What Happened to ASX Lithium Stocks?

Lithium has been on a wild ride in recent years.

In 2021, eight of the top 10 performing stocks on the All Ords were lithium stocks.

Fast-forward to now, five of the 20 most shorted stocks on the ASX are lithium stocks:

Lithium miners have gone from top performers to some of the worst performers.

For instance, lithium developer Lake Resources [ASX:LKE] is down 75% over the past 12 months. Ioneer [ASX:INR] is down 60%.

Sayona Mining [ASX:SYA] and Core Lithium [ASX:CXO] are down around 35%.

Producers have fared a bit better, with Pilbara Minerals [ASX:PLS] up around 15% over the past 12 months.

And takeover target Liontown Resources [ASX:LTR] is up 50% over the past year, aided by Albemarle’s [NYSE:ALB] recent interest.

But the performance of lithium stocks is even worse if we consider how much they have come down since late 2022.

For instance, Anson Resources [ASX:ASN] is down 60% since September 2022. Leo Lithium [ASX:LLL] is down 40%. Even Pilbara is down nearly 30% since September:

It’s a similar story worldwide.

The Solactive Global Lithium Index — tracking the world’s largest and most liquid lithium companies — is down 12% over the last 12 months and down nearly 25% since September.

So what happened?

Is the lithium stock slump permanent? Or does the contraction offer buying opportunities?

(By the way, I discussed this and more with my colleagues James Cooper and Selva Freigedo, both experts on commodities and battery metals. You can watch the discussion further down in this article.)

Lithium spot prices take a hit

A big reason for the recent correction in lithium stocks is the underlying commodity itself.

Lithium spot prices have fallen sharply in 2023 after hitting record highs late last year.

The drop is most pronounced in China, a key player in the lithium scene.

Prices of lithium carbonate halved since setting a record last November.

A March BloombergNEF report noted:

‘Lithium carbonate prices saw a greater rate of decline as greater supply growth outlook for the year coincides with weaker demand sentiment.’

Will lithium prices remain high?

While lithium spot prices fell this year, they remain historically elevated.

For instance, spot spodumene concentrate averaged US$5,920 per tonne in February 2023, more than double the average spot price for February 2022, and more than 10-times higher than the prices in February 2021.

Yes, prices have come off their peak in 2023, but lithium bulls argue prices are still highly attractive for profit margins and won’t collapse any time soon.

In its latest quarterly report released earlier this month, the Department of Industry, Science and Resources noted that lithium demand is strong and prices are set to ‘pick up over the latter half’ of its five-year outlook period:

‘Prices are expected to pick-up over the latter half of the 5-year outlook period, as the additional global lithium supply is absorbed by rising global demand. Demand will rise as countries look towards their 2030 emissions targets, and as EV market penetration accelerates in Europe, the United States and other advanced economies.

‘Global lithium demand continues to grow rapidly, driven by surging demand for electric vehicle (EV) batteries. Demand for lithium batteries accounted for almost 80% of all lithium use in 2022. This is expected to reach 90% by the end of the outlook period, as EVs gain market share in the world passenger car market.’

For me, the supply outlook is a key issue.

One of my favourite investment axioms is from historian Edward Chancellor, who said that ‘investors spend 90 per cent of their time thinking about demand and only 10 per cent on supply’.

And it’s true that many investors have focused largely on demand when bidding up lithium stocks in 2022.

But what about the supply side of the equation?

High prices elicit countervailing responses. That may mean more marginal producers coming online, big players ramping up production, or a shift to substitutes.

As the respected Australian financial journalist Trevor Sykes wrote in his book on Australian mining (emphasis added):

‘No one has yet managed to repeal the age-old laws of supply and demand. As the price of a metal rises, there is a stronger incentive to search for new orebodies. Also, known deposits which were previously marginal become economic. As the metal’s price rises, supplies from these new sources will come on stream, bringing the price back down. This happens regularly in many metal markets, tin and copper being good examples. No metal is so rare that its price can keep rising indefinitely…’

No metal is so rare that its price can keep rising indefinitely.

Lithium demand is definitely strong…but lithium supply is set to respond.

The sticking point will be whether the expected surge in supply will come online quick enough without major setbacks.

As Bloomberg noted last month:

‘Lithium supply is heading for a major increase this year as a wave of expansions and new projects get up and running. Still, there’s doubt over whether some less-established companies will be able to deliver promised output given the range of regulatory, technical and commercial challenges.’

Lithium…the one-hit wonder?

Lithium demand is both a blessing and a curse for the white metal.

Already, 80% of all lithium use is associated with EV batteries. That’s set to reach 90% before 2030.

Lithium’s future is wedded to EV adoption. That’s great because EV sales are only set to grow. But there’s a risk posed by innovation in EV battery chemistries and compositions.

Our resident geologist and commodities expert, James Cooper, likens lithium to a ‘one-hit wonder’.

Last month, he wrote:

‘While it’s been a great ride for investors, there’s an elephant in the room facing lithium producers…its demand outlook is exclusively tied to just one source…EV batteries.

‘That puts mining stocks tied to lithium in a precarious position.

‘Rolling Stone magazine credits the ‘80s song “Take on Me” as the greatest one-hit wonder of all time.

‘That’s why, with just a single demand driver, lithium tops the charts as the “one-hit wonder” in the commodity world.

‘Green metal producers are at the mercy of engineers looking to improve efficiency, while reducing costs and finding alternative metals with stable supply chains.

‘With each technological breakthrough, there’s a winner and loser in the commodity space.’

For James, copper is the more attractive battery metal as its uses are more diverse and permeate the whole electrification megatrend.

Lithium stocks and the Lassonde Curve

Can we map the performance of ASX lithium stocks onto the famed Lassonde Curve?

The Lassonde Curve is a namesake of Pierre Lassonde, one of the founders of Franco-Nevada, the first gold royalty company.

Lassonde reflected on his mining experience and thought he could distil it into the typical life cycle of a mining company and how that life cycle correlates with market value.

You can see the typical Lassonde Curve below:

As you’d expect, market value jumps during the speculative stage when investors punt on bonanza discoveries or drill results.

What’s interesting is the orphan period.

That’s when the initial speculative frenzy dies and reality kicks in.

Yes, a miner may be sitting on a promising resource — and early investors may have benefited from the initial jubilation — but this resource will take years and plenty of cash to develop.

That will mean more capital raises, more debt, more pain, and more risk.

According to Lassonde, investors rush back in when the mine nears production and can extract ore at a profit.

The ASX is home to plenty of lithium developers who are years out of production.

So maybe the recent correction is the ASX lithium sector entering its orphan period on the Lassonde Curve.

Are ASX lithium stocks attractive at current prices?

So, do lithium stocks offer value at current prices?

I asked this question to James and my colleague Selva Freigedo during a discussion on the long-term outlook for copper and lithium.

Both Selva and James were bullish on the long-term outlook of lithium stocks and thought the correction offered enticing opportunities for discerning investors.

You can watch the full discussion below.

For me, one thing I’d keep in mind is what valuation expert Aswath Damodaran labelled the ‘big market delusion’.

The delusion refers to the belief all firms in a booming industry rise together, despite the fact that some will win and some will lose.

Lithium is a booming sector, and we’re only at the start of global EV adoption.

But that doesn’t mean all EV makers and all lithium miners will succeed.

Don’t throw cash at any stock with lithium in the title. Dig into the economics, costs, and business model of each individual company.

Be diligent…and pick wisely.

Regards,

Kiryll Prakapenka,
Editor, Money Morning