From today's AFR
"Australia’s lithium boom remains one of the sharemarket’s hottest sectors with the commodity expected to remain in a supply deficit out to 2030 as demand for the battery ingredient from electric vehicle makers continues to soar globally.Just this week, shares of lithium miner IGO jumped more than 5 per cent after it flagged a $1.1 billion windfall for investors from its joint venture stake in Western Australia’s hard rock lithium Greenbushes mine.Surging demand for lithium, the key ingredient used in electric vehicle batteries, has spilled over into the ASX. New York TimesSoaring demand for lithium has driven IGO’s shares 249 per cent higher over the past five years to a $10.5 billion valuation.
Rival Pilbara Minerals has jumped 549 per cent over the period to $14.5 billion as its profits from the Pilgangoora Mine hit $2.4 billion in the 2023 financial year.The lithium rush has spilled into the sharemarket with dozens of ASX-listed junior explorers in Australia, Africa, South and North America all looking to exploit the supply shortages and emulate the blockbuster success of existing producers.“We prefer producers generating cash with significant growth options in the portfolio like IGO Ltd and Pilbara [Minerals],” UBS resources analyst Lachlan Shaw said.
“When we look across the developers, I’d say it takes years and years to get these projects discovered, defined, studied, financed, built and into production.”Still a long way to go. The market’s hottest explorer last month was Azure Minerals, which received a $2.31-a-share takeover offer from New York-listed Chilean producer SQM that valued the Perth-based company at more than $900 million. The stock has rocketed 1200 per cent over 12 months amid peak market interest in its drilling results at the Andover lithium tenement.
Other speculative explorers such as Liontown Resources and Canada-based Patriot Battery Metals have doubled or tripled in value over the past 12 months amid takeover interest and estimates of huge lithium resources.“Azure and Patriot have what looks to be high-quality resources, but those projects won’t be in production until 2029, maybe later, so there’s a long way to go,” Mr Shaw said.
Analysts and fund managers expect more merger and acquisition activity as dozens of other lithium explorers target production by next year.They are being led by Wesfarmers’ Mount Holland mine and its Kwinana lithium refinery, which the $61 billion investment conglomerate says could power about 1 million EVs each year when in production.Others including Argosy Minerals’ Rincon Lithium Project, Allkem’s Olaroz stage-two project, and Liontown’s Kathleen Valley project are scheduled to bring more supply to the market by next year.
Extreme volatility
Share price performances for the sector vary widely. This year alone, Argosy’s shares have more than halved in value, while Allkem is up more than 25 per cent and Liontown’s shares have more than doubled.UBS still forecasts the lithium supply market to be in deficit by about 1 million tonnes a year in 2030, although Mr Shaw said recent falls in the lithium carbonate price to below $US3000 a tonne was pressuring valuations.UBS forecasts lithium spodumene prices to average $US3500 a tonne in 2024, before retreating to $US3000 a tonne in 2025.Morningstar equities analyst Seth Goldstein said investors should expect extreme volatility in the share prices that have come to define the sector over the past few years.
“The market will be in and out of deficit out to 2030, the volatility in the level of the deficit and prices is likely to continue even as demand rises exponentially,” he said.“We think downstream demand will remain strong due to growth in EV sales and increased battery use for energy storage systems. So, that will drive an undersupply by the end of the year and prices will rise and remain higher into 2024.”Among the major producers, Morningstar values lithium and iron ore producer Mineral Resources at $67 a share as Australia’s broader mining industry faces wage, energy and input cost inflation through 2024. That compares to the current share price of about $71.75.On Friday, UBS reiterated its buy recommendation for IGO with a $14.90 price target. The broker is neutral on Pilbara Minerals with a 12-month price target of $4.85. The shares are trading at about $13.70 and $4.62, respectively."
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