I think PLS will be line-ball for the future. The others like Altura I don't have much confidence in. Am sure we will look back on these price charts (PLS included) the same way we look back at the iron ore miners. KB himself even made the parallel recently.
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The lithium boom will end, like all the others
The Australian/ Paul Garvey
June 1
Lithium’s moment in the sun is evoking more than a few memories of the iron ore boom — and we all remember how that ended.
Lithium stocks have been on a tear over the past year, culminating on Monday with the $800 million merger of lithium mining duo Galaxy Minerals and General Mining.
The price of lithium has been surging amid forecasts for a continued rise in demand for the lithium-ion batteries used in electric vehicles and home energy storage systems.
Structurally, there are some notable similarities in the lithium market to what we saw in iron ore over the past decade.
Just like iron ore, lithium is abundant. Already there are enough identified resources in place around the world to meet demand for something like 500 years.
Just like iron ore, the lithium market is dominated by a handful of major producers who control almost all the market. In the case of lithium the roles of iron ore majors Rio Tinto, BHP Billiton and Vale are played by Talison, SQM, Albemarle and FMC, who together account for almost 90 per cent of world production.
Just like iron ore, there is an expectation in the lithium space that high-cost production out of China will put a floor under the price in the event the market moves into oversupply.
Hopefully the lithium players have more success on that front than their iron ore counterparts, who were smashed when iron ore prices fell through that theoretical Chinese floor and just kept dropping.
The iron ore and lithium booms both inspired a wave of exploration companies to drop what they were doing and move into the latest hot commodity, often with immediate share price rewards (minnow Latin Resources yesterday enjoyed a 40 per cent surge after announcing it had picked up a big parcel of lithium prospects in Argentina and Peru).
Of course, the iron ore boom ended as all booms do, with the price crashing as supply overwhelmed demand. While the frenzy around lithium is still alive and well, there is a growing view that its tipping point may not be far away.
Macquarie this week became the latest big bank to wade into the lithium space, with an in-depth analysis of the sector from its research team concluding that the boom conditions in lithium will only last for another 18 months or so.
Macquarie initiated coverage on lithium plays Orocobre, Pilbara Minerals (now led, interestingly enough, by a refugee of the iron ore crash in former Atlas Iron managing director Ken Brinsden), Neometals, Galaxy and Altura Mining.
Only Orocobre and Neometals managed to avoid “sell” recommendations, with Macquarie rating the pair as “buys” due to the fact they are already either in or near production today.
Longer term Macquarie is convinced that the big boys of lithium will act just like the big boys of iron ore, and eventually crank up their output in an effort to win greater market share.
The analysts note that the incumbent big lithium producers don’t even need to bother with any pesky expansion of their operations to meet the growing demand.
As it is, they say, the four lithium heavyweights are all producing well below their capacity in an apparent attempt to support prices. History in other commodities, most notably potash, shows that such a situation rarely lasts.
“We firmly believe these increases will start to materialise in order to keep additional new entrants out of the market,” the Macquarie analysts say.
“Our demand projections are well ahead of industry estimates, yet we still struggle to find a supply constraint.”
Citi analysts led by Matthew Schembri are similarly dour about the longer term outlook. They have reiterated their sell call on Orocobre, noting that the current share price reflects a perpetual lithium price of $US9300 a tonne over Orocobre’s 40-year mine life compared to Citi’s long-term forecast of $US6000 a tonne.
When comparing the iron ore and lithium booms, it is still worth remembering that iron ore’s incredible decade did produce one big, enduring winner in Andrew Forrest’s Fortescue Metals Group.
Fortescue is now entrenched alongside Rio, BHP and Vale in the international iron ore pecking order, and the key for investors playing the lithium boom will be finding the lithium up-and-comer with the quality and longevity to continue successfully well after the market turns for the worse.
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