Canaccord Genuity’s Reg Spencer says a rebound in lithium prices...

Canaccord Genuity’s Reg Spencer says a rebound in lithium prices is more than a dead cat bounceThe firm expects lithium prices to come in at between US$1250-1500/t over the rest of 2024Producer Pilbara Minerals and earlier stage plays Latin and Winsome Resources among CG’s stocks to watch

Canaccord Genuity lithium expert Reg Spencer says the recovery in lithium prices is more than a dead cat bounce with the corporate advisory firm and brokerage is “constructive” on the battery metal over the next 18 months.

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With chemical prices tanking in China last year, falling from over US$80,000/t to ~US$13,000/t, the spodumene concentrate produced by Aussie miners took a dive as well, with benchmark prices sliding from over US$8000/t to as low as US$850/t in January this year.

But they’ve since recovered to US$1185/t, with Fastmarkets prices averaging US$1224/t so far in May.

Is the rebound bound to falter, or are we coming into a new stage of the cycle for the electric vehicle battery ingredient?

“We are not of the view that this is a dead cat bounce,” Spencer told * this week.

“Our supply and demand modeling suggests a market that’s in balance in calendar ’24 and calendar ’25. We model a very small surplus.”

Canaccord’s models include a provision for some low grade, high cost Chinese lepidolite and Zimbabwean hard rock projects to ramp up production.

Those mines were the Schrodinger’s Cats of the lithium market, seemingly simultaneously alive and dead.

But Spencer said the outcome which had these mines performing to spec was already provided for in CG’s model.

“If pricing stays here, there is the possibility that this supply remains offline or at least the supply that has been closed remains offline, as is the case with some Chinese lepidolite operations,” Spencer said.

“But then secondly, some of this African spodumene supply it’s not clear yet as to how those assets are ramping up and performing.

“Embedded in our supply demand modeling, we assume that those operations ramp up to full capacity during the course of this year.

“There’s never been a lithium asset outside of Sigma (the Grota do Cirilo mine in Brazil) that has ever ramped up to nameplate without any troubles or commissioning issues.

“So that market balance that I referred to for ’24 and ’25 is a fine balance. If there is any disappointment in any major supply source through the course in the year or now, we could very much find ourselves back to market deficit conditions, which would then support a higher spodumene price as we move into the second half and in 2025.”

30% revival

Spencer noted the closure and curbing of operating lithium mines showed the price had fallen below incentive pricing and levels needed to keep marginal producers operating earlier this year.

That suggests the ~30% revival in lithium prices was a reaction to market fundamentals, rather than speculation on hitting the bottom of the cycle.

“We also saw other classic bottom of the cycle signals when you saw some high cost operations like Core Lithium (ASX:CXO) move on to care and maintenance and new projects were deferred,” Spencer said.

“So we think the setup is not that bad. Certainly not as bad as what some of the equity valuations might imply.”

CG’s latest pricing forecasts anticipate SC6 trading between US$1250-1500/t over the rest of the year, implying chemicals pricing of between US$15,000-20,000/t, Spencer said.

“I suppose US$1250 is a long way away from US$6,000, where it peaked in late 2022. But it’s important to remember that those prices were never sustainable in the first place,” he noted.

“And if you have a look at historical prices for spodumene concentrate, the price was US$400-600/t for a very, very long time.

“So in the context of history US$1500/t or US$1250/t is actually not too bad and any decent producer should be able to make decent margins at current prices.”

Limited read through

We’re a few weeks removed from April’s March quarter reporting season, the last major market moving event for most ASX lithium stocks.

Spencer said there was limited read through from the reports for the year ahead and current quarter given prices bottomed out in January and February before sharply recovering.

China’s Lunar New Year celebrations, a virtual shutdown period for the world’s second largest economy and centre of the EV universe, make it hard to assess demand trends.

“I think the June quarter will be far more instructive. You’re probably going to see better financial performance from the lithium producers,” Spencer said.

“And now that we’re past Chinese New Year holidays and EV sales seem to be tracking reasonably well it might be a bit more of a guide as to what we might expect through the back half of the year.”

Canaccord’s hot picks

It might be the most shorted company in the ASX 200, but Spencer says Pilbara Minerals (ASXLS) remains the standout lithium producer in the Aussie market.

“They’re the largest pure play, the margins are solid, they’ve got organic growth over the next two years as they push forward with their P1000 project to get to a million tonnes per annum spodumene and they’re well funded,” Spencer said.

Pilbara is diversifying away from just mining and shipping spodumene to Asia, with a small stake in a POSCO lithium hydroxide plant in South Korea and a midstream demo project onsite at the Pilgangoora mine near Port Hedland in partnership with Calix (ASX:CXL).

A feasibility study will also be completed early next year on a downstream refinery which, if successful, would be co-owned by PLS and Chinese lithium giant Ganfeng.

Higher pricing would be PLS’ friend in more way than one.

“That company has a 22% short position on it at the moment, so if we do see continued strengthening in pricing, there is the possibility of a bit of a short squeeze which would be obviously beneficial for the stock,” Spencer noted.

“So on a fundamental basis, Pilbara is still our preferred large cap exposure in the sector at this point.”