Canaccord Genuity\u2019s Reg Spencer says a rebound in lithium prices is more than a dead cat bounce
\nThe firm expects lithium prices to come in at between US$1250-1500\/t over the rest of 2024
\nProducer Pilbara Minerals and earlier stage plays Latin and Winsome Resources among CG\u2019s stocks to watch<\/p>\n
Canaccord Genuity lithium expert Reg Spencer says the recovery in lithium prices is more than a dead cat bounce with the corporate advisory firm and brokerage is \u201cconstructive\u201d on the battery metal over the next 18 months.<\/p>\n
With chemical prices tanking in China last year, falling from over US$80,000\/t to ~US$13,000\/t, the spodumene concentrate produced by Aussie miners took a dive as well, with benchmark prices sliding from over US$8000\/t to as low as US$850\/t in January this year.<\/p>\n
But they\u2019ve since recovered to US$1185\/t, with Fastmarkets prices averaging US$1224\/t so far in May.<\/p>\n
Is the rebound bound to falter, or are we coming into a new stage of the cycle for the electric vehicle battery ingredient?<\/p>\n
\u201cWe are not of the view that this is a dead cat bounce,\u201d Spencer told Stockhead this week.<\/p>\n
\u201cOur supply and demand modeling suggests a market that\u2019s in balance in calendar \u201924 and calendar \u201925. We model a very small surplus.\u201d<\/p>\n
Canaccord\u2019s models include a provision for some low grade, high cost Chinese lepidolite and Zimbabwean hard rock projects to ramp up production.<\/p>\n
Those mines were the Schrodinger\u2019s Cats of the lithium market, seemingly simultaneously alive and dead.<\/p>\n
But Spencer said the outcome which had these mines performing to spec was already provided for in CG\u2019s model.<\/p>\n
\u201cIf pricing stays here, there is the possibility that this supply remains offline or at least the supply that has been closed remains offline, as is the case with some Chinese lepidolite operations,\u201d Spencer said.<\/p>\n
\u201cBut then secondly, some of this African spodumene supply it\u2019s not clear yet as to how those assets are ramping up and performing.<\/p>\n
\u201cEmbedded in our supply demand modeling, we assume that those operations ramp up to full capacity during the course of this year.<\/p>\n
\u201cThere\u2019s never been a lithium asset outside of Sigma (the Grota do Cirilo mine in Brazil) that has ever ramped up to nameplate without any troubles or commissioning issues.<\/p>\n
\u201cSo that market balance that I referred to for \u201924 and \u201925 is a fine balance. If there is any disappointment in any major supply source through the course in the year or now, we could very much find ourselves back to market deficit conditions, which would then support a higher spodumene price as we move into the second half and in 2025.\u201d
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Spencer noted the closure and curbing of operating lithium mines showed the price had fallen below incentive pricing and levels needed to keep marginal producers operating earlier this year.<\/p>\n
That suggests the ~30% revival in lithium prices was a reaction to market fundamentals, rather than speculation on hitting the bottom of the cycle.<\/p>\n
\u201cWe also saw other classic bottom of the cycle signals when you saw some high cost operations like Core Lithium (ASX:CXO)<\/strong><\/a> move on to care and maintenance and new projects were deferred,\u201d Spencer said.<\/p>\n \u201cSo we think the setup is not that bad. Certainly not as bad as what some of the equity valuations might imply.\u201d<\/p>\n CG\u2019s latest pricing forecasts anticipate SC6 trading between US$1250-1500\/t over the rest of the year, implying chemicals pricing of between US$15,000-20,000\/t, Spencer said.<\/p>\n \u201cI suppose US$1250 is a long way away from US$6,000, where it peaked in late 2022. But it\u2019s important to remember that those prices were never sustainable in the first place,\u201d he noted.<\/p>\n \u201cAnd if you have a look at historical prices for spodumene concentrate, the price was US$400-600\/t for a very, very long time.<\/p>\n \u201cSo in the context of history US$1500\/t or US$1250\/t is actually not too bad and any decent producer should be able to make decent margins at current prices.\u201d We\u2019re a few weeks removed from April\u2019s March quarter reporting season, the last major market moving event for most ASX lithium stocks.<\/p>\n Spencer said there was limited read through from the reports for the year ahead and current quarter given prices bottomed out in January and February before sharply recovering.<\/p>\n China\u2019s Lunar New Year celebrations, a virtual shutdown period for the world\u2019s second largest economy and centre of the EV universe, make it hard to assess demand trends.<\/p>\n \u201cI think the June quarter will be far more instructive. You\u2019re probably going to see better financial performance from the lithium producers,\u201d Spencer said.