Australia | Feb 24 2020
Amid a lack of certainty about when lithium prices will improve Australian spodumene producers are continuing to curtail production.
-Coronavirus impact more significant for Galaxy Resources
-Prices unlikely to improve greatly until the end of 2020
-Supply chain is moving in the right direction, albeit slowly
By Eva Brocklehurst
Lithium is in a holding pattern. Australian spodumene producers have signalled further curtailments are likely in 2020 as they await improved pricing. 2019 was a tough year, as inventory built up and lithium prices slumped around -50%.
As financial results come to hand it remains evident these companies are being hampered by softness in the seaborne spodumene market. UBS points out Galaxy Resources ((GXY)) had to cut back its business by -40% for 2020. Mount Cattlin (Western Australia) is operating at around half nameplate capacity and the company currently expects to produce 90-105,000t of spodumene concentrate.
Galaxy Resources held 65,000t of spodumene in inventory as of December 31, 2019 and intends to draw this down over 2020.
Yet, coronavirus (Galaxy Resources is 100% exposed to Chinese processors) appears to be having some impact on customer businesses and, as a result, the company will not provide a sales forecast until there is more clarity in the market.
Only 25% of sales to China typically make up Orocobre's ((ORE)) order book which indicates a more limited impact versus spodumene-producing peers, assuming, Credit Suisse points out, the issue is short lived. In the current climate the broker finds it difficult to assess the timing for a re-rating and suspects this will be based on evidence of underlying demand growth rather than improved pricing.
For Pilbara Minerals ((PLS)), Macquarie expects some recovery in sales over the second half and acknowledges the company is improving recoveries following optimisation works in September. The company is expected to maintain campaign operations over the second half. This is important so the cash bleed can be minimised while awaiting the turnaround in market conditions.
Macquarie expects an improvement in lithium prices towards the end of 2020, although suspects the risk for the near-term is to the downside. Galaxy Resources has also noted China may possibly extend new electric vehicles subsidies into 2021 but, while this may be encouraging, the broker points out there is no official announcement.
Orocobre anticipates some normalisation of demand and supply in lithium markets although, again, Macquarie doubts this could be meaningful and it may be some time before tightness emerges to drive a recovery.
Moreover, the company's third quarter sales price guidance of US$5000/t, down -8% from the December quarter, would maintains a trend for over a year of falling price realisation, Credit Suisse points out.
Downside risk to prices but the broker assesses these are now approaching a floor. Assessing first half operating expenditure of US$4787/t against the price forecast for the March quarter means operating margins have compressed to around 4%, and the broker considers this neither sustainable nor sufficient to attract the capital required to fund future projects.
Meanwhile, Orocobre intends to acquire the remainder of Advantage Lithium (65%) by way of scrip. An additional 15.1m shares are expected to be issued. The key project is Cauchari, which lies within the same basin as Olaroz (Argentina). The deal still requires the approval of Canadian courts.
The company anticipates the integration of both tenements will deliver optimal management of the basin and enhance long-term production capacity. Management has emphasised this acquisition does not reflect concerns about brine quality and flow rates in Olaroz but remains part of future growth plans.
Credit Suisse notes, while this adds another leg to the growth strategy, the projects will not be generating value for some time.
Galaxy Resources is still looking to sell down a minority stake in the Sal de Vida project (Argentina) and Citi expects more clarity on the execution plan towards the middle of the year. First production is targeted for the first half of 2022. Yet, the broker suggests it will take another 6-12 months before inventory is normalised and prices start to reflect be positive impact.
UBS highlights some positives on the horizon, as the supply chain is moving and some drawing down of inventory is occurring. Global battery manufacturing investment and the roll-out of electric vehicles are increasing. Moreover, with governments moving to ban the future sale of new petrol, diesel and hybrid cars (such as Britain from 2035) the company asserts the current lithium price is unsustainable.
While several brokers are yet to review the latest results from lithium producers, FNArena's database has a target of $1.09 for Galaxy Resources, which signals 4.8% upside to the last share price. There are two Buy ratings, three Hold and one Sell (Macquarie).
For Orocobre there are three Buy ratings, two Hold and two Sell. The consensus target is $3.33, signalling -0.6% downside to the last share price. Pilbara Minerals has one Buy (Credit Suisse, yet to update on the results), one Hold (Citi, yet to update) and two Sell. The consensus target is $0.34, suggesting 17.2% upside to the last share price.
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