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Supply Response In Lithium Heats Up

Commodities | May 26 2016

This story features MINERAL RESOURCES LIMITED, and other companies. For more info SHARE ANALYSIS: MIN

-Key is identifying quality projects
-Two new Oz sources in 18 months
-Surplus by 2019?


By Eva Brocklehurst

Major producers of lithium are ratcheting up production from brine-based operations in South America, as growth in lithium-ion battery usage, primarily in the electric vehicle and grid storage markets, excites interest in the commodity.

FMC Corp has become the third major producer to flag an increase, following Albermarle and SQM, and Deutsche Bank observes the company intends to increase output of battery-grade lithium hydroxide to at least 30,000 tonnes per annum by 2019, from 10,000tpa currently. The broker has recently highlighted FMC's strong downstream business and the quality of its Argentine project. The company's supply target represents an additional 13% to the broker's forecasts.

The news supports Deutsche Bank's contention that the key for investors in the lithium space is identifying the companies which control the high quality projects and have access to capital and strong operating margins, with potential to grow volumes. On this theme, Deutsche Bank highlights Albermarle, Orocobre ((ORE)) and Mineral Resources ((MIN)) as top picks for upstream lithium exposure.

Canaccord Genuity forecasts the market to grow 81% by 2020 and 259% by 2025. The broker expects the demand for these batteries in the electric car market will be the key driver of demand for the next decade, accounting for 38% of all demand by 2025, versus just 6% in 2015.

A supply response is expected, but the longer-term demand profile suggests prices will go higher. The broker estimates global supply at 176,000 tonnes of lithium carbonate equivalent (LCE) in 2015, with production dominated by six operations and four major companies including Albermarle, SQM, FMC Corp and Sichuan Tianqi.

In determining the supply side response, the broker analyses over 60 projects for the product, with 19 at an advanced stage and offering potential for additional production in the next 5-6 years. Included in the 19, the broker expects only two new sources globally within the next 18 months – Mt Cattlin and Mt Marion – both Australian projects.

Mt Cattlin joint venture partners include Galaxy Resources ((GXY)) and General Mining Corp ((GMM)) while Mt Marion partners include Ganfeng Lithium, Mineral Resources and Neometals ((NMT)).

To meet base case forecasts the broker estimates an additional 312,000 tonnes per annum in new production will be required by 2025. Based on its modelling, Canaccord Genuity forecasts lithium carbonate prices to rise to US$10,500/t in 2025, from US$6,000/t in 2015.

After crunching these numbers the broker amends its target price for Mt Cattlin partners Galaxy Resources, up to 60c from 50c, and General Mining, down to 85c from 95c. Both stocks are rated Speculative Buy.

Beyond the next two years the broker expects additional supply from new hard rock projects such as Pilgangoora, involving Altura Mining ((AJM)) and Pilbara Minerals ((PLS)), as well as brownfield expansions from brine operations, including Orocobre's Olaroz stage 2 in Argentina.

Based on the likelihood of these new projects being brought into production and base case demand assumptions the broker forecasts the lithium market to be in surplus in 2018 and 2019 before returning to deficit in 2023.

Citi has upgraded is lithium carbonate price forecasts by 17% for 2016 and 9.0% for 2017 to US$7,625/t and US$7,375/t respectively. This broker remains cautious about 2017 as new production enters the market but does not, as yet, anticipate a significant correction in the price.

Deutsche Bank also concludes from the rapid uptake of electric vehicles in China that demand for LCE outstripped supply in 2015, leading to a deficit, particularly in China. The broker expects global demand will grow at a compound 18% over the next three years, although supply is expected to respond. If FMC's planned production increases come to fruition the market could be in surplus by 2019, the broker contends.

See also, The Power Of Lithium on May 16, 2016.

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