Growth in electric vehicles is relentlessly driving interest in lithium. Canaccord Genuity has visited China and met with various members of the supply chain, including lithium converter plants, cobalt salts producers and cathode/anode producers.
The broker is bullish on both the short and long-term outlook for the sector, and expects the rise of electric transport and grid storage to be a global theme that has clear implications for the demand for lithium and cobalt as input materials to the battery industry.
Vested Equity Research also believes the long-term drivers of lithium are very promising but cautions that bullishness is unlikely to be justified over the short term. Still, the researchers acknowledge there is no reason why the price of lithium and investments exposed to it could not re-rate earlier, as investors become more comfortable with the story.
The researchers note 14 countries have committed to quantitative electric vehicle stock objectives by establishing regulatory incentives, also observing that China's electric vehicle sales are increasingly driven by government subsidies and purchasing quotas on traditional vehicles in tier 1 cities.
Subsidies for commercial and passenger electric vehicles can be as high as 60% of the selling price of a commercial vehicle or 40% in the case of passenger vehicles.
Chinese government subsidies for the purchase of electric vehicles have recently been revised to favour those with longer driving ranges, meaning a requirement for lithium batteries with higher energy density characteristics.
Demand
Citi expects a shift in demand and 2017 to be the first year that lithium consumption for batteries outstrips non-battery demand. This has important implications for product quality. Quality attributes will become more important as manufacturers look for consistent product specification and security of supply.
Nevertheless, the shift is not driven by declining usage in non-battery industrial demand and this is expected to grow at a 4% compound rate between 2015-2025. The broker forecasts lithium demand from the consumer electronics sector to grow at a rate of 5.1% out to 2025.
Despite the strong growth in demand, Citi expects burgeoning supply will pressure prices towards a long-term outcome of US$7500/t for lithium carbonate and US$550/t for spodumene from the current US$12-15,000/t and US$900/t, respectively.
Hard rock or spodumene projects have lower capital expenditure and shorter lead times to production and are expected to be around 55% of global supply by 2020. Longer term, the broker suspects hard rock projects are at increasing risk from lower operating-cost brine projects.
Supply
Vested Equity Research quotes the US Geological Survey which indicates that discovered lithium resources equate to 40mt with around 85-94% of the commercially viable concentrations at a limited number of locations in Australia, Chile, Argentina and China.
Two brine deposits in Chile account for 43% of global production whilst 30% of supply comes from one hard rock mine in Australia. The researchers do not expect any new brine resource to come online before 2020 and expect the supply gap to be filled by Australian spodumene from Galaxy Resources ((GXY)) and Neometals ((NMT)).
Canaccord Genuity asserts the supply of lithium spodumene concentrates to converter plants is expected to remain restricted in the near term versus a significant expansion in converter capacity. Significant expansion in capacity is a common theme in China, the broker notes and, anecdotally, there appears to be sufficient capital available for these expansion plans.
Restrictions of movement on capital out of China are expected to remain in place for the foreseeable future. There remains some concerns about the ability of raw material supply to keep up, with the main concern about the availability of lithium and cobalt concentrate feedstocks.
Canaccord Genuity believes this could have positive implications on lithium product pricing and for those companies currently in production, such as the broker's preferred sector exposure Galaxy Resources, which has a Buy rating and 70c target.
Interestingly, none of the market participants the broker met in China believe that direct shipping ore from Australia will be a sustainable source of supply. Increasing government scrutiny on environmental standards means potential headwinds for such supply, which has to dispose of large volumes of waste.
Oz Players
Citi initiates coverage on lithium juniors, which it believes are working hard to ride demand for the product.The broker takes a Buy, High Risk rating on Pilbara Minerals ((PLS)) with a 65c target and a Neutral, High Risk rating on Galaxy Resources with a 55c target.
Pilbara Minerals has a project, Pilgangoora, in Western Australia that targets commissioning in 2018 and shipments in the June quarter. Galaxy Resources recently re-commissioned the Mt Cattlin mine, WA, that is expected to produce 160,000 tonnes of spodumene in 2017/18 increasing to 200,000t in 2019 as recoveries improve.
The cash flow from the project will be used to fund the studies and capital expenditure for the company's Sal De Vida brine project in Argentina. Galaxy also has another hard rock project at James Bay in Canada.
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