After lithium carbonate and hydroxide prices jumped a further 25 per cent and 12.5 per cent, respectively, in the first two weeks of 2022, broker Credit Suisse on Monday again increased their forecasts and said “unprecedented margins change everything” for the sector.
Analyst Saul Kavonic said the boom, which has seen prices soar 540 per cent since the start of 2021, had “much further to run” amid strong lithium-iron-phosphate battery demand in China and tight supply, and “crucially we are referring to the contract price” received by miners. While he left contract price expectations unchanged, Mr Kavonic raised his spodumene, carbonate and hydroxide spot price forecasts out to 2025 by 8 per cent to 33 per cent.
“Demand rose swiftly in 2021 while mines were still curtailing, and supply cannot keep pace,” he said.
“The near-term price backdrop can see more than 40 per cent of net asset value accrue within the next four years, so material free cash flow is no longer a longer-dated prospect.”
It comes as the sector prepares to provide quarterly updates in the coming two weeks, with Allkem, which was formed following the recent merger between Orocobre and Galaxy Resources, to kick things off on Tuesday. Other major players – Pilbara Minerals, Mineral Resources and IGO – also report this month.
Ahead of the updates, Macquarie analysts on Monday said they remained “positive” on lithium and rare earths miners following a strong 2021 as bumper electric sales, chip shortages, climate change momentum and lack of supply combined to push prices “higher and faster than many have anticipated”. Macquarie in December again upgraded their price predictions, raising peak spodumene prices around 100 per cent.
More recently, rising opposition to exploration land sales in key producer Chile have further increased the prospect supply may struggle to keep up with demand in the years ahead.
While share prices have already rallied hard – Pilbara more than tripled last year – Mr Kavonic said the supply-demand outlook and the fact some were trading on lower 2023 multiples than BHP Billiton and Rio Tinto despite greater growth projections and “green” appeal boded well for producers.
Ben Cleary, a partner at Tribeca Investment Partners, last week told The Australian Financial Review that mining countries in South America, such as Chile and Argentina, were “generally heading in the same direction” in terms of higher taxes and royalties, and more challenging operating conditions. “[It could] be a boon for Australian miners that will benefit from global supply shortages and higher commodity prices,” he said.
“These issues are well known in commodity markets but we don’t believe fully priced in and risk is to the upside in 2022 as these supply issues become more pronounced,” he added, noting other key battery metals like Copper and Nickel would also benefit.
