The Australian

Investors turn bullish on lithium outlook


Macquarie Equities has had a major change of heart on the outlook for Australian lithium miners.

After incorporat­ing its aggressive­ly bullish outlook for global electric-vehicle demand, the broker now sees “limitation­s” in the supply response causing the lithium market to shift into deficit next year.

It also sees the market “remaining tight”, with “significan­t shortages” emerging in 2025.

Even after strong gains in the year to date, lithium prices should rise by 30-100 per cent between 2021 and 2025 and remain at “incentive levels” for miners for some years. This would have major implicatio­ns for the earnings outlook for lithium miners, the broker said.

On that basis, Macquarie made big changes to its ratings for lithium miners under its coverage.

Orocobre was upgraded from underperfo­rm to outperform, with a new target of $7.60 a share, from $2.90 previously — a 162 per cent increase — while Galaxy Resources was raised to from underperfo­rm to outperform and its target boosted to $4.20, from $1.60, up 163 per cent.

Orocobre shares rose 6.6 per cent to an 11-week high close of $5.83 on Tuesday. Galaxy Resources rose 4.5 per cent to a 34month high close of $3.26.

Pilbara Minerals also went from underperfo­rm to outperform, with a new target price of $1.30, up 420 per cent from 25c.

Mineral Resources remained at outperform, with a target price of $61, from $50 previously.

The broker said “upgrade momentum remains strong” with a spot price scenario (using current lithium prices) generating earnings 160 per cent above its base case for Mineral Resources.

Macquarie was unable to opine on IGO Group as it was engaged for corporate work for the company, which agreed on Tuesday to divest 30 per cent of its Tropicana gold mine to Regis Resources for $903m.

But the deal will allow IGO to reduce its debt profile and reposition itself as a pure-play battery metal company when it completes its purchase of a 49 per cent stake in Tianqi Lithium Energy.

That will give it a 25 per cent interest in the giant Greenbushe­s lithium mining and processing operation and a 49 per cent stake in the Kwinana lithium hydroxide plant, both in Western Australia.

Global lithium prices were largely unmoved through the bulk of last year and early this year, but a strong recovery in demand for lithium-iron phosphate batteries created significan­t lithium supply shortages in China, compounded by the Pilgangoor­a Altura operation entering administra­tion late last year and Wodgina remaining on care and maintenanc­e.

The lack of short-term supply response has resulted in spot lithium prices in China rising 70 per cent since the beginning of the year, compared to 20-30 per cent rises for other regional prices.

But as expectatio­ns of a tightening global lithium market increase, Macquarie analysts expect regional prices to catch up to the jump in Chinese spot prices over the course of the year.

The broker said that, after significan­t upgrades for electricve­hicle demand forecasts by Macquarie’s Asian automotive research team, the outlook for lithium had shifted.

Its base case now assumes global electric-vehicle compound annual growth in demand of 42 per cent over the next five years, translatin­g into market penetratio­n of 16 per cent by 2025.

China remains the key growth driver, with domestic market penetratio­n now expected to reach 21 per cent of total car sales by 2025 and 41 per cent by 2030.

But the supply response is expected to be limited by rising quality requiremen­ts.

“We believe the supply response to surging demand for lithium is likely to disappoint,” Macquarie analysts said.

“Hard rock producers have already experience­d extreme price volatility in the past two years, and we expect to see a more discipline­d approach to the current market.”

Integratio­n of existing spodumene capacity downstream is set to suppress the supply response, and COVID-19-related restrictio­ns are likely to delay lithium brine capacity expansions in South America.

Moreover, rising electricve­hicle demand is expected to result in material deficits emerging by 2025.

Given the size of the deficits, Macquarie expects lithium to remain at or above “incentive pricing”, estimated at $US720 a tonne for spodumene, $US13,000 a tonne for lithium carbonate and $US16,000 a tonne for lithium hydroxide.

Macquarie’s China battery materials analysts say new developmen­ts in battery technology — solid-state batteries/graphene batteries, lithium metal anode and/or lithium sulphur anode/ electrolyt­e — could more than double lithium usage when anodes are fully replaced with lithium metal.

“Lithium is the material that is most leveraged to EV volume upside with all types of lithium-ion batteries containing around 7-10 per cent regardless of the overall battery chemistry,” they said.

“Consequent­ly, we expect lithium demand to follow the same growth rates as batteries but with demand pulled forward due to the need to build inventory through the supply chain ahead of the manufactur­e of vehicles.”

While noting that cheaper lithium iron phosphate (LFP) batteries have recently regained popularity in China, Macquarie analysts expect higher energy density batteries NCA (nickel-cobalt-aluminium) and NCM (nickel-cobaltmang­anese) to become dominant over time and for this to drive an increasing preference for lithium hydroxide as a cathode precursor.

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 ?? BLOOMBERG ?? The demand for lithium from mines such as this one in northern Chile is expected to rise as more electric vehicles hit the road
BLOOMBERG The demand for lithium from mines such as this one in northern Chile is expected to rise as more electric vehicles hit the road
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