As Rinehart buys up Liontown, lithium bulls fight to keep the faith

Gina Rinehart’s raid on the takeover target comes amid a growing debate about whether the drop in prices for the battery metal is cyclical or structural.

Oct 4, 2023 – 3.13pm

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Gina Rinehart may have some unflattering things to say about the prospects of lithium hopeful Liontown Resources, but it seems she just cannot stop buying the takeover target’s shares.

Rinehart said late on Tuesday that her company Hancock Prospecting now owns 14.67 per cent of Liontown, continuing a buying spree that has resulted in her stake growing from 7.72 per cent in mid-September.

Gina Rinehart is moving up the share registry at Liontown at a fascinating moment for the sector. David Rowe

Given Liontown has effectively accepted a $6.6 billion takeover offer from US giant Albemarle, Rinehart’s intentions remain a bit of a mystery. Is she planning her own bid? Does she intend to try to block the deal, which will require a 25 per cent vote against? Or does she want to use her stake as a wedge to extract a promise from Albemarle to work with Hancock in some way?

Time will tell. But, in the meantime, the sharp fall in lithium prices has sparked another crucial debate in this white-hot sector: is the industry facing cyclical headwinds or structural problems?

Prices of lithium carbonate equivalent have fallen from $US85 a kilogram in November last year to about $US25 a kilogram. The slump in China has been even more pronounced. Lithium carbonate prices there have fallen by half since early June, and are now about 70 per cent lower than 11 months ago.

What’s concerning market watchers is a break in lithium’s usual seasonal trends. Demand in China, the world’s biggest electric vehicle market, typically picks up in the December quarter as manufacturers replenish their feedstock before the peak period for battery cell production and installation. But it didn’t happen this year, because battery makers apparently had plenty of inventory they could draw on.

The supply question

For broking house Wilsons, lithium remains a promising sector. It argues China’s demand drop reflects short-term domestic issues, rather than a move away from electric vehicles. A bumper month for EV sales in August, where year-on-year growth bounced back to 35 per cent, is evidence the long-term growth story remains intact.

Wilsons is also sanguine about the outlook for supply, which remains arguably the biggest debate in the sector. As Tesla founder Elon Musk is fond of saying, lithium itself isn’t scarce, and the fear is that a flood of new projects will overwhelm the jump in EV demand projected to take sales penetration to 50 per cent by 2030. Wilsons concedes this is a live risk, but says history suggests bringing on new supply is fraught with cost and time overruns – as several Australian lithium miners can attest.

“By the decade’s end, the lithium market is anticipated to face a substantial deficit as demand outpaces supply. We do not think supply delays are adequately reflected in consensus expectations, which could exacerbate the forecast shortfall,” Wilsons says.

Goldman Sachs has a different view. In a report on the outlook for batteries, it too expresses confidence in demand for EVs. But analyst Nikhil Bhandari argues this will be driven in part by a significant reduction in EV costs as battery prices fall about 40 per cent by 2025.

And almost half of this reduction in battery prices comes from lower raw material costs, including lithium. Goldman sees lithium prices continuing to fall under the weight of increasing supply into next year, before rebounding in 2025 – but only back to 2021 levels, at about $US15 a kilogram. That’s broadly in line with market consensus but below Wilsons’ long-term price estimates of about $US25 a kilogram.

Wilsons’ top picks in the sector are Allkem and Mineral Resources. It says investors should look for the trifecta of production growth, cashflow to fund that production growth and low production costs – in other words, qualities that should allow a lithium miner to withstand what will remain a volatile sector.

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