<\/p>\n \u201cAnd now that we\u2019re past Chinese New Year holidays and EV sales seem to be tracking reasonably well it might be a bit more of a guide as to what we might expect through the back half of the year.\u201d It might be the most shorted company in the ASX 200, but Spencer says Pilbara Minerals (ASX:PLS)<\/strong><\/a> remains the standout lithium producer in the Aussie market.<\/p>\n \u201cThey\u2019re the largest pure play, the margins are solid, they\u2019ve got organic growth over the next two years as they push forward with their P1000 project to get to a million tonnes per annum spodumene and they\u2019re well funded,\u201d Spencer said.<\/p>\n Pilbara is diversifying away from just mining and shipping spodumene to Asia, with a small stake in a POSCO lithium hydroxide plant in South Korea and a midstream demo project onsite at the Pilgangoora mine near Port Hedland\u00a0 in partnership with Calix (ASX:CXL).<\/strong><\/a><\/p>\n A feasibility study will also be completed early next year on a downstream refinery which, if successful, would be co-owned by PLS and Chinese lithium giant Ganfeng.<\/p>\n Higher pricing would be PLS\u2019 friend in more way than one.<\/p>\n \u201cThat company has a 22% short position on it at the moment, so if we do see continued strengthening in pricing, there is the possibility of a bit of a short squeeze which would be obviously beneficial for the stock,\u201d Spencer noted.<\/p>\n \u201cSo on a fundamental basis, Pilbara is still our preferred large cap exposure in the sector at this point.\u201d We\u2019re not at incentive pricing yet for larger new lithium projects.<\/p>\n Heading down the market to developers and CG likes those explorers who have pathways to production that could avoid the billion-dollar-plus capex of mega projects like Liontown Resources\u2019 (ASX:LTR)<\/strong><\/a> Kathleen Valley in WA or Sayona Mining\u2019s (ASX:SYA)<\/strong><\/a> Moblan in Quebec.<\/p>\n High up on the list is Latin Resources (ASX:LRS)<\/strong><\/a>, the next cab off the rank in Brazil\u2019s Minas Gerais region after the success of TSX listed Sigma Lithium\u2019s Grota do Cirilo.<\/p>\n Its Salinas project, anchored by the Colina deposit, contains 70.3Mt at 1.27% Li2O.<\/p>\n \u201cSigma has shown what is possible in Brazil, their stage one project cost well under US$200 million to build, it does 250,000tpa of spodumene concentrate, and cash costs in spite of their high strip ratio are US$450-500\/t,\u201d Spencer said.<\/p>\n \u201cSo they\u2019re still able to operate even in a low pricing environment and they\u2019ve shown that the capital intensity for projects like that are very, very low.<\/p>\n \u201cSo with Latin located literally just up the road we think that they should be able to follow in Sigma\u2019s footsteps.<\/p>\n \u201cLatin will have a resource upgrade out in the next month or so, that will feed into a DFS, noting that the resource is much larger than the one on which the PEA (preliminary economic assessment) that they completed last year was based, we think that could support a much larger project or a much higher production run rate.\u201d<\/p>\n The PEA projected it would cost US$253m ($382m) to develop the first phase at Salinas, with another US$55m ($83m) required to ramp up to full scale production of 405,000tpa of 5.5% Li2O spod and 123,000tpa of lower grade 3% Li2O spod at operating all in sustaining costs of US$536\/t.<\/p>\n Also interesting CG is James Bay play Winsome Resources (ASX:WR1)<\/strong><\/a>, which last month announced a plan to repurpose a mothballed diamond processing plant in a deal that could cut its capital requirements at the Adina project in Quebec.<\/p>\n \u201cThey\u2019ve defined a resource in Quebec on their Adina project of 70 million times. There are certainly opportunities for that to continue to get larger as they undertake more drilling,\u201d Spencer said.<\/p>\n \u201cBut what is really interesting about that stock is that they recently executed an option over the Renard diamond mine, which is located about 60km south of Adina.<\/p>\n \u201cA diamond plant will typically include a dense media separation circuit, as does Renard, and DMS is a well known processing route for spodumene concentrates.<\/p>\n \u201cSo that option allows Winsome to acquire that mine and all the infrastructure for $52 million in cash or stock.<\/p>\n \u201cThey have to build a road to site and there will be some modifications required to that mine, all up they could be developing a project for hundreds of millions of dollars less than what a greenfield site would otherwise cost.\u201d<\/p>\n \u00a0<\/p>\n <\/span>\u00a0<\/p>\n At Stockhead we tell it like it is. While Latin Resources was a Stockhead advertiser at the time of writing, it did not sponsor this article.<\/em><\/p>\n <\/span><\/p>\n The post A Live Cat Bounce: Canaccord\u2019s Reg Spencer is positive on lithium\u2019s revival<\/a> appeared first on Stockhead<\/a>.<\/p>","protected":false},"excerpt":{"rendered":"
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