Lithium Coverage Broadens, Outlook Mixed

Commodities | Jun 20 2017

Brokers have recently broadened coverage of the lithium sector and modified price assumptions as demand for the material continues unabated. Yet the road from production to end-use is not straightforward.

-Australia's spodumene suppliers likely to fill near-term deficit in the market
-Pressure on lithium pricing suspected later in 2017
-Production problems and technical issues mean supply may not be consistent


By Eva Brocklehurst

Lithium is mineral on everyone's lips these days, along with graphite and cobalt. Brokers have recently pushed through modified price assumptions and industry outlooks, as demand for the materials, which are critical to the revolution in electric vehicles and big storage batteries, continues unchecked. However, producing the material and converting it to a form suitable for end use is not straightforward.

Macquarie upgrades its expectations for lithium and cobalt prices in the longer term and delves into the implications for several Australian stocks. While maintaining its estimates and Neutral rating for key lithium producer, Orocobre ((ORE)), Macquarie upgrades Pilbara Minerals ((PLS)) and Galaxy Resources ((GXY)) to Outperform and Altura Mining ((AJM)) to Neutral.

The broker does not expect Pilbara's Pilgangoora concentrate project to be in full production until FY19, although earnings are expected to start flowing in FY18. Earnings estimates for Galaxy are unchanged because of the contract nature of its sales. Galaxy recently recommissioned its Mt Cattlin mine in Western Australia, which is expected to produce around 160,000t of spodumene (hard rock) in 2017/18.

Citi assumes coverage of Pilbara Minerals with a Buy/High Risk recommendation and Galaxy Resources with Neutral/High Risk. By 2023, the broker estimates each will contribute around 11% of global supply of lithium. Macquarie prefers hard rock projects over brine developments and in this analysis increases the discount applied to Galaxy's Sal De Vida project, which results in a -8% reduction to the target price.

The broker also reverts to an equity share valuation for Neometals ((NMT)), given the failed sale of its 13.8% stake in the Mt Marion lithium project, 43.1% owned by Mineral Resources ((MIN)). The broker maintains its Outperform recommendations for graphite producers Syrah Resources ((SYR)) and Magnis Resources ((MNS)).

UBS also recently initiated coverage on Galaxy, Orocobre and Syrah Resources and believes Syrah offers a unique proposition in being both the largest and most advanced new entrant to the flake graphite market. The broker notes Orocobre's execution at Olaroz has not been without incident and future expansions are unlikely to be without delays.

Despite the operating risks in Orocobre's lithium brine processing, UBS highlights the stock is one of the few new entrants with a producing asset, which could mean it benefits from an interim shortfall in supply more readily than earlier-stage peers.

In the meantime, with a shortfall of hard rock supply, Galaxy should also benefit from spodumene concentrate prices. Nevertheless, with a number of new competitor projects under construction the broker envisages the heightened lithium concentrate price is likely to be short lived.

Price Outlook

The basis for Macquarie's upgrade to lithium and cobalt price forecasts is a belief that increased electric vehicle production in China, based on the recently-announced credit system, will continue to drive demand in the medium term. The broker is more cautious about policy translating immediately to Chinese consumer uptake but, in conjunction with a slower ramping up of new projects, envisages a supply deficit extending into the early 2020s.

Australia's spodumene sector is the most likely source to fill the deficit, in the broker's opinion. Chilean brine production is trending sideways and there is little in the way of expansion in the near term.

Meanwhile, ramping up of new supply at Australia's Mt Marion and Mt Cattlin have been slower than anticipated, as technical difficulties at the mines and the issues surrounding integrating new concentrate feed into existing conversion capacity continue. These are expected to be overcome in time.

Macquarie believes lithium pricing has the potential, when fed through Chinese conversion facilities, to push the top end of the cost curve higher. As Australian lithium output is almost doubling this year the broker expects pressure on pricing into the second half and estimates December quarter prices at around US$8000/t versus the US$10,900/t witnessed in the current quarter.

Cobalt continues to surprise to the upside in terms of pricing and the broker raises its forecasts for this year by 20% to US$25/lb and 2018 forecasts by 11% to US$20/lb. The broker also raises its long-term price by 32% to reflect the lack of high-quality projects that are needed to balance the market.

Citi describes the lithium market as a wrestle between strong demand growth and a building wave of supply from existing and new producers. Spodumene projects have lower capital expenditure and shorter lead time to production and are expected to capture an increasing share of the market in the near term. But longer term these projects are at risk from the lower-cost brine projects.

The broker expects increased supply to cool lithium prices towards a long-term rate of US$7500/t for lithium carbonate and US$550/t for spodumene. The emergence of DSO (direct shipping ore), the broker suspects, is opportunistic, as at current prices it is economically viable to ship unprocessed ore to China from Australia. The broker believes this is not a structural market threat, as the economics do not work at its long-term price forecasts over a five-year period.

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