Banter and general comments, page-11110

Had this come this afternoon from Morgans....

What’s happened

The lithium sector has plunged in price today (AKE -13%, PLS -20%, IGO -12%, MIN -7%, LTR -19%) despite no notable movements in the lithium spot market. A report released recently by GoldmanSachs is calling the beginning of the end of the battery materials bull market. We haven’t seen the report but we’re told it references growth in Chinese production of an alternative lithium bearing mineral, lepidolite, which will smother the market. To our knowledge lepidolite has not been used extensively in commercial production and instead the hard rock market continues to be dominated by pegmatite, or alternatively lithium carbonate produced from brines. Separately there has been some confusion around reports that the Argentinian government has set a $53k/t reference price for lithium carbonate. We have discussed this with investor relations at AKE who have confirmed that this in relation to royalties, it will not override commercial arrangements with customers and that AKE is not anticipating materially different royalty costs.

Our view

Our view on the supply shortage has not changed. Clearly supply will increase in coming years but demand is also expected to grow strongly. Contract prices are still well below the spot market so there is still room for contract prices to increase in the coming quarters. Prices are expected to peak next year though and clearly the market is being very quick to anticipate when this might happen. We think that with the strong pullback there is enough upside to retain our ADD rating on AKE with the expectation of strong increases in cashflow. We acknowledge that the price reaction today highlights the risks in the sector and the volatility could be enough to keep some investors on the sidelines regardless of whether the concerns about alternative production growth are warranted.