Why these fundies are braving the lithium rout
Alex GluyasJul 11, 2024 – 12.44pm
Chris Ellison’s Mineral Resources has been sold off in the lithium rout. Trevor Collensnormal
The price collapse has plunged ASX-listed lithium stocks into a bear market, with major producers including Pilbara Minerals – the Australian sharemarket’s most shorted stock – IGO and Mineral Resources all down more than 20 per cent. Liontown Resources ranked as the worst-performing stock on the ASX 200 in the past financial year.
Ethical Partners’ Australian Share Fund holds IGO in its top five active positions. And Mr Parkin believes the company has been
caught in the broader sell-off despite being one of the lowest-cost producers in the sector.
While Ethical Partners is steering clear of stocks that aren’t producing the battery mineral yet, Mr Parkin noted that IGO’s cash costs in the $US300 range are far below spot prices. That means the producer will continue to make money even if prices fall further.
Green shoots
Janus Henderson has also been slowly adding to the lithium positions in its Global Natural Resources Fund, with its preference being Mineral Resources and Pilbara Minerals.
Senior portfolio manager Darko Kuzmanovic believes the slowdown in electric vehicle demand over the past 12 months is abating, and supply is starting to tighten.
“There appears to be some upside with EV sales increasing in China and prices now appear to be below replacement value, especially non-China greenfield projects,” he said.
And Robert Gregory at Glenmore Fund Management told
The Financial Review last week that
he may add to his existing positions in Mineral Resources and Pilbara Minerals, which he said had a “very high quality” mine in Western Australia.
“The lithium price has fallen a lot, so I understand some people in the market think it’s got another leg to fall, which may be the case,” Mr Gregory said. “But we are at a point where a lot of the high-cost producers aren’t making money – So, you know, it’s an area I’m looking at.”
ANZ told clients on Thursday that the fall in lithium prices looks “overdone”, and predicted carbonate prices could rally as much as 50 per cent from current levels to $US18,000 a tonne by next year.
“There are other factors suggesting lithium deserves a higher price,” said ANZ commodity strategist Soni Kumari. “We expect prices to stabilise in the near term.”
Wilsons Advisory said lithium prices were either at, or near, a floor, given a growing number of producing and prospective mines are already unprofitable. That is expected to result in higher-cost producers mothballing or deferring expansion projects, which will eventually result in supply exiting the market, and tip the physical market into a deficit.
This has already started to happen, with Core Lithium suspending mining at its Finnis operation earlier this year until market conditions improve.
Alarm bells
For that reason, Wilsons is sticking with low-cost producers Arcadium Lithium and Mineral Resources, given they are well-placed to weather the “temporary” softness in lithium prices.
Still, not everyone is convinced.
David Franklyn, portfolio manager of Argonaut’s Natural Resources Fund, remains cautious of the lithium sector and is sticking to small positions in emerging producers Patriot Battery Metals and Latin Resources. He’s steering clear of the bigger producers for now due to concerns about their upcoming results which he expects to be hit by weak spot prices.
Macquarie warned last week that it expects Pilbara Minerals and Arcadium Lithium to miss consensus earnings forecasts for the first half of this year, while costs for IGO and Pilbara will come in higher than expected.
The broker has an “outperform” rating on Arcadium due to its protection from lithium prices, but remains “neutral” on Pilbara Minerals, IGO and Mineral Resources.
Morgan Stanley also remains cautious on lithium stocks, with strategists tipping that the ramp up in new projects, which was fuelled by record prices in 2022, will keep the physical market oversupplied beyond 2030.
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