Why Lithium stocks went south

I only hold LIT -ETF on the US market which dropped last night but recovering in pre market tonight in the US it holds most of the ASX Lithium miners in the ETF.

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Expansion talk wipes billions off lithium miners
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Lithium stocks were rattled by fears of oversupply this week. Matjaz Krivic
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by Peter Ker
Whichever narrative you choose to believe about the supply and demand outlook for lithium, there was something to suit your argument this past week.

If you're convinced the world's auto manufacturers will have an insatiable demand for the battery commodity, Ford's announcement that it would more than double investment in electric vehicles over the next five years would have been music to your ears.

If you're concerned about an oversupply of lithium coming from the salt lakes of South America, look no further than the royalty settlement struck by Chilean producer SQM, which gave the company permission to more than triple production over the next seven years.

Worried about the growing tide of lithium-rich spodumene rock coming out of Western Australia? Business intelligence firm Roskill declared that too much was coming too quickly and would ensure lithium prices peaked in 2018.


Convinced the recent bull run in Australian lithium stocks is just the start of a long-term growth trend? You would have found vindication in the fact Orocobre was able to raise more than $250 million this week at the stock's highest ever price.

Company Profile
Minerals exploration and production company with focus on developing Lithium/Potash resources in Argentina.

But if you thought Australian lithium stocks had reached frothy valuations in recent weeks, a 17 per cent slump in stocks such as Galaxy and Pilbara Minerals in the space of four days provided fodder for your cognitive bias. Kidman Resources fell more than nine per cent on Friday.

Chilean growth
Of the various headlines that pushed lithium stocks around this week, SQM's deal was the most significant.

Already one of the world's major producers, SQM will now be able to boost annual capacity from 66,000 tonnes of lithium carbonate to as much as 216,000 tonnes by 2025, with further growth possible until 2030.


In a market that was already debating oversupply fears, the SQM deal was like petrol on a fire.

"This deal has consequences for the long-term price, but we aren't worried about sending this signal because electric vehicles will keep driving demand," said Eduardo Bitran from Chile's economic development agency, Corfo, which struck the deal with SQM.

UBS analyst Lachlan Shaw says the SQM deal will not affect lithium supply for at least four or five years given the time required to build the expansions.

When SQM's expansion eventually does hit, Mr Shaw says demand should be surging sufficiently to ensure a shortage of lithium.


"This new deal will require the biggest expansion in lithium brine production ever. Even for a company with SQM's technical proficiency, getting the studies, permitting, financing, a final investment decision and construction done on the scale we are talking about, is going to be three to five years before you get first production," he said.

"Our view is quite bullish on the demand side … our demand numbers really kick into over-drive around 2022 and 2023."

Australian spodumene
For Australian investors and companies, spodumene is the main game.


Most experts agree the amount of spodumene being shipped to Asian markets, particularly China, is beyond the capacity of the beneficiation plants that convert the spodumene into higher value products that can be sold into battery markets.

Many Australian spodumene producers and aspirants have protected themselves against this bottleneck, by linking the price they receive for spodumene to the price of the beneficiated product, given the latter remains in short supply.

Despite that pricing protection, Roskill's concern is that those bringing on new spodumene projects may struggle to sell all of their product in the next few years given the surplus of spodumene created by the beneficiation bottleneck.

"Can these operations maintain production if they can't sell a significant proportion of capacity?" said Roskill's Robert Baylis earlier this week.


The trick for investors is to focus on how many years of production Australian lithium companies have already locked away in sales contracts.

Galaxy has sold 100 per cent of planned production for the next five years. Tawana Resources has contractually agreed prices for its first two years of production, while Pilbara Minerals has sold the first six years of production from the first stage of its Pilgangoora project plus a significant chunk of the project's larger second stage.

Only time will tell how strong those contracts are; a recent oversupply of LNG has reportedly enabled Asian customers to successfully negotiate price cuts on contracts that still have decades to run.

Mr Shaw said investors should also be focused on execution risks, as companies like Pilbara, Altura and Tawana seek to bring their Australian lithium projects into production within the next six months.

"People need to understand that there is significant execution risk in building these plants and in particular, ramping up to the levels that are consistent with what the studies laid out," he said.

Other major ASX-listed lithium stocks include Mineral Resources, which is shipping raw spodumene through Port Hedland, Neometals, which is a joint venture partner in the Mt Marion mine and Kidman Resources, which has a joint venture spodumene project with SQM in WA.