Chart over the past 2 years looks pretty good to me.
the sp bakes in a lot of future long dated cashflows so is just as sensitive to rising bond yields (higher yields reduce the value of cashflows further away in time and thus reduce the intrinsic value of the company) as to lithium spot prices.
hence the sp of AKE moves more like a non profitable high growth tech stock (think zoom, Spotify, etc) whose cashflows are further into the future, than a traditional mining stock whose cashflows are near dated in accordance with the commodity cycle (fmg, bhp, rio).
im loving the fact that lithium carbonate battery grade spot prices are sitting at usd 60,000 ie aud 80,000. This is incredible and well beyond my bull case for the lithium price. Even more exciting, there are multiple factors restraining the supply response eg
- labour shortages, supply chain issues and delays in ramping up spodumene output for the spodumene miners
- atacama water restrictions
- covid related construction delays in bringing new projects online (just as we have seen in Argentina at olaroz stage 2).
meanwhile, the demand growth profile looks strong through most of 2022, although may ease later in 2022 (eg due to the expiry of China NEV incentives at the end of this year, which is dragging forward EV demand in the biggest EV market by far.
anyway, i think we can look forward to plenty of buy side interest for AKE shares through the coming months, given AKE guidance for H1 cy2022 lithium prices was usd20,000 but the real average sale prices achieved will likely be 30,000 for h1; the q1 prices will be more like 20,000 due to the lag in previously negotiated contract pricing, such that prices received usually lag spot prices by around a quarter. Q2 prices should average say 30-40,000, even accounting for lower prices for the proportion of lower quality primary/ industrial grade.
the story should be similar or better for mt caittlan.
thus we should see further significant increases in margins and operating cashflows in q1, then again in q2, then again in q3. There may be some easing of spot prices in h2 (q3) which will flow through to lower sales prices in q4, but they will likely still be in the range of usd20,000 so margins and cashflows will still be strong.
meanwhile, by that time (end 2022) stage 2 of olaroz will be near commissioning and sdv will be progressing, plus Mt C should be announcing resource upgrades (due to their drilling brownfield expansions) and JB should be nearing their DFS and thus closer to FID. Naraha will be online and the company will be hinting at future growth drivers via stage 2 sdv, stage 3 olaroz, stage 1 JB and perhaps even stage 1 cauchari.
so if you just ignore the day to day, month to month sp gyrations and sit back to stay focussed on the bigger picture of the long term lithium supply-demand market balance (which will determine price and thus margins), the future looks bright for AKE. I have crunched the numbers for a dcf several times over recent years, but I find DCFs fairly useless because the range is so wide for possible lithium spot prices over the next 5 years (usd4000-80000) and for annual lithium sales volumes (depending on how quickly they develop and ramp up new projects and expand existing projects) and for the risk free rate etc etc.
thus I just decided a few years back to essentially set and forget my ore and gxy holdings, enjoying the power of capital gains tax free compound returns over a decade (by avoiding trading in and out which triggers a cgt liability of 47% every time or 23% even if held >1yr), with the following reassuring factors to help me sleep at night:
- the tailwind of a structural mega trend driving an exponential demand curve,
- environmental/ capital/ logistic constraints to bringing online new supply for many competitors,
- an enviable position in the lowest quartile of the cost curve,
- flexible product diversification across spodumene/ brine, carbonate/ hydroxide
- geographic diversification across Australia, South America and North America
- a strategic partner and hydroxide plant in Japan with Toyota,
- a strong financial position
- a management team with experience over almost a decade for developing and operating brine and hard rock mines.
I don’t know what bond yields or spot prices will do in 2023 and beyond, but I’m confident that long term AKE investors will be able to find a point at an upswing in the lithium price cycle to cash in for some large capital gains if they have the patience and gumption to hold through the volatility and noise over the next 5 years.
good luck team!
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