp-up concerns.
The differences in target prices on Galaxy, and Macquarie’s downgrade of Altura’s target price, serves to highlight that if there is one key to success in investing in the lithium space in the year ahead, careful stock selection will be more important than in the boom years.