Lithium Market Turbulence Creates Buying Opportunities for Long-Term Investors

• Lithium prices have fallen 50-60% in 2023 after surging 140% in 2022, creating high volatility
• Key reasons include destocking of inventory, some slowing EV demand, and new lithium supply coming online faster than expected
• Expert thinks around $20,000/tonne is the lithium price floor currently
• Incumbent lithium producers like Albemarle and SQM are making big investments into hard rock lithium projects in Australia
• Lithium demand outlook remains positive long-term even if there is short-term uncertainty

The lithium market has experienced extreme volatility over the past two years. After lithium prices surged around 140% in 2022 on the back of strong electric vehicle (EV) demand and supply constraints, they have plunged 50-60% so far in 2023.

Destocking Driving Lower Prices

A combination of factors have driven lithium prices lower after last year's surge, including de-stocking of built-up inventory, some slowing EV demand concerns, and faster-than-expected new lithium supply coming online. There's been a lot of inventory last year so there are supply reasons and there are demand reasons, however, the demand reasons seem to be coming into play more.

With high lithium prices in 2021 and 2022, there was overbuying of lithium which has now led to excess inventory being worked through. There was a lot of buying last year and a lot of lithium is sitting inside cathode and inside cells.

There have been unexpected new lithium production from more inefficient and dirtier mineral sources in China, called lepidolite, helped by the previously high prices. The very high prices incentivized all sorts of lithium supply that is not otherwise economic. Lepidolite in China, which is a very dirty and expensive way to make lithium chemicals nevertheless became profitable and plenty of companies in China started to make and process it. Groups like Goldman Sachs have been accurate in their warnings that this extra Chinese lithium supply could weigh on prices. However, at current prices these may not be economic, which will cause that supply source to fade from the market.

In addition, lithium chemical supply out of China has continued ramping up through the pandemic. New lithium sources have come online recently as well, such as from Australia’s Core Lithium and Brazil’s Sigma Lithium. Expansions from existing producers like Orocobre have also added to global supply.

In terms of demand, EV sales growth projections for 2023 have moderated recently. Tesla CEO Elon Musk was also quite downbeat on EV demand during the company’s recent quarterly earnings call.

Watch the Cost Curve for Price Floors

Given all these factors impacting the still rather opaque lithium market, we hesitate to predict where prices are headed in the short term. However, $20,000 per tonne is around the current price floor for lithium based on an analysis of the global industry cost curve. It’s very difficult for the high end of the cost curve to make money at that price. However, that doesn't mean that you can't see lower than $20,000 prices for short periods.”

There will be periods where lithium producers operate at a loss when prices plunge, similar to the last major downcycle in the late 2010s that saw prices fall briefly under $10,000 per tonne. But the price will not go down to $5,000 or $6,000 as it did in the last downcycle because the costs have gone up so much. Longer-term lithium prices will average around $30,000 per tonne and higher-cost production needs to be incentivized to meet strong demand growth.

Incumbents Making Big Investments

Despite the current lithium market uncertainty, prominent lithium producers seem to indicate a bullish long-term view by making big investments into new hard rock mining capacities, like in Australia. We're will see more M&A.

Chile’s SQM made a large minority investment in Australian junior miner Azure at a huge premium and is trying to take full control. Albemarle has been battling with Australian billionaire mining magnate Gina Rinehart over acquiring an Australian hard rock lithium mine, as well as trying to buy out its partner in the massive Greenbushes mine in the country.

What's interesting is that the incumbents - Albemarle, SQM - those who know the business the best, are buying spodumene resources in Australia. Outsiders from the industry who have a big vested interest, don't seem to be doing that - they're going for unconventional flow sheets, so they're taking on some added risk in doing that.

It is clear that industry leaders recognize that, while Chile still holds the world’s best lithium brine resources, government policy changes there have made the landscape more challenging. Argentina’s brines also bring substantial production risk. Chile's pain is Australia's gain and will also be Canada's gain.

Future Investments From SQM / Albemarle in Canada?

Investment interest in Canadian lithium juniors from major players will increase. Even large players like SQM may look to Canada, and specifically Quebec as the most likely location. Look at Patriot Battery Metals and Li-FT Power in discovering promising lithium prospects. SQM recently picked up Australian lithium explorer, Azure Minerals, taking a 19.9% stake.

Investment Thesis for Lithium

• Current lower lithium prices present a buying opportunity for investors with a long-term view before demand accelerates again
• Key lithium demand drivers like electric vehicle adoption remain positive over the next decade despite some near-term volatility
• Leading incumbent lithium producers making big investments signals strong confidence in long-term market outlook
• Exposure to explorers in frontier regions like Canada's Quebec and established districts like Australia offers upside
• Monitor m&a activity for indicators of lithium market direction; more deals likely on the horizon

While short-term uncertainty clouds the lithium market outlook currently, the long-term investment case remains positive. Lithium demand is expected to grow exponentially over the next decade driven by electric vehicle adoption and lithium-ion battery usage. Despite some demand headwinds emerging in 2023, major lithium producers are making big investments to expand production, signaling their confidence. For investors, buying during periods of lower prices can yield strong returns if held long enough for demand to accelerate again. Upside also exists with explorers discovering new lithium resources globally in both existing districts and frontier regions. And corporate deal-making activity continues to be robust, which can provide hints at sector sentiment in the future.

Key Takeaways

• Recent 50-60% lithium price decline driven by destocking, some slowing demand, and new supply
• Industry expert says around $20,000/tonne of lithium is the current price floor level
• Major incumbent lithium producers making large investments signal long-term confidence
• Corporate M&A activity is expected to continue despite market volatility

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 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

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 13lithium pegmatite dykes near infrastructure and they have initiated a 45,000-meter drill program in 2023 to define resources. Li-FT also has an 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.