Ground Breakers: As investment bank giants turn lithium bears, others see a buying opportunity
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What a wild ride yesterday was for battery metals investors, who haven’t seen such a pronounced pullback since prices were falling off a proverbial cliff back in 2019 and 2020.
The good news for committed shareholders is at the bottom of any cliff is normally a ravine and a new cliff to scale.
Lithium stocks’ Wednesday tumble, headlined by a more than 20% fall for market leader Pilbara Minerals (ASX:PLS), was all the more remarkable because price news remains good.
The most obvious source of the disarray was a note over the weekend from Goldman Sachs that lithium chemical prices could fall from upwards of US$70,000/t to just US$16,000/t.
That has received plenty of clapback from lithium pricing experts and analysts more committed to the field. Reg Spencer, a longtime watcher of the lithium game at Canacccord Genuity, told Stockhead’s Jessica Cummins yesterday lithium supply was always slower to come on board than expected.
Benchmark Minerals Intelligence head honcho Simon Moores was even more scathing of the GS crew.
We’ve seen this before, we will see it again. Goldman Sachs: you can’t just add up all the #lithium mine level potential & make an oversupply call
The speciality chemicals world is more nuanced than iron ore
It’s why the world doesn’t rely investment banks for research any more
— Simon Moores (@sdmoores) June 1, 2022
Yesterday’s selldown in lithium did little to quell RBC’s enthusiasm for IGO (ASX:IGO), owner of around a quarter of Greenbushes in WA’s South West, the world’s highest grade and most prolific hard rock lithium mine.
RBC analysts Kaan Peker, Paul Wiggers de Vries and Alexander Barkley think IGO, which also owns the Nova nickel-copper mine in WA, is worth plenty more than its current $8.71b market cap.
They lifted their rating from sector to outperform and price target from $12.50 to $15.50. After yesterday’s selloff IGO is trading at just $11.50, despite Western Areas (ASX:WSA) shareholders voting up a ~$1.3 billion cash takeover yesterday that will shore up mine life concerns in its nickel division.
Peker et. al. say the sell-off is not all bad news for investors.
“While we expect nickel and lithium prices to remain elevated, we have them declining over FY23,” they said.
“The key question for investors will be can IGO appreciate despite softening nickel and lithium prices?
“We think so; with strong FCF generation, production growth via high-returning projects and a number of key potential near-term catalysts.
“The recent sector sell-off has depressed multiples, despite strong underlying battery demand/commodity prices, creating a buying opportunity, in our view.”
RBC has separately lifted its base, bulk and battery material forecasts by 27% and 24% respectively over 2022 and 2023, led primarily by lithium, nickel and coal, prompting upgrades for miners the investment bank expects to rebound once the macro headwinds that have pushed equity valuations down in recent months unwind.
“With the recent correction, we have seen value re-emerge across certain equities in our coverage,” they said.
“Besides value, we prefer miners which are exposed to energy or cost-curves supported by energy prices (thermal/met coal, aluminum, zinc) and the electrification thematic (nickel, lithium, copper), which also feature strong cash flows, balance sheets, production growth and capital returns.”
RBC has lifted its 2022 spodumene estimate by 99% to US$4481/t (around US$2000/t below current prices) and 2023 estimate by 96% to US$2920/t, with lithium chemical forecasts for hydroxide and carbonate up 112% and 121% to US$61,913/t and US$59,533/t in 2022 and up 114% and 128% to US$40,795/t and US$36,500/t in 2023.
It sees long term prices post-2025 falling to US$800/t for spod, US$15,000/t for hydroxide and US$12,750t for carbonate.
Stubbornly high commodity prices have forced the bank’s hand when it comes to coal, nickel and iron ore as well.
RBC sees booming thermal coal fetching an average of US$257/t this year and US$200/t next year, up 40% and 54% respectively, with a long run price of US$110/t.
Its nickel price forecasts have been adjusted up as well after the recent surge in the battery metal, up 23% to US$11.98/lb in 2022 and 11% to US$10/lb in 2023.
RBC’s iron ore forecasts have been adjusted up 10% to US$112/t for 2022, with its 2023 estimate up 13% to US$85/t (long term US$75/t), while coking coal estimates have been increased 28% to US$335/t in 2022 and 20% to US$180/t in 2023 (long term US$150/t).
Massive sell-offs like this are often followed by a bounce, but surging prices for oil and coal have been good for few companies on the ASX bar the energy sector, which is up a stunning 2.82%.
The EU moved to cut Russian exports yesterday in another escalation of sanctions against the belligerent nation following its invasion of Ukraine.
China’s exit from Covid lockdowns has proven a double-edged sword, improving metal demand but also threatening lifting already heady oil prices.
The big iron ore miners tumbled, while lithium companies posted a minor if unspectacular recovery.
Pilbara Minerals (ASX:PLS) shares lifted around 1% after announcing late yesterday that COO Dale Henderson would be appointed to step into Ken Brinsden’s sizeable shoes as the Pilgangoora miner’s new managing director and CEO.
The aforementioned IGO also lifted ~4.5% on the back of the WSA scheme vote and RBC’s glowing recommendation.