Ground Breakers: Don’t cry for Allkem, the Argentine and Aussie lithium miner whose prices still sing
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The ASX investing community over December and much of early 2023 has been awash with concerns lithium has peaked after a 2022 few foresaw.
Prices sky-rocketed past US$80,000/t for lithium chemicals and, on some spot indices, around US$8000/t for spodumene.
Battery grade lithium hydroxide and carbonate saw rises in excess of 130% from January 1 2022 to December 31, but as the year closed Chinese demand began to wane.
That has played into calls from some analysts that prices are on their way back down. Goldman Sachs’ doomsday prediction from back in May last year that carbonate and hydroxide prices could fall into the teens seems fanciful now.
In its latest update Goldman forecasts US$53,300/t for lithium carbonate in 2023, US$58,650/t for lithium hydroxide and US$4330/t for spodumene concentrate, falling precipitously to US$11,000/t, US$12,500/t and US$800/t respectively for 2024 and 2025 before rising again long term to US$15,000/t, US$16,500/t and US$1000/t.
Other investment banks have expectations the price will drop in 2023, with RBC expecting an average of US$64,000/t for carbonate, US$63,500/t for hydroxide and US$6143/t for spodumene, though it expects prices to remain elevated out to 2026.
In the real world, Chinese domestic lithium prices have slid amid a drop in demand ahead of Lunar New Year, the end of its electric vehicle subsidies and economic concerns after its Covid lockdowns and reopening outbreak, dropping to ~US$72,000/t in recent days.
Today, a reminder that lithium producers remain in full pomp when it comes to pricing in the here and now, with Allkem (ASX:AKE), holder of a 10% market share in global lithium raw material supply, reporting strong results for the December quarter despite operational issues.
Allkem produced 16,404 dry metric tonnes of spodumene from its Mt Cattlin mine in WA in the December quarter, shipping 15,702dmt at a gross cash margin of 72% on prices of US$5284/dmt for 5.3% spodumene concentrate. That’s US$6000/dmt on a 6% basis, up 5% on the prior quarter.
At its Olaroz brine operations in Argentina, Allkem delivered a record 4253t of lithium carbonate, up 17% on December 2021, with half-year production of 7542t 13% higher than the previous record in 2019.
Its 3131t of sales traded at a third party price of US$53,013/t, up 23% on the September quarter, delivering record quarterly revenue of US$151m and a gross cash margin of 90%.
Also banking US$32m from the sale of low grade concentrate at Mt Cattlin, Allkem has defied market bearishness to predict robust EV sales growth based on its strong order books and “potential pent up demand.”
And the higher ups at Allkem remain confident in the lithium market, saying they continue to see strong demand for their products from converters in China and elsewhere.
Allkem’s chief sales and marketing officer Christian Cortes told analysts on the company’s quarterly call this morning they expected demand for lithium to be constrained by supply until 2030.
“The constraints in terms of production for a variety of reasons are expected to continue and also the pressure on costs are expected to continue,” he said.
“What we had as floors in the past is not relevant at all, for the future. If you’re trying to see where prices could go in the future … I don’t really want to go in that area.
“But what is clear is that for the foreseeable future, and these are not straight lines — the line of production and the line of consumption — but for the foreseeable future, probably by 2030, what we see at the moment, demand will be constrained by supply.
“And at this stage, we don’t see any reason why if we were to indicate a floor, we don’t see any reason why the market will actually reach those floors, because there is constrained production.”
Those potential constraints have been seen from Allkem’s perspective in Argentina, where export tax breaks which accounted for 1.5% to 4% of revenue will be wound bank, and at its new James Bay project in Canada’s Quebec Province, where federal environmental approval finally arrived yesterday with 271 conditions attached after a near five-year process.
Once final provincial and Cree Nation approvals are granted for James Bay, Allkem boss Martin Perez de Solay said it would be able to provide a construction timeline and production guidance.
Cortes meanwhile expects growth in EV and lithium demand to continue into 2023, despite negativity about the Chinese market.
“The main driver of this growth, electric vehicles, continued its breakthrough into the mainstream, with global full years sales estimated to be approximately 10 & 1/2 million units, representing year over year growth of 56% or 3.7 million units,” he said.
“To put this in context, the (Chinese) market grew more in a single year last year than the entire market in 2020, two years prior. This growth is expected to continue into 2023.
“Despite some concerns about the lingering impact of COVID-19 and the potential for global recession, consensus EV unit sales growth in 2023 is forecast to be similar to 2022 to around 3.6-3.7 million units, with an increasing proportion of this expected to come from Europe and North America.
“This is an encouraging sign as both EV and lithium demand growth becomes more diversified and widespread.”
Despite pressure on spot prices, which exceeded anyone’s expectations in 2022, Cortes says customers continue to ask for more volume and quicker shipping, with long term contract pricing expected to trend upwards.
Allkem itself has production growth on the cards, with its Stage 2 development at Olaroz expected to hit first production in the second quarter of 2023 after commissioning in the March quarter, with construction 96% complete.
The first two strings of ponds at the new Sal de Vida brine project also hit 82% completion, with the EPC contract awarded for its process plant. Production is expected after a board review by mid-2024.
AKE also produced 200t of lithium hydroxide sold to third parties from its Naraha plant in Japan in the December quarter (nameplate of 10,000tpa), with improvement to battery grade production expected over the next year.
The miner finished the year with US$552m in net cash, up US$105m on September 30, with revenue of US$265m at an operating cash margin of US$218m (82%).
However, it did see costs rise 3% quarter on quarter and 8% year on year at Olaroz to US$4682/t, while costs climbed substantially from US$796/dmt to US$1016/dmt at the production constrained Mt Cattlin, where a feasibility study on a cutback is due in the March quarter.
Allkem shares were off 0.04% this morning, with other lithium miners in a similar no-man’s land. IGO (ASX:IGO) was off 0.62% with Pilbara Minerals (ASX:PLS) down 0.61% and Mineral Resources (ASX:MIN) up 0.07%.
The broader materials sector stumbled 0.4%, setting up a second straight day of mining losses.