We note a recent sell off among several ASX-listed lithium companies on fears of a dramatic oversupply from Direct Ship Lithium Ore ("DSO"). In our view, suggestions of large volumes of lithium from DSO sources are dramatically overstated. We see significant economic and technical reasons why it is unlikely for this material to ultimately present as a meaningful or sustainable supply. We reiterate conviction BUY calls for GXY.ASX and ORE.ASX, and maintain our SPEC BUY rating for AJM.ASX.
DSO economics aren't as favourable as they seem: We estimate the production costs for lithium carbonate from DSO sources to be ~US$14,300/t LCE (dependent on recovery to concentrate), affording less attractive margins to converter plants based on current pricing of US$10-16,000/t). On this basis we see little incentive for converters to resort to DSO sourced concentrate as an alternative feedstock despite its apparent availability.
Availability of suitable processing facilities and adequate mineral converter plant capacity a major question mark: We note the lack of suitable fit for purpose concentration facilities in China, leading to doubts over the ability for re-purposed iron ore (Fe contamination?) or copper concentrators to deliver a product which meets minimum specifications (grade, impurities). Furthermore, we expect a considerable bottleneck in a current lack of adequate converter capacity to handle large volumes of concentrate produced from DSO ore (current capacity of 110-130kt LCE). Other key considerations include disposal/storage of large volumes of waste material produced form the concentration process.
Product qualification, product specification and suitability in end market applications: Conversion facilities are required to go through an extensive accreditation process (6-24 months) before product can be used as a battery feedstock material. Given this lead time, it's likely that any material produced from DSO sources would only be initially suitable for lower spec (and lower priced) applications.
Sell off overdone - reiterating BUY/SPEC BUY ratings for CGAu lithium coverage:
Altura Mining (AJM:ASX | SPEC BUY | Target: $0.25): current price represents 92% upside to our target. Catalysts include finalisation of project financing for Pilgangoora in Jun/Jul'17.
Galaxy Resources (GXY:ASX | BUY | Target: $3.35): Reiterating conviction call with target offering ~97% upside. Catalyst rich 2H expected including James Bay drilling/resource update (Jul/Aug'17), 2018 Mt Cattlin offtake pricing (Q3/Q4'17), Sal de Vida financing (Q4'17), James Bay feasibility (Q4'17).
Orocobre (ORE:ASX | BUY | Target: $5.80): 62% upside to target, with improving production outlook at Olaroz, and potential share price catalysts in finalisation of Stage 2 financing and confirmation of 10ktpa lithium Hydroxide project.
GXY Price at posting:
$1.62 Sentiment: Buy Disclosure: Held
