Hi Paul,
I don't think you can compare PE ratios of base metals producers with Lithium producers as they are completely different industry segments (and different PE ratios will be applicable). As you pointed out production of battery grade product is difficult and is therefore a much more a niche industry than base metals (currently and for probably a number of years yet). This is why I am applying a PE ratio which is normally applied to chemical manufacturers which in the case of specialty chemicals can even be 20 to 25 times earnings.
Here are the PE ratios from Simply Wall Street - the US data is on the left and the Australian market data is on the right (I would largely ignore the Australian data as I think its probably too sparsely populated - at least for Chemicals and Paper/Forestry). The US data does show a significant difference between the PE ratios in the "Metals and Mining" and "Chemicals" industries.
I think a PE of 15 is not out of the question for a battery grade carbonate producer and I think during the peak market hysteria which is still probably a number of years away (once people realise how difficult it's going to be to bring battery grade supply online, and how the momentum/demand towards EVs and energy storage is unstoppable no matter what kind of economic recession we get ourselves into), I think PEs of 18 or even 20 are achievable.
Perhaps I could use a lower PE range for the Lithium Chloride scenario given that it will be an order of magnitude easier to produce. I could have used 10, 12 and 15, for example. However, given the tightness of supply I'm not sure it's really going to matter. As I have said before, production of battery grade carbonate might be hard but it's categorically impossible without the raw lithium material. Notice in the latest Lithium pricing that bombers provided on Friday that Lithium Chloride is now sitting at ~100% of payability with respect to Lithium Carbonate. So in terms of pricing or PE ratios I'm not sure how much carbonate vs chloride really matters (it might be splitting hairs at the end of the day) - in fact Lithium Chloride has become the higher margin business (how long it stays that way is anyone's guess). Maybe we get to the point where battery manufacturers need to build lithium conversion plants because the miners are just not interested - there's no real money in it.
In regards to the existing producers when we look at the "actuals" (i.e. last quarter, last year, trailing 12 months, etc) we can see that the average PE ratios are well above 15 (highlighted in yellow). However, this is because most have been ramping up production and the increase in lithium pricing is relatively recent and still flowing through the industry (where older contract prices are still in place) - which is only now flowing through to earnings. So yes, you are right that when you look at forward PEs these are lower (highlighted in green). However, I think that there is a large portion of the market that are still not convinced that higher Lithium prices are here to stay (Goldman Sach, Credit Suisse and Morgan Stanley are certainly not helping in this respect). So basically I think there is a more conservative approach that is being applied to the forward valuations than what we will see when prices and earnings stablise/normalise (at whatever level that might be).
Also, keep in mind that the base metal commodity prices have come off the boil significantly, a number of commodities have halved over the past 6 to 12 months. As a result the current PE ratios are quite low as they reflect the higher earnings over the last year. So basically the opposite dynamic to what is happening in the Lithium space.
So obviously I'm speculating with respect to the future PE ratios for the Lithium industry especially given that it's a brave new world and nobody knows how its all going to play out. I also think that once the broader market realises that these companies are cash machines, and not just "for now" or for the next "couple of years", but for the next decade (at least), that these companies will demand a premium from an investment perspective. It just might take a little more time for the market to fully realise this (or see the proof that it needs in the stability of the industry).
Hope this helps explain my thinking. At the end of the day people can use whatever PEs they feel most comfortable with.
ALL IMO DYOR
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