Opportunities and insights for resources investors
MENU Latest stock sell-off times unstoppable decarbonisation drive equals investment opportunity
It’s the most enduring thematic of our times, and now investors can get exposure at a significantly lower price thanks to the recent impact of rising rates and global strife.
26th May 2022
Barry FitzGerald Share Article
Lithium stocks already showing first signs of recovery while Boss prepares for FID as uranium outlook charges up.
The global decarbonisation thematic is none too worried about the shakedown in equity markets over China’s slowdown and the impact of rising inflation/interest rates in the major economies.
The thematic is alive and well. And it’s here to stay for decades to come as governments and companies alike combine forces to rein in global carbon emissions from the (renewable and sustainable) electrification of everything.
It means decarbonisation is pushing through the current equity market concerns. And because decarbonisation is metals-intensive (including uranium), the thematic acts as a long-term differentiator for mining equity values.
That’s not to say that mineral commodities and the equity values of the miners have been immune to the current shakedown in equity markets. They haven’t been, and they will continue to be buffeted, for a time anyway.
But strong growth will return to China once it learns to live with COVID like the rest of the world, and the heat will eventually come out of interest rates/inflation once COVID-affected supply channels recover, and some form of detente is achieved in the Russia-Ukraine conflict.
None of those recovery factors for the global economy are around the corner. But they will pass, while all the time, the decarbonisation thematic will continue to gather pace, creating huge and decades-long supply challenges for the broad sweep of commodities plugged in to the decarbonisation effort.
From all that it can be suggested that the current equity market weakness is providing investors with a substantially lower-cost entry point than was the case a couple of months ago to the biggest and most enduring thematic of our times – global decarbonisation. Lithium:
Investors in the ASX-listed lithium space are starting to take advantage of the situation, with the sector’s leading stocks fighting back on the share price front after being pounded along with the rest of the market.
And as pointed out by Macquarie in a research note a week ago, they all have “material” valuation upside at spot prices.
The firm has a price target on Pilbara (PLS) of $4 compared with its Thursday close of $2.81. Allkem (AKE), trading at $13.49, was given a price target of $17.70 and Liontown (LTR), trading at $1.28, was given a target of $2.50.
Their recent share price pounding was a response to the perception that China’s economic slowdown and COVID lockdowns would drag lithium prices down. While there has been a little bit of weakness, the resultant equities sell-off has clearly been overdone.
Macquarie estimated that the producers PLS and Allkem (Liontown is a developer) were being valued as if their realised lithium carbonate equivalent price was $US15,000/t.
The spot price is currently a shade under $US70,000/t. Repeating that is a spot price, not the net price the producers would be receiving under their mix of contract and spot prices.
But there is an almighty scramble by the industry to capture a greater share of the bumper spot pricing by shifting their customers to more variable/index-based pricing contracts.
Early success in doing just that was why the big US lithium producer Albemarle was able to again upgrade profit expectations during the week.
PLS provided further evidence during the week that investors’ concerns over lithium prices on the China slowdown were overdone when it reported the result of its fifth online auction of spodumene concentrates.
The cargo of 5,000/t (grading 5.5% lithium oxide) popped off for a record $US5,955/t. On a more standard 6% basis, it equates to $6,586/t, or 5% more than the last auction a month ago.
PLS boss Ken Brinsden will be giving investors an up to date assessment on the lithium market at the Resources Rising Stars conference on the Gold Coast (7-8 June). Liontown boss Tony Ottaviano will also be updating investors on the group’s Kathleen Valley development.
RBC Capital noted that the price equivalent in the PLS auction was 35% above the current spot price in China (and 6% above the reported weekly Platts index price).
It said the record price “indicated that Chinese converters are willing to pay more for spodumene given the current lithium market conditions”.
“We believe this is a good indication that underlying demand remains strong and that spodumene concentrate prices in China and seaborne (markets) can still move higher,” RBC said.
It all goes to what was suggested earlier – demand for the metals critical to global decarbonisation is pushing on regardless of the current hissy fit in equity markets.
While the lithium producers and developers are starting to recapture their former highs, the juniors are doing okay too as investors switched on to the decarbonisation thematic seek out leveraged exposure that a discovery can provide.
That came through in the 10% gain on Thursday to 8c for Trek (TKM) on news that it had come across a swam of lithium-bearing pegmatite dykes at its Tambourah project near Marble Bar.
Fortescue (FMG) did some sampling and rock-chip sampling there between 2016-2020, with assays from its work returning greater than 1% lithium, allowing Trek to talk about the pegmatites being lithium-bearing at this early stage. Trek is now getting busy working up drill targets.
Trek also gets the understatement of the year award by noting its board knows something about lithium in the Pilbara. It was talking about the guys that started what is now the $7.5 billion PLS story - Neil Biddle, John Young and Tony Leibowitz.
PLS Price at posting:
$2.81 Sentiment: Buy Disclosure: Held
(20min delay)