Lithium Supply Responds To Higher Prices

Australia | Jun 08 2021

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Australian producers are well placed to contribute to lithium supply needed to feed unprecedented demand for electric vehicles over the coming decade

-Lithium demand expected to increase 10x-plus into 2030
-Lithium could be undersupplied by 2025
-Pilbara Minerals has the capacity for a 3-fold increase on current production by 2030
-Battery grade lithium carbonate and hydroxide prices in China up 73% and 87%

By Mark Story

Driven by increased demand, especially from China for both carbonate and hydroxide, lithium price tailwinds have emerged into the third quarter of calendar year 2021. Much of the renewed demand from China comes from shifting of gears in the country’s commitment to ensuring 25% of all motor vehicles produced in 2025 are battery-powered electric vehicles (BEV).

Tesla was the largest producer of BEVs in 2020, and is still considered the most well-known name in the BEV market globally. However, new brands and models from China are appearing at an accelerating speed. In addition, many top technology companies in China (including Baidu, Xiaomi, and Huawei,) have announced their plans to participate in this BEV boom.

Given that you can’t make a lithium-ion battery without lithium, it’s critically important for BEV manufactures gain a foothold in supply.

Electric Vehicle batteries are now the biggest lithium consumer, representing 60% of the total market. After a solid first quarter 2021, Citi believes global EV sales will clock another record in 2021 with 85% year-on-year growth predominately driven by European (up 94%) and Chinese (up 78%) markets.

This has simply pushed the price of lithium, and other rare earths also required to manufacture rechargeable lithium-ion batteries for BEVs, on an upward trajectory for some time. This year alone (year-to-date), battery grade lithium carbonate and hydroxide prices in China are already up 73% and 87% respectively.

Wood Mackenzie estimates that over 95% of incremental new lithium demand over this decade will be EV related. However, electric vehicles aside, Citi also expects the coordinated recovery in all key lithium consuming markets, including consumer electronics and industrial applications, will help drive circa 35% lithium consumption growth in 2021, followed by 25% in 2022/23.

Demand to increase ten-fold

Over the longer term, lithium demand is expected to increase over 10x into 2030, against a committed new supply growth of around 2.5x, exposing a potential large supply/demand deficit. As Wilsons notes, this creates conditions for buoyant prices, with upside risk a distinct possibility over the short to medium term.

Looking at existing, probable and possible mining projects, and mapping this against the implied global auto EV production and grid-based batteries timelines, Wilsons suggests the lithium market could be under-supplied by 2025. By the end of the decade, Wilsons believes the under-supply has the potential to be larger than 30% of the market – assuming all known possible mines are brought online.

Wilsons reminds investors that between 2022 and 2024, supply growth will reach its fastest pace at 35%-plus annually, compared to the expected 20% annual average over 2021-2030. Wilsons suspects this may provide a price ceiling until deficits begin to emerge from 2025 onwards, which in the broker’s view dramatically raises the prospects of much higher lithium prices.

But given that lithium prices have surged since mid-2020, Wilsons concludes investors must buy into the dream of surging demand and constrained mine supply, on the expectation that this deficit will not be lessened via innovation.

Ramping up capacity

Meanwhile, in response to this demand, conversion mills in China are chasing these higher prices/margins and are asking for more volumes from the primary feedstock suppliers. As a result, existing producers are ratcheting up to operate their plants at maximum capacity.

While battery-grade lithium is demanding to extract, Australia is expected to be the largest supplier of ‘hard rock’ lithium (50% of global lithium supply), which is more suited to high grade, energy-dense batteries. Then there’s South American lithium, which accounts for 25% of global supply and is produced via brine.

Here in Australia, the four main producers — Galaxy Resources ((GXY)), Mineral Resources ((MIN)), Orocobre ((ORE)), and Pilbara Minerals ((PLS)) — are well placed to contribute to lithium supply growth story and are also operating mines at capacity.

