Are lithium stocks tipped to lose their charm in 2018 and beyond?


With recent speculation on the global lithium prices under risk at the back of supply now expected to meet and then outstrip the demand scenario, ASX listed lithium stocks seem to bear the brunt of the macro picture. The situation has worsened with the news that sector’s biggest producers, Chile-based Sociedad Quimica y Minera de Chile (SQM) which has reached a settlement with Chile’s development agency with regards to production enhancement, is now expected to increase the production level from 63,000 tonnes of lithium carbonate in 2019 to 163,000 tonnes by 2024. SQM stock which was hammered by the supply issues for the mineral has, in fact been, bought by key broking and investment firms post the update.

On the other hand, the stocks that otherwise were tipped for momentum owing to growth in electric vehicles market, are seen to come under pressure as investors are making profits post the strong gains that have been witnessed for many lithium producers in 2017, and in anticipation of weakening commodity sentiments. Nonetheless, it is important to note that the lithium miners may also be setting in place some form of strategy with levers to manage production costs and supply scenario. Further, the terms for offtake contracts might play an immense role in deciding the future approach given the changing lithium landscape. It is also key to note that market experts are tipping that SQM’s additional volume increases will not impact the market until 2020, while there is a possibility that market starts balancing by late 2018.

As per few market experts, 2025 lithium price forecast has been reduced to $8,500 per metric ton from $10,000 per metric ton while near-term price forecast has been increased to $11,000 per metric ton through 2020 at the back greenfield expansions supporting undersupply and brownfield expansions taking 3 to 5 years for ramping up. There is a possibility that low-cost spodumene producers in Australia might be in focus over the high-cost operations in Europe and China given SQM’s latest update, and the long-term scenario might also be timed with SQM’s additional production coming online post 2022.

Meanwhile, Galaxy Resources Limited (ASX: GXY) was seen to plunge by 7.4% on January 19, 2018 while Pilbara Minerals Ltd (ASX: PLS) slipped by 1.5% along with Mineral Resources Limited (ASX: MIN) that was knocked down by 6.6%. Altura Mining Ltd (ASX: AJM) was seen to plunge by 8%.

In fact, this movement comes along with the recent announcements from Orocobre Limited (ORE down 9.6% on January 19, 2018) on significant production enhancement, fund raising and CAU15 drilling results. ORE had planned to accelerate a larger phase 2 expansion of the Olaroz lithium facility in Argentina, by adding 25,000 tonnes per annum of lithium carbonate production capacity, which will take Olaroz’s total production capacity to 42,500 tonnes per annum. The commissioning of the expansion is expected in the December half of CY2019. The phase 2 expansion capital expenditure will be funded through a $361 million capital raising. The company has raised $34 million through the Institutional Entitlement Offer and expects to raise funds of approximately $45 million through Retail Entitlement Offer. Rest $282 million will be raised through strategic placement to Toyota Tsusho Corporation. On the other hand, ORE in an update on the brine sampling of diamond drill hole CAU15 in the Cauchari JV property, confirmed that the NW Sector contains relatively high drainable porosity and permeability south from CAU07 through CAU16 to CAU15.

Given the end-use market scenario, we still believe that the key lithium stocks sitting on better mine performances with secured off-take agreements have the potential. Some might even witness an entry opportunity given the share price dip and near-term prospects as supply-demand scenario might not change immediately. Thus, it is worth to watch this space closely for any further developments while we maintain our hold position in GXY, PLS and ORE at the moment (as at January 19, 2018), with the result reporting season also around the corner.


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