Lithium stocks already based on much lower spodumene prices than spot, so sell-off is silly

2nd June 2022

Barry FitzGerald

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Last week’s suggestion that the broad market sell-off in response to rising inflation/interest rates and the Chinese slowdown had been overdone when it came to lithium stocks did not exactly stand the test of time.

Barely a week later the ASX lithium space went into a nosedive, wiping billions from the combined market caps of key players like Pilbara (PLS), which took a one-day hit mid-week of 22%, and Allkem, (AKE) which tumbled 15% the same day.

No lithium stock was spared in the remarkable re-set to lower levels. Anyone one would think that something had gone horribly wrong with the great thematic of our times – global decarbonisation through the electrification of everything, with lithium-ion batteries playing a key role.

That was not the case. The reason for the re-set was an almost lemming-like response to a research note from Goldman Sachs suggesting the bull market in lithium was “over for now” and one from Credit Suisse suggesting prices could peak in coming months.

The Goldman Sachs note in particular was criticised for suggesting a slowdown in demand, albeit with growth continuing at high rates, from 2023. No one else sees that as being the case. If anything, there will be acceleration of demand.

The more important aspect is what happens to supply. Supply is rising but it won’t be quick enough to meet the wall of demand, certainly not in the next five years or so.

There will be catch up at some point which is why there is no disagreement that the long-run price for lithium carbon equivalent is around $US15,000-$US25,000/t. That compares with the current price of about $US57,000/t.

And to be sure, Goldman Sachs was not saying anything particularly wild in its report, it has prices falling to $US16,000/t in 2023.

Valuations of the ASX lithium stocks are based on the long-term price expectations, not the current price. It is a point Macquarie made – it has lithium carbonate at $US48,000t in 2023 - without mentioning Goldman Sachs in a update on Pilbara at its lower price levels.

“We estimate that Pilbara’s share price (it has kept its $4 price target on the $2.28 stock) is now factoring in a flat lithium carbonate price of $US13,000/t.’’

“This is 80% below current spot lithium carbonate prices in China and is equivalent to a flat spodumene (6% lithium oxide) of $US950/t, 85% below the last BMX spot sale (Pilbara’s spot trading platform),” Macquarie said.

In the case of Liontown (LTR), which is putting the finishing touches to a supply deal from its Kathleen Valley project in WA with Tesla, Macquarie reckons the market is factoring in a lithium carbonate price of $US11,000/t.

Liontown was sent 19% lower on Wednesday to $1.14. It moved slightly higher to $1.19 on Thursday, leaving it well short of Macquarie’s $2.50 price target.

Macquarie acknowledged that there are growing signs of a major correction in prices for lithium and the other battery metals of nickel and cobalt after the boom of the last year, mainly due to the China slowdown.

“For cobalt and lithium, this could be temporary once China bounces back, while nickel prices could continue to fall due to increasing Indonesian supply,” Macquarie said.

In Thursday’s market, the lithium stocks were either slightly higher or holding their (lower) levels set in Wednesday’s rout.

So without embarrassment, it can be said that last week’s suggestion that the broad equities market sell-off has been overdone when it comes to the lithium stocks, still holds, particularly after Wednesday’s silliness.