Lithium explorers are hot again. Here’s how Canaccord Genuity sees the rest of 2023 rolling out
Link copied to
Last year lithium prices climbed a previously unthinkable mountain.
Until 2022, prices for battery grade chemicals lithium hydroxide and carbonate, essential ingredients in any electric vehicle cathode, would have been considered exceptional in the mid to high US$20,000/t range.
By the end of the Year of the Tiger, they had scaled US$80,000/t, propelled by EV sales figures that eclipsed 10 million units worldwide for the first time and could be heading another 35% upwards in 2023 to 14m if the International Energy Agency is to be believed.
With prices at those levels, most sensible analysts predicted a correction, though the pace of especially the Chinese focused carbonate market’s quartering to ~US$20,000/t caught many off-guard and prompted a sell-off in lithium stocks through the first four months of 2023.
Now, lithium is back in vogue, with Fastmarkets chemical prices back in the US$40,000/t range for both hydroxide (typically used in long range nickel rich batteries) and carbonate (used in shorter range lithium-iron-phosphate batteries and lower nickel density nickel-cobalt-manganese cathode types).
With the year halfway done, it’s a good time for us to take stock of where the lithium market is.
And there are few better experts to do that than Canaccord Genuity head of research Reg Spencer, who says demand and supply will be delicately balanced through the rest of 2023.
“Q1 EV sales were OK and still pointed to solid year on year growth. We’re expecting 40% year on year increases in overall EV sales and that should provide a good basis for demand,” he said.
“But then conversely, this is also expected to be a strong supply growth year and the last bit of research that we published in May pointed to a 45-50% year on year increase in supply growth.
“So that should keep things relatively balanced.”
The main lithium product known to the Australian market is spodumene, the roughly 6% pure lithium oxide concentrate produced at hard rock mines in WA like Greenbushes, Pilgangoora, Wodgina, Mt Marion and Mt Cattlin.
Collectively these operations account for around half of the world’s lithium raw material supply.
Spencer says it is difficult to know exactly where prices are going to go amid a macro environment that is constantly shifting, signposted by recession fears after a string of interest rate hikes from central banks across the Western economy.
“We came back from the Fastmarkets Conference in Vegas a few weeks ago, which is a big lithium industry conference and there wasn’t a lot of conviction as to where pricing in the second half would go,” he said.
“I think a lot of that uncertainty comes about from the macro uncertainty that we’re currently witnessing — high rates of inflation, high interest rates, that can and potentially may lead to slower sales growth for EVs given that most people finance the purchase of a new car.
“If we do see a recession in the second half of this year, that’s no doubt going to lead to slower demand growth.”
On the other side of the equation, Spencer said the ramp up of new supply from both brownfield expansions and greenfields developments would impact pricing in the second half.
That could see a slight pullback for spodumene, which was trading at spot levels in excess of US$8000/t late last year (though producer average sales prices on contracts were closer to the US$4500-6000/t range).
“All things being equal, we actually think pricing settles a little bit into the back half of the year and see spodumene for example, going from say US$4,000 a tonne at the start of the year to somewhere between US$3000 and US$3500 a tonne,” Spencer said.
“And similarly for chemicals, that Chinese carbonate price seems to have recovered a little bit, we expect them to be relatively flat at the end of the year, but given the fine balance between supply and demand through the second half that pricing can go either way.
“But we don’t expect any major pullback in pricing like what we saw earlier in the year with Chinese spot carbonate prices.”
A pullback in spodumene pricing may seem bearish for the market, but it’s important to note how profitable miners remain at those levels.
“It’s huge, there’s not many other metals markets where those kinds of margins are on offer,” Spencer said.
“If you have a look at the typical production costs for a spodumene producer, it’s somewhere between US$500-900 per tonne and pricing depending upon who you talk to is anywhere from US$3500-4500 today.
“Even under a bear case or lower price scenario, that would still afford margins of well in excess of 150%.
“So I don’t think you should worry about margins. I guess the issue is investors, because of those high prices that we saw last year, perhaps got used to seeing prices at that level. And would any pullback in prices led to any volatility in the equities? Maybe.
