Lithium Company Reviews as Many Producers Miss Expectations

• Lithium companies like Core Lithium and IGO reported lower than expected production in Q2 2023 due to operational issues. This has put some short-term downward pressure on lithium prices.
• However, lithium demand forecasts remain strong in the medium and long term, driven by electric vehicle growth. Multiple companies reiterated expansion plans.
• There is a divergence in how the market values pure upstream lithium producers compared to diversified miners or chemical converters. The former has much higher valuations currently.
• Majors like Rio Tinto and Exxon are showing increasing interest in entering the lithium supply chain, demonstrating the market's long-term potential.
• Lithium equities look attractively priced at current levels if lithium prices recover in 2024.

Lithium Prices Face Headwinds but Long-Term Demand Remains Strong

Several major lithium producers reported lower than expected production figures in the second quarter of 2023, causing some short-term downward pressure on lithium prices. However, demand forecasts remain robust for long term. Multiple players across the lithium supply chain continue to push forward with capacity expansion plans to meet anticipated growth.

Lithium companies like Core Lithium and IGO reported lower than expected production in Q2 2023 due to operational issues. This surprise drop in supply from some of Australia's largest lithium operations has led to excess inventories. As a consequence, more volume is flooding into the spot market.

The resulting oversupply, relative to demand, has put downward pressure on pricing over the past months. Lithium pricing drifts off between $3-3,500 per tonnes.

However, the present dip in pricing and softness in lithium equities may represent a buying opportunity for investors who maintain conviction in accelerating long-term lithium demand.

Electric Vehicle Growth Trajectory Remains Intact

The core driver of lithium demand over the coming decade is the rapidly rising adoption of electric vehicles (EVs). Despite economic turbulence, EV sales growth in 2022 defied expectations. Full-year global sales are still forecast to increase by over 35% to around 14 million units according to specialist researcher EV Volumes.

Many of the world's largest automakers have committed to transitioning their fleets entirely to EVs over the next 15 years. Volkswagen, for example, is targeting 50% EV sales by 2030. Hitting these targets will require exponential growth in EV batteries and therefore underlying raw materials like lithium.

If you look at battery cell production for the first half of the year, great numbers - China up +40%. This surge in lithium-ion cell manufacturing already underway supports the positive demand outlook. Once pandemic-related supply chain disruptions fully normalize, cell production could accelerate further.

Upstream Operations to Benefit from Spot Price Recovery

The present lithium price softness directly affects the profitability of so-called 'hard rock' mines producing lithium concentrate, as they often sell significant volumes into the spot market. Names like Pilbara Minerals and Core Lithium ship spodumene concentrate from Australian mines mostly to Chinese converter plants.

These upstream miners have faced stock price pressure in recent months from declining prices. However, given bright long-term demand prospects, any pricing rebounds could act as a significant catalyst.

Pilbara in particular retains strong positive momentum as management reiterated plans to continue expanding, with CEO Ken Brinsden quoted as saying "full steam ahead" on growth projects. Pilbara's production guidance for the year is also unchanged, underpinning the company's attractive growth pipeline.

Diversified Lithium Majors Maintain Long-Term Focus

In contrast to pure-play mine developers, the world's largest diversified lithium producers maintain a conservative stance on markets. But they also appear undeterred from their long-term growth plans.

Albemarle, the globe's largest lithium company, raised its revenue guidance slightly this quarter. But CEO Kent Masters emphasized taking a prudent approach, stating Albemarle must "make sure we don't get ahead of ourselves relative to lithium pricing."

Its rival Livent echoed this balanced perspective. Livent recognizes current uncertainty. Yet despite nearer-term caution, these lithium majors continue directing massive capital towards new projects expected online in 2024-25. Livent is progressing with its expansion projects in Argentina, including developing a new Canadian hard rock resource through its Nemaska JV. Albemarle is deploying over $3 billion through 2025 to build conversion capacity, including in China through its Wodgina JV with Mineral Resources.

Mineral Resources itself is also pivoting towards lithium, directing capital towards developing its hard rock resources. MinRes is now a competitor to Albemarle. They're going to toll lithium until 2024 but then after that, they can go to Ganfeng, they can go to Albemarle...

This demonstrates the industry's long-term confidence that multi-year capacity investments will pay dividends through sustainably strong demand.

Lithium Investment Thesis Hinges on Electric Vehicle Adoption

The core investment case for lithium equities relies on the electric vehicle revolution accelerating as expected this decade. Although an economic downturn could temporarily dampen consumer demand, auto manufacturers' strategic commitments to electrifying their offerings remain unchanged. Volkswagen's CEO dubbed their industry-leading EV budget "set in stone", irrespective of inflation or supply chain crises.

For investors, pure play mine developers with world-class deposits offer the highest risk-reward propositions. These companies often have relatively low operating costs due to high quality resources. They can benefit tremendously from not only rising lithium prices but also growing demand for limited hard rock supplies.

However, the recent divergence between Upstream miners and Downstream producers shows the market affords the latter lower multiples. This likely reflects their exposure to potential margin compression if rising prices spark greater conversion investments over time relative to Upstream capacity. Still, diversified names should offer lower volatility.

In summary, the latest quarterly results have created some uncertainty around the exact lithium price trajectory over the next 12-18 months. But accelerating electric vehicle sales volume should buoy prices in the long run. For opportunistic investors, temporary target price markdowns across quality lithium stocks provide a compelling window to build positions.

The Investment Thesis for Lithium

• The accelerating adoption of electric vehicles this decade offers a compelling secular growth story to drive lithium demand higher. EV sales forecasts suggest a >30% CAGR over the next 3-5 years.
• Hard rock lithium developers with large, high-quality deposits have significant upside from rising prices. Names like Pilbara Minerals, Core Lithium and Sigma Lithium stand out.
• However, diversified chemical producers should provide greater earnings stability. Livent offers particular appeal following its merger with Allkem.
• Any further price weakness over the next 6-12 months allows investors to acquire quality assets at increasingly attractive valuations.
• Maintain a mix of high-upside developers and more stable majors.

Accelerating electric vehicle adoption leaves little doubt regarding the positive trajectory for lithium demand over the coming decade. Though short-term pricing has softened recently from an extremely frothy peak, industry participants remain uniformly optimistic about markets tightening again soon. Leading producers continue directing capital towards large capacity expansions to ensure supply keeps pace.

With industry leaders and specialists clearly expressing bullish conviction, the recent pullbacks across quality lithium stocks seem more likely a pause that refreshes rather than cause for concern. Savvy investors can exploit the momentary weakness to build stakes in promising developers and diversified majors at comparatively discounted levels ahead of the next upswing.

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, to play a major role in the transition to sustainable energy. The company score assets are the advanced-stage TLC lithium project in Nevada and the Falchanilithium 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.

Li-FT Power

company'sLi-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 Project in the 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.