Monsters of Rock: Woah Nelly! BMI warns to hold your horses on renewed lithium euphoria

Lithium stocks back to Earth as analysts question magnitude of China supply cuts
MinRes puts resource behind Lockyer gas discovery, and could initiate a partial sale to fund development
Gold stocks topsy-turvy ahead of expected US Fed rate cut

Lithium stocks were absolutely on fire late last week, with multi-billion dollar producers making gains normally reserved for memestocks.

The reason? The shutdown of a major lepidolite mine in China, responsible for production of around 5000-6000t of lithium carbonate equivalent a month.

Owned by CATL, the world’s biggest battery producer, experts have suggested the shutdown has the potential to be a canary in the coal mine when it comes to China’s low grade lepidolite operations.

CATL is an integrated producer, and if it can’t make a buck at current prices of around US$10,640/t, what hope do standalone operations have?

Australian producers have already begun to take material out of the market, with Arcadium Lithium (ASX:LTM) announcing the closure from next year of its Mt Cattlin mine in WA’s South, while Core Lithium (ASX:CXO) halted production earlier this year at the Finniss mine in the NT and Mineral Resources (ASX:MIN) and Albemarle have both pulled back on expansion plans.

The CATL shut news occurred as the EU moved to water down tariffs to be imposed on Chinese electric vehicles, prompting hopes for strong lithium demand from carmakers.

While Fitch’s BMI Commodity Insights thinks prices will find short-term support on the supply cuts, the forecaster’s analysts don’t see a major turnaround in commodity pricing on the horizon.

“We expect lithium prices to find some short-term support amid positive momentum from reversing sentiment over easing supply glut concerns, fuelled by the EU lowering tariffs on Mainland Chinese EVs, on top of recently announced mine suspensions and project delays,” BMI said.

“We note that the latter might serve as a downside risk to our global lithium mine production forecasts, which we expect will be driven by Australia and Mainland China in 2024-2025. That said, we still expect lithium prices to stay depressed relative to the previously elevated levels of 2022-2023, owing to the market largely remaining in surplus.

“As of September 10 2024, lithium carbonate and lithium hydroxide prices are hovering slightly above USD10,000/tonne, with the year-to-date averages for lithium carbonate and lithium hydroxide in 2024 thus far being USD13,384/tonne and USD12,282/tonne, respectively.”

MinRes eyes cash for gas

Speaking of MinRes, it’s opened the door to a selldown of its Perth Basin gas and oil interests as the embattled miner seeks to bring its Lockyer discovery to life.

Chris Ellison’s firm posted maiden resources for its Lockyer gas and Erregulla oil finds.

Lockyer, found by MinRes in 2021, contains a maiden 2C contingent gas resource of 435 petajoule sales gas with 3.3 million barrels of associated condensate.

That’s 76 million barrels of oil equivalent, with the convention onshore gas find also including a 2U prospective gas resource of 1.42 billion cubic feet with a risked 2U of 487Bcf across 14 Kingia Sandstone projects and leads.

MinRes says in response to inbound queries from both domestic and global parties it’s revieing “development and partnering opportunities related to EP 368 and Ep 426”.

“As part of this review, MinRes will assess joint venture partnerships, as well as full or partial sale options,” the company said.

“MinRes is also considering development financing options through infrastructure funding partners, as noted in April 2024. MinRes will only consider opportunities that realise greater value for shareholders than what MinRes considers it can achieve through its standalone delivery plans.”

MinRes is planning to use the gas bounty to power its own lithium and iron ore operations in WA, but has called on the WA Government for an exemption to sell a portion of its resources on the international market to recoup its start up costs.

On top of that is a maiden 2C contingent oil resource of 31.6MMboe at Erregulla, considered one of the largest onshort oil discoveries in WA since Barrow Island in 1964. MinRes is looking at separate ownership and development plans for the assets.

As far as prior M&A in the Perth Basin is concerned, the most recent example is Gina Rinehart’s $440 million early 2023 buyout of Warrego Energy. Competition was fierce at the time, with Rinehart outmuscling Kerry Stokes backed Beach Energy (ASX:BPT) and Warrego JV partner Strike Energy (ASX:STX).

At the same time MinRes delivered its own takeover of Norwest Energy, the minority JV owner at Lockyer.

We got our senior energy reporter Bevis Yeo to crunch some rough numbers on how the bid valued West Erregulla at the time, coming in at around 8-9% of the in ground value of WGO’s gas.

Lockyer’s current in ground value is around $7.8bn, but it’s important to remember oil prices (and by extension gas) have come off the boil since early 2023, dropping from over US$80/bbl to around US$69/bbl today.

Building the project at Lockyer is a very different proposition also to a private operator in Hancock dropping its dosh on a JV.

According to reports, Morgan Stanley put an indicative valuation on Lockyer of $827 million, depending what the WA Government does about its application of the domestic gas reservation policy.

Facing analyst and investor concerns over its net debt position after a dive in lithium prices last year, MinRes is already planning to rake in some cash through asset sales, announcing FIRB approval on Tuesday last week for a $1.3bn deal to sell a non-operating 49% stake in its Onslow Iron haul road to Morgan Stanley.

MinRes started the day strong before turning on a dime, down 0.37% a little before the market close.

Also down +4% was Westgold Resources (ASX:WGX), which dropped despite lifting its production guidance from 220,000-235,000oz to 400,000-420,000oz post the acquisition of TSX-listed Karora Resources. It also posted an exploration target at the Fletcher deposit in the Beta Hunt mine of 1.6-2.1Moz at 2.1-2.5g/t.

Emerald Resources (ASX:EMR) slid 5.9% after a wall slip at its Okvau mine, despite saying guidance at the Cambodian operation was unchanged.

That came despite some positivity in an up and down gold space, with Comex futures for December up 0.2% to US$2615.80/oz ahead of the US Fed rate call this week. The materials sector slid 0.28%.