“But the reality is that a lot of these spodumene guys are still enjoying some very, very strong margins, and even under a much more conservative long term pricing scenario that should still remain the case.”
We’re now seeing M & A take centre stage as larger players look to expand their production base and grab market share ahead of a boom in EV sales and market penetration.
The sharks are rumoured to be circling at Patriot Battery Metals (ASX:PMT), owner of the closely watched Corvette discovery in Canada’s James Bay region.
Its chairman Ken Brinsden’s history as the former MD of $15 billion capped Pilbara Minerals (ASX:PLS) has the rumour mill running wild that the Aussie giant is plotting a bid or strategic investment.
Allkem (ASX:AKE) will create the world’s third biggest lithium producer behind America’s Albemarle and Chile’s SQM with a $16 billion merger with American brine lithium producer Livent announced in May.
Bill Beament, famed for his stewardship of gold miner Northern Star Resources (ASX:NST) from a penny stock to a $15 billion gold behemoth in a decade, is planning to take control of Essential Metals (ASX:ESS) and its small scale Pioneer Dome lithium discovery near Norseman via a ~$150 million scheme of arrangement with his mining services and battery metals firm Develop (ASX:DVP) backed by Chris Ellison’s Mineral Resources (ASX:MIN).
The big kahuna is Liontown Resources (ASX:LTR), a former penny dreadful which REJECTED a more than $5 billion cash offer from Albemarle for its 500,000tpa Kathleen Valley mine in WA.
Its venerable chairman Tim Goyder outlined the rationale for that stubbornness at a conference in May:
“We believe that the cash flow that this project is going to generate over two years will pay for it (Albemarle’s offer price),” he said at the Resources Rising Stars Conference on the Gold Coast.
“So we’re two and a half billion dollars a year of free cash flow.
“So you know, we’re not selling this company on consensus, I told Kent there (Albemarle boss Kent J. Masters) my friend in Albemarle, and so we’ll just see what happens.”
Spencer says any company with a hard rock lithium resource in excess of 100Mt, the benchmark for a tier-1 discovery, will come under the microscope of the majors.
While the Liontown-Albemarle situation appears to be “at an impasse”, he says there’s no shortage of M&A developments on the cards.
“You’ve got the rumours as you say around Patriot, which are not new. We would highlight Patriot as a potential takeout target just given the scale and quality of the discovery they’ve made there in Quebec. They will have a resource update out in July, sometime this month and that could be a potential catalyst as well,” Spencer said.
“Other M&A developments include Sigma, which is a Canadian company in Brazil, there’s a lot of rumours circulating around whether that asset will be bought.
“And to put that into context, that is a project that’s ramping up as we speak targeting an initial 500,000t a year of spodumene so it is a substantial asset.
“And then more recently Develop with Bill Beament, acquiring Essential Metals and that being their first foray into lithium. So there’s plenty happening. I don’t think the M&A aspect to the lithium sector is going to slow down anytime soon.
“And to be honest with you over time, we would expect to see the sector go through some form of consolidation. So we’re very interested to see what plays out in the second half.”
In Australia, Spencer highlights Azure Minerals (ASX:AZS) as an explorer of interest. It attracted SQM as an almost 20% shareholder earlier this year and has legendary prospector Mark Creasy on board as a backer and 40% owner of its Andover JV in the Pilbara.
The company this week said a resource estimate will be posted in the first quarter of next year after a 100,000m diamond and RC drilling program to firm up its spodumene bearing potential.
“They were previously exploring for nickel. They’ve only drilled about 10-odd holes into this thing and already it’s starting to look like a project of scale,” Spencer said.
“SQM is a 20% shareholder in of Azure and that’s something that seems to have captured imagination. It’s not necessarily a small cap anymore, it’s … a $600-700 million market cap now, but that’s one that we think has a lot of potential in terms of new discoveries.”
WA is the GOAT when it comes to hard rock lithium. But Canaccord is also positive on a couple of other jurisdictions.
