Investing in Lithium Cycles: Demand, Pricing and M&A Trends

• Lithium prices have fallen recently, with some forecasts predicting further declines. However, low prices are unlikely to incentivize new supply.
• There is debate about whether lithium should be viewed as a commodity or specialty chemical. Prices have been volatile like a commodity.
• Demand outlook is uncertain, with mixed signals from China. Watching Ganfeng as a potential leading indicator.
• M&A landscape evolving, with Hancock/Rinehart blocking deals in Australia. Speculation around potential Pilbara bid from Albemarle.
• Many early-stage lithium explorers have seen valuations reset to more reasonable levels. Good optionality if drilling proves successful discoveries.

Lithium Pricing Outlook Remains Uncertain

Lithium prices have fallen sharply in recent months, leading some prominent forecasters like JP Morgan to predict further steep declines ahead. In an October research note, JP Morgan forecast lithium carbonate prices dropping to around just $15,000 per tonne in 2023, down from over $70,000 earlier this year. The bank argues new supply will swamp demand, particularly from lower-quality sources in Africa.

However, experts argue such ultra-low pricing forecasts fail to account for the inability of new projects to get financed and reach production at such unprofitable levels. As lithium prices fall, high-cost supply shuts down. For example, conversion facilities in China have already started closing as margins evaporate. Pricing likely needs to remain above $25,000 to $30,000 for most projects to be economically viable. While short spikes above $80,000 are unlikely to be sustainable long-term, pricing below $15,000 could spark underinvestment and future shortages.

Commodity v Specialty Chemical Dynamics

The extreme volatility in lithium pricing over the past few years has reignited debate about whether lithium should be viewed fundamentally as a specialty chemical or a commodity. On one hand, lithium is clearly not an interchangeable commodity like copper or iron ore. It is a critical mineral input that enables the global transition to electric vehicles and battery storage.

However, when observing the actual price action in key lithium benchmarks, the swings have behaved more akin to a commodity than a specialty chemical. For example, lithium carbonate prices in China swung from around $7,000/tonne to nearly $80,000/tonne and back below $60,000 all within the span of two years. These types of extreme moves are typical in commodities, but highly irregular relative to the stable, steady pricing that characterizes most specialty chemicals.

The disconnect derives from the fact that while lithium itself is a specialized product, the current shortage environment has forced buyers to treat lithium more as a commodity input. With supply tight, battery makers and auto OEMs have found themselves competing in spot markets for limited lithium volumes. The bidding wars and supply squeezes have driven pricing volatility more resembling an oil or iron ore bull run.

However, specialty chemical producers ordinarily benefit from pricing power, steady demand growth and long-term customer relationships. Lithium is still building this kind of pricing power. Until structural shortages ease, lithium pricing may continue behaving more like a commodity subject to extreme swings based on temporary imbalances between supply and demand.

Over the long run, developing a truly specialty chemical model depends on lithium producers securing predictable demand via long-term volume contracts with customers. Annual pricing negotiations can then grow at modest rates mirroring underlying demand rather than price spikes from short-term supply squeezes. The industry hopes to gradually transition towards this type of specialty chemical relationship between lithium producers and battery/auto consum

China Demand Trends Remain Key Uncertainty

The demand outlook remains uncertain, with mixed signals coming from the key driver China. Some industry contacts suggest falling prices reflect softening demand as the economy slows. However, leading lithium producer Ganfeng saw its shares spike higher in October as one of the few China lithium proxies with a US listing. This could signal improving sentiment looking ahead to 2023. Tight physical markets are also evident in the lithium futures curve, with near-dated contracts rising rapidly relative to later dates likely reflecting a squeeze on immediate supply availability.

Evolving M&A Landscape Sees Rinehart Flexing Power in Australia

The mergers and acquisition landscape continues to evolve rapidly alongside the shifting supply-demand dynamics. In Australia, mining magnate Gina Rinehart has emerged as a major force shaping industry consolidation. Rinehart has been actively blocking potential lithium deals by acquiring stakes just under the 20% threshold that triggers a formal takeover offer.

In 2019, Rinehart thwarted Wesfarmers' takeover attempt of Kidman Resources by acquiring 19.9% of the company. More recently, she has stymied Albemarle's planned $3.1 billion takeover of Liontown Resources by accumulating 19.9% of Liontown's shares. This move sent Liontown's share price plunging over 20% as the deal collapsed. Rinehart's underlying motives remain subject to speculation. Some suggest she is angling for board seats and greater influence with promising lithium developers. Given her track record in iron ore, Rinehart may also harbor longer-term ambitions of orchestrating further industry consolidation.

