After hitting all-time highs in 2022, lithium took a downward turn from November to May, when prices started to rebound. With prices now retreating again, many investors are wondering if it’s still a good time to buy lithium stocks.
Demand for lithium is expected to increase in the coming years as electric vehicle (EV) sales continue to beat forecasts to the upside in key markets. The energy storage sector is also a segment that could grow exponentially in the next decade.
Looking at 2023, lithium demand is forecast to increase by 28 percent year-on-year, with a further 24 percent increase year-on-year expected in 2024, according to Fastmarkets. By 2033, the firm anticipates lithium demand of around 3.5 million metric tons.
“Then we started this year with a bit of weakness in China with EV sales, but that’s come back as of May,” he said. “The economics of lithium are playing out as expected … we’ve come back to where I think is a fair position at the moment for the year.”
In terms of prices, Fastmarkets believes volatility will remain, which means lithium may move above and below the firm’s average annual forecast. Similarly, Chris Berry of House Mountain Partners said price volatility is likely to continue for the coming decade — not just for lithium, but for many other battery raw materials as well.
“That has implications, obviously, depending upon where you are in the supply chain — whether you are a miner, a cathode manufacturer or an original equipment manufacturer,” he said. “I think the market will ultimately dictate what is sustainable … I do think we’re very limited on the downside, the days of US$6,000 or US$10,000 (per metric ton) lithium are ancient history.”
When it comes to stocks, last year many lithium companies jumped on the back of favorable market conditions, with companies listed in Canada, the US and Australia seeing gains. But market uncertainty has been on the rise, hitting every sector.
Lithium equities are hypersensitive to the spot price, which at the end is noise and distraction, Tara Berrie of EV maker Rivian (NASDAQ:RIVN) said during