Lithium Market Faces Supply Crunch While Prices Moderate From 2022 Highs

• Lithium prices have dropped from record highs in 2022 but remain strong at around $37,000-38,000 per tonne currently.
• The lithium market has grown significantly from 300,000 tonnes in 2018 to around 1 million tonnes in 2023. Further growth to 3 million tonnes by end of decade expected.
• Around 60 new lithium mines are needed by 2030 to meet projected demand. Supply diversifying but still heavily reliant on South America and Australia.
• OEMs and battery manufacturers moving to secure lithium supply through off-take agreements and investments, with a focus on domestic US supply.
• More stability is expected in lithium prices near-term vs volatility seen in 2022, but deficits are still projected through late 2020s so prices need to stay strong to incentivize new supply.

The lithium industry experienced a highly volatile 2022, with prices for lithium carbonate and hydroxide surging to record highs over $80,000/tonne before retreating significantly from those peaks. Lithium prices currently sit around $37,000-38,000/tonne, having stabilized over the course of 2023 after declining during the first quarter.

Despite moderating from last year's spikes, lithium prices remain robust by historical standards. For the vast majority of lithium producers $30,000/tonne it's still a very very good price. Producers higher on the cost curve require strong pricing to remain economically viable. When prices briefly dipped below $30,000/tonne earlier this year, the market quickly rebounded. The lithium market should behave more seasonally in 2023, with slower demand in the first half of the year picking up in Q3 and Q4 as has been typical historically. More broadly, volatility may moderate somewhat but prices need to hold at solid levels to incentivize investment in new mines required to meet surging lithium demand.

In 2024 and 2025, expect to see a little bit more of a balanced market. Lithium prices should hold strong, they might not have the same highs of 2022, but where prices are at now is still a very comfortable margin for producers. Less erratic pricing and steadier accretive growth is the sign of a maturing market.

Global Demand Surge Calls for Massive Supply Growth

The fundamental driver of higher lithium prices in recent years has been the rapid growth in demand as electric vehicle adoption accelerates globally. The lithium market has expanded from around 300,000 tonnes in 2018 to approximately 1 million tonnes in 2023. Looking ahead, the market will grow to 3 million tonnes by the end of the decade. Other projections indicate the supply deficit could surpass 500,000 tonnes by 2030. Although the supply-side growth is there, demand is going to outpace supply.

To meet projected demand, around 60 new lithium mines will need to be built by the end of the decade, assuming average capacities of 40,000-45,000 tonnes per year. While lithium supply is diversifying geographically, with new projects upcoming in North America and Europe, South America and Australia still dominate production.

Securing Off-take Becomes Priority for Automakers, Battery Producers

With supply lagging demand growth, automakers and battery manufacturers are acting aggressively to lock in future lithium supply through off-take agreements and joint ventures. The OEMs and cell manufacturers' strategy at the moment is securing lithium supply.

Recent examples include GM investing $650 million in Lithium Americas and LG Energy Solution providing $75 million in funding to Piedmont Lithium. There is also a focus on building up local supply chains to feed US battery factories, spurred by incentives in the Inflation Reduction Act. Ideally, it's about securing that supply domestically but if not, then from a country that the US has a free trade agreement with.

While forecasts point to lithium shortages persisting through the late 2020s, prices at current levels can incentivize enough new mines to keep the market relatively balanced after the volatility of 2022. We might not have the highs of 2022 anytime soon, but where prices are at now is still a very comfortable margin for producers. We saw at the beginning of the year that prices quite quickly rebounded when they did drop below the $30 000 mark. It's an indication of what's to come.

The Investment Thesis for Lithium Mining Companies

• Strong demand growth from EV adoption to drive lithium deficits through the late 2020s, supporting prices at profitable levels for producers.
• Established low-cost brine producers in Chile and Australia well-positioned to generate strong cash flows at current pricing.
• High prices also enable the development of new hard rock mines to help close the supply gap. Favor companies with advantaged deposits and off-takes secured.
• Key risks include potential demand destruction if EV adoption slows and timing risks for new projects - monitor construction timelines closely.
• Diversify across brine and hard rock exposure and geographies. Blend stable cash flow generators with higher growth developers.

In summary, compelling market dynamics underpinned by the global energy transition provide a positive long-term outlook for lithium investments. Producers able to grow supply at low costs will thrive, as will developers bringing online capacity to help close projected deficits. Selecting assets with strategic advantages across brine, hard rock and geographies together with prudent risk management will be key to realizing the sector's potential.

Some Lithium Stocks Worth Considering

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 the 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 studies. With assets at various stages of feasibility and feasibility studies, American Lithium is positioned to be a major player in lithium and uranium mining.

Frontier Lithium

Frontier Lithium is a preproduction company focused on becoming a major domestic supplier of lithium in North America for the electric vehicle and energy storage markets. Its flagship PAKlithium project in Ontario contains the highest grade lithium resource in North America and is the second largest by size at over 27,000 hectares. The project has delineated two premium spodumene-bearing lithium deposits, PAK and Spark, as well as two other discoveries, Bolt and Pennock. A 2023 pre-feasibility forecasts a 24-year project life with a post-tax NPV of $1.74 billion and 24.1% IRR based on producing spodumene concentrates and downstream lithium hydroxide. The project has significant potential for further exploration and resource expansion.

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 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.