“We’re still huge fans of the potential in Canada. We were over there a couple of weeks ago, went on a few site visits, met with some government representatives and we’re still very positive on the medium to longer term potential for Canada to be a meaningful player in the lithium supply chain,” Spencer said.
His favourite explorers include Winsome Resources (ASX:WR1), working on the maiden resource at its Adina-Cancet project in Quebec, Green Technology Metals (ASX:GT1) in Ontario and Cygnus Metals (ASX:CY5) in Quebec.
“There’s another emerging region in Canada which is really only just starting to pop up on investors’ radars, and that is the Northwest Territories, specifically around the city of Yellowknife,” Spencer adds.
“There’s a Canadian company called Li-FT Power that seems to be doing some good things up there and looks like they may have made a new discovery based on recent drilling results and there’s a couple of little Aussie companies that are close to where Li-FT are operating in Midas Minerals (ASX:MM1) and Loyal Lithium (ASX:LLI), which are worth watching as well.”
But the most exciting exploration front for Canaccord at the moment may be Brazil.
“Sigma lithium, the big Canadian company, has demonstrated that you can make a discovery, complete your studies, permit your project and build it in a relatively short period of time, which is not necessarily the case in other jurisdictions where you have extended permitting timelines, or like Western Australia where labour availability issues and high rates of inflation which lead to capital cost blowouts on new project,” Spencer said.
“So Brazil is very interesting. We were early backers of Latin Resources (ASX:LRS), which has made a new discovery at the Salinas project.
“They’re not finished yet, we think that resource can continue to grow.
“And the M&A potential around Sigma should continue to see some interest in that region.
“Other Australian companies in Brazil that we find interesting, might be companies like Solis (ASX:SLM), with their Jaguar Project, which is currently seeing its first drill holes at the minute. So we’re quite excited about Brazil as well.”
Goldman Sachs is the lithium stonker’s biggest nightmare, with its bearish price projections sinking equity valuations not once but twice last year.
Its analysts continue to see a “supply led correction” in the second half of the year.
“Over the past months, lithium prices have bounced back on signs of recovery in the Chinese EV market. While we expect recovering demand to support lithium prices in the near-term, we continue to see a supply led correction over 2H 2023,” Australian analysts Hugo Nicolaci, Paul Young and Elise Bailey said in a note this month.
“On our revised SD estimates, global spodumene is still the main driver of incremental raw material supply growth, on track to add 500kt LCE cumulative capacity over 2023-24, and China’s lepidolite capacity will likely rise over 200kty LCE by end of next year.
“Separately, we reiterate the upside risk to medium to longer-term lithium supply from LatAm projects and Direct Lithium Extraction (DLE), heightened by the potential applicability of DLE to lower quality or other less conventional brine resources.”
Goldman thinks spodumene prices will fall to US$3500 in the fourth quarter of 2023, but predicts more extreme slides to an average of US$1763/t in 2024 and US$800/t in 2025. Few market watchers are so pessimistic.
Goldman has neutral ratings on Liontown and Pilbara Minerals, with MinRes and Core Lithium (ASX:CXO) rated as sells by the investment bank.
In general Australian lithium companies are considered undervalued compared to their overseas peers. Aussie miners have outperformed this year, in part on the back of M&A speculation around locally listed players.
“While differences on assumed lithium pricing had partly explained the discrepancy in some years previously, the valuation gap also appears to have narrowed vs. both consensus LCE production and EBITDA growth (and remains widest for AKE, IGO, and PLS), though the greater vertical integration and exposure to longer life brine assets of global peers may also be a contributing factor,” GS’ analysts say.
“While our ratings are relative to our Australian coverage, we highlight the broader upside risk to the Australian names if they were to re-rate more in line with global peers.”
They say Allkem is best positioned in terms of production growth, expected to see LCE volumes lift more than four times over by FY28.
MinRes will see 25% earnings growth over the period, with Allkem expected to see 10% earnings growth, PLS 8% and IGO around 1%, though GS’ low long term lithium price forecasts impact those numbers.
At Stockhead, we tell it like it is. While Azure Minerals and Latin Resources are Stockhead advertisers, they did not sponsor this article.