Lithium stocks took a tumble last week following lithium research and news items which have unnerved some participants in the market. Today highlights that markets can over-react. Peter Chilton looks at the fundamentals of supply and demand and comes to the conclusion that the market for lithium will be buoyant for some time to come!

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Correction in lithium prices?

There are three story lines which upset the market for lithium stocks:

1. Goldman Sachs expects to see a “sharp correction” in the lithium price over the next two years; the bull market is “over for now”.

2. Investors interpreted the changes to lithium pricing formulas in Argentina as a price cap.

3. A Chinese company is buying lithium in Africa, which could be interpreted as leading to a big supply increase.

Under the Radar Report Comment

The key is the actual lithium price you are talking about. True, the tight lithium market has driven some prices for spot or small parcels of material to unsustainable levels. But the majority of sales volumes from lithium producers (hard rock or brine) are at much lower, more sustainable prices.

There may be a correction from the lofty levels of a small segment of the market, but the majority of sales are being conducted at prices needed to provide supply and incentivise new capacity. Current supply is desperately lagging.

As we reported last month in Issues 496/497, that month Benchmark Mineral Intelligence, the foremost trackers of battery metals, said that US$42bn of new capital investment is needed if the lithium industry is to meet 2030 demand, a four-fold increase from current levels.

Benchmark estimates that 600k tonnes of lithium (lithium carbonate equivalent or LCE) will be produced in 2022 and the capital investment will be needed to lift supply to 2.4m tonnes LCE.

We can’t be sure exactly what will happen to lithium prices during this period, but given the massive investment involved, we expect prices will remain elevated. Further lithium demand growth does not end in 2030. It continues to 2040 and 2050 as electric vehicles progressively replace ICE or internal combustion vehicles.

The huge growth in expected demand is continuing to drive exploration and new projects, with increased activity extending beyond Australia and South America into Africa and North America. Lithium newsflow is prolific! It feels like a bull market!

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Changes to lithium pricing formulas in Argentina?

There was another news item which implied that Argentina was constraining prices. Why would they do that? Argentina needs all the revenue it can get. We believe this move was linked to contract and transfer pricing to ensure tax and royalty revenue was not leaking out of the country.

We do not believe there will be a floor or ceiling price in Argentina.

China buying lithium mines in Africa?

Another news item concerned Chinese automaker BYD planning to buy six ‘lithium mines’ in Africa which would produce 1m tonnes LCE per year. But what are they really buying? Most likely they are undeveloped resources. What about the resource grades, mining method, mineral processing route and how long before first production? Is 1m tonnes per year realistic?

Auto makers going upstream to buy lithium mines to guarantee supply is nothing new. Benchmark have said that western automakers are looking to acquire their own mines in their supply chains to provide certainty of supply.

The Chinese have been buying overseas mineral assets for years.

Investment conclusion

While we still like the producers Pilbara Minerals (PLS) and Allkem (AKE), the product of the merger between Orocobre and Galaxy, we cover five other lithium developers at varying stages. A number are on the cusp of production and the risks are relatively low but we believe that the upside is considerable as valuations move to reflect greater certainty of cash flow. One that stands out is Argosy Minerals (AGY) which we recently covered (Issue x, 19 May 2022). Its Rincon lithium brine project in Argentina is entering into production in a matter of months. It’s exciting times in lithium (still)!

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