Owning 100% of the largest, independent hard-rock lithium operations in the world, Pilbara Minerals is pure-play lithium. Wilsons notes, the company has the potential for circa 1000ktpa of lithium to be produced by 2030, a three-fold increase on current production.

The broker also notes, Pilbara Minerals has an important role as the largest non-integrated spodumene supplier in the market, and is the most leveraged to spodumene prices in the current upgrade cycle.

Unsurprisingly, strong lithium price movement year-to-date is unearthing latent supply that is expected to keep the overall lithium market balance in surplus zone for some time. Citi believes current price action is required in the short-term to incentivise projects needed to meet 2024-plus demand.

Reflecting the optimistic demand outlook throughout calendar year 2021, and plans by downstream producers to build stock in preparation for expansions in the next six months, prices for both lithium carbonate (US$11,000/t) and lithium hydroxide (US$12,000/t) also remain stable.

While lithium carbonate and lithium hydroxide are expected to remain at these levels for the remainder of the quarter, Macquarie sees upside potential for the carbonate price in third quarter. This is being driven by an increase in smelter activity in China and also due to the “pull effect” of rising hydroxide prices.

Spodumene upgrade cycle

Citi also expects mineral-based feedstock to maintain the lead over brine as a source of lithium units over the medium term. Overall, the broker increases earnings estimates for spodumene-producing names due to higher long-term price assumption (from US$550/t to US$600/t).

As the only pure spodumene producer, Citi believes Pilbara Minerals is most leveraged to the spodumene price upgrade and has increased the target price to $1.30 (from $1.10). However, higher prices, particularly for spodumene, also push the broker’s valuations and target prices higher for IGO Ltd ((IGO)) to $7.80 (from $7.30), Galaxy Resources to $4.15 (from $4.00), Mineral Resources to $51 (from $50), while the Orocobre target price is unchanged at $7.60.

Citi upgrades Pilbara Minerals to Neutral/High Risk from Sell/High Risk. The broker expects the company to benefit the most from high near-term spodumene pricing environment, and increases long term price assumptions (to US$600/t from US$500/t).

Pilbara Minerals is also assessing the potential to process spodumene into a mid-stream lithium product in a joint venture with Calix ((CXL)).

The company is also assessing the re-start options for the recently acquired Ngungaju plant, which could come online earlier than expected. Approval of the POSCO joint venture is also expected in the near-term and will provide Pilbara Minerals with exposure to downstream hydroxide production.

Meanwhile, Galaxy has indicated that it expects third quarter 2021 spodumene prices to be above US$750/t, which JPMorgan notes has doubled in 12 months. The broker has upgraded its price estimate by 10-25% and anticipates prices getting to previous cycle highs of US$1,000/t in 2024.

Galaxy has upgraded calendar year 2021 spodumene production guidance for Mt Cattlin, with the third quarter 2021 spodumene price also higher than Macquarie expected. However, due to increased material movements and a cut to the reserve, there’s a modest downgrades to the broker’s earnings forecasts.

Given its diversified revenue stream upside, Macquarie’s sector preference remains Mineral Resources, while the broker’s pure-play preference order is Pilbara Minerals, Galaxy and Orocobre. In Macquarie’s view, the merger of Galaxy and Orocobre will provide synergies for the miners’ Argentinian operations, including development and operational expertise for Sal de Vida’s development in Argentina, plus a stronger base from which to fund the entity’s other growth projects.

For investors willing to take a long-term view on the lithium thematic, Wilsons thinks the pure-play producers  look the most prospective. However, with optimism elevated around the EV demand outlook, the broker suggests looking for better tactical entry points into Australian lithium producers.

Assuming spot lithium prices hold until 2025, Wilsons suspects Pilbara Minerals and Orocobre/Galaxy earnings could be greater than 10x higher than today. Applying a 15x enterprise value to earnings (EV/EBITDA) multiple, and discounting back to today at 10% annually, the broker finds both Pilbara Minerals and Orocobre/Galaxy share process are offering around 15-20% upside on a 12-month view.

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