Lithium stocks already based on much lower spodumene prices than spot, so sell-off is silly

2nd June 2022
Barry FitzGerald

Last week’s suggestion that the broad market sell-off in response to rising inflation/interest rates and the Chinese slowdown had been overdone when it came to lithium stocks did not exactly stand the test of time.

Barely a week later the ASX lithium space went into a nosedive, wiping billions from the combined market caps of key players like Pilbara (PLS), which took a one-day hit mid-week of 22%, and Allkem, (AKE) which tumbled 15% the same day.

No lithium stock was spared in the remarkable re-set to lower levels. Anyone one would think that something had gone horribly wrong with the great thematic of our times – global decarbonisation through the electrification of everything, with lithium-ion batteries playing a key role.

That was not the case. The reason for the re-set was an almost lemming-like response to a research note from Goldman Sachs suggesting the bull market in lithium was “over for now” and one from Credit Suisse suggesting prices could peak in coming months.

The Goldman Sachs note in particular was criticised for suggesting a slowdown in demand, albeit with growth continuing at high rates, from 2023. No one else sees that as being the case. If anything, there will be acceleration of demand.

The more important aspect is what happens to supply. Supply is rising but it won’t be quick enough to meet the wall of demand, certainly not in the next five years or so.

There will be catch up at some point which is why there is no disagreement that the long-run price for lithium carbon equivalent is around $US15,000-$US25,000/t. That compares with the current price of about $US57,000/t.

And to be sure, Goldman Sachs was not saying anything particularly wild in its report, it has prices falling to $US16,000/t in 2023.

Valuations of the ASX lithium stocks are based on the long-term price expectations, not the current price. It is a point Macquarie made – it has lithium carbonate at $US48,000t in 2023 - without mentioning Goldman Sachs in a update on Pilbara at its lower price levels.

“We estimate that Pilbara’s share price (it has kept its $4 price target on the $2.28 stock) is now factoring in a flat lithium carbonate price of $US13,000/t.’’

“This is 80% below current spot lithium carbonate prices in China and is equivalent to a flat spodumene (6% lithium oxide) of $US950/t, 85% below the last BMX spot sale (Pilbara’s spot trading platform),” Macquarie said.

In the case of Liontown (LTR), which is putting the finishing touches to a supply deal from its Kathleen Valley project in WA with Tesla, Macquarie reckons the market is factoring in a lithium carbonate price of $US11,000/t.

Liontown was sent 19% lower on Wednesday to $1.14. It moved slightly higher to $1.19 on Thursday, leaving it well short of Macquarie’s $2.50 price target.

Macquarie acknowledged that there are growing signs of a major correction in prices for lithium and the other battery metals of nickel and cobalt after the boom of the last year, mainly due to the China slowdown.

“For cobalt and lithium, this could be temporary once China bounces back, while nickel prices could continue to fall due to increasing Indonesian supply,” Macquarie said.

In Thursday’s market, the lithium stocks were either slightly higher or holding their (lower) levels set in Wednesday’s rout.

So without embarrassment, it can be said that last week’s suggestion that the broad equities market sell-off has been overdone when it comes to the lithium stocks, still holds, particularly after Wednesday’s silliness.

GREENVALE (GRV):

Neil Biddle identified the lithium opportunity way before anyone else in this market and set about establishing Pilbara as a finder/developer of the stuff while everyone else was asleep at the wheel.

A veteran explorer more than a mine operator, Biddle moved on from Pilbara with a personal brief to find another opportunity in the resources space, and like his vanguard move into lithium, he settled on one outside of the square - torbanite of all things.

A rare type of oil shale, torbanite yields big amounts of high-value bitumen, light crude oil (used to spray bitumen) and activated carbon which can sell at particularly fancy prices. Critically, Biddle was able to secure Australia’s only known torbanite deposit, near Alpha in central Queensland.

Here was an opportunity to set up a strong cash flow business that would help replace Australia’s dependency on bitumen from our friends in China and elsewhere in Asia.

The project was backed into Greenvale (GRV) and work to date has confirmed the torbanite, and the cannel coal seams at the Alpha project do in fact yield up to 179 litres per tonne for more than 22 million barrels of synthetic oil equivalent.

But it is a emissions-intensive business which would quite possibly struggle to get environmental clearance.

Not perturbed by that, and showing the same sort of big picture thinking that got the now $7.6 billion Pilbara into the lithium space, Biddle has come up with a cunning plan to offset emissions from the retorting of tonalite by getting into the greener than green geothermal energy business.

Its entry into the business is through a staged scrip deal to acquire the privately held Within Energy which has its foot on potential geothermal energy sources near Brisbane, Maryborough and Gladstone.

The geothermal targets are shallow (cheaper to drill and rig up), and using the binary cycle plants now used extensively in the US and Europe, they would only need to yield 100-120 degree reservoir water to produce green power.

Being green means the geothermal power could potentially be eligible for carbon credits as well as renewable energy credits, enabling Greenvale to present an integrated Alpha/geothermal business  case for the required approvals on a net zero carbon emissions basis.

And potentially at least, geothermal power surplus to needs could be sold to others.

As part of the swing into the geothermal space, Greenvale’s early stage exploration effort in the Georgina Basin for new IOCG copper-gold deposits is being moved across to the ASX-listed Astro (ARO).

Astro will acquire 80% of the Georgina Basin play in return for the issue of a 19% stake in the company to Greenvale and a 2% production royalty, should the Georgina Basin exploration interests eventually deliver a mine. Biddle will also be joining the Astro board.

Biddle will be on hand at next week’s Resources Rising Stars conference on the Gold Coast (7-8 June) to run through the push into geothermal power, and his plans for the development of Alpha. Many in the room will have followed Biddle from back when Pilbara was a 5c stock with a lithium idea.

Greenvale has come up from a recent low of 15.5c to be trading at 18c on news of the geothermal push. But that remains well short of the 52-week high of 66c when enthusiasm for the Georgina Basin exploration effort was overdone, given its exciting but early stage status.

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