For example, analysts speculate Rinehart could be plotting a tie-up between her Roy Hill iron ore company and major lithium producer Pilbara Minerals. This would mimic the tactics of former BHP boss Don Argus in the 1990s and 2000s, where Argus repeatedly blocked smaller miners' deals with the ultimate endgame of taking over the entire iron ore industry, which BHP eventually achieved.

By parlaying her influence into a Pilbara takeover, Rinehart could gain control over a major vertically integrated lithium producer and royalties over the world-class Pilgangoora project. For now, Rinehart appears content building her stakes in emerging lithium players, but her endgame likely involves acquiring a flagship lithium asset. After being stymied at Liontown, Pilbara may well be in her sights sooner rather than later.

Junior Lithium Explorer Valuations Reset to Attractive Levels

Beyond the maneuvering of the lithium majors, the landscape for earlier-stage explorers has seen a notable transformation in recent months. The extreme bull market sentiment of 2021 has faded, with valuations for many lithium development companies declining back to more rational levels. Rather than paying excessive premiums for early-stage exploration potential, investors now have opportunities to gain upside optionality at far more reasonable entry points.

For companies with projects in mining-friendly jurisdictions like Quebec's James Bay region of Western Australia, there remains strong investor interest in providing capital to drill out discoveries. Quebec stock stories like Winsome Resources have attracted significant investor interest in flow-through financings that fund exploration with substantial tax benefits. Former leaders of successful lithium explorers like Sayona Mining are pursuing new ventures while sentiment remains positive.

Of course, even major discoveries might not propel huge stock gains in a weak market environment. But patient investors could be rewarded once the cycle ultimately turns higher again. The lithium industry may have gotten ahead of itself last year amidst unsustainably over-exuberance. But with demand from the global EV transition only set to accelerate in the coming decade, securing positions in potential world-class deposits at reasonable valuations could generate major long-term upside.

Lithium Companies to Watch

American Lithium

American Lithium is developing large-scale lithium projects in Nevada and Peru as well as one of the world's biggest uranium projects, with the goal of playing a major role in the transition to sustainable energy. The company's core assets are the advanced-stage TLC lithium project in Nevada and Falchani lithium project in Peru, which have robust preliminary economic assessments. American Lithium also owns the Macusani uranium project in Peru, which has seen significant historical development. With assets at various stages of pre-feasibility and feasibility studies, American Lithium is positioned to be a major player in lithium and uranium mining.

Brunswick Exploration

Based in Montreal, Canada, Brunswick Exploration (TSX.V: BRW) is an early-stage exploration company searching for metals like lithium needed for decarbonization. Using cutting-edge exploration technologies and proven prospecting techniques, Brunswick aims to leverage its team of experienced geologists to identify and discover unknown lithium deposits across Canada. The company believes combining innovative modern technologies with time-tested geology methods will lead to new mineral discoveries.

Frontier Lithium

Frontier Lithium Inc. is a mining company focused on the exploration and development of lithium deposits in Northern Ontario, Canada. The company's flagship asset is the PAK Lithium Project, located in a premium lithium district. The PAK Project represents the largest land package in the region at close to 27,000 hectares, with significant potential for further exploration.

The project contains North America's highest-grade lithium resource, with two premium spodumene-bearing deposits - PAK and Spark - located 2.3 km apart. A 2023 pre-feasibility study outlined a 24-year project life, at a post-tax NPV(8%) of US$1.74 billion and an Internal Rate of Return (IRR) of 24.1%. Frontier Lithium aims to become a major supplier of spodumene concentrates and battery-grade lithium hydroxide to support the growing electric vehicle market in North America. The company is advancing PAK toward production as the first fully integrated lithium mining and processing operation in Ontario.

Li-FT Power

Li-FT is a mineral exploration company focused on acquiring and developing lithium pegmatite projects in Canada. Their flagship Yellowknife Lithium Project in Northwest Territories contains 13 lithium pegmatite dykes near infrastructure and they have initiated a 45,000 meter drill program in 2023 to define resources. Li-FT also has the early-stage Cali Project in Northwest Territories within a historic lithium pegmatite belt and drilling is planned once permits are received. In Quebec, Li-FT has three large exploration properties near the Whabouchi deposit where 10 targets have been generated and initial drilling of two targets will occur in summer 2023 with more exploration planned for 2024. Overall, Li-FT is advancing a portfolio of Canadian lithium assets through systematic exploration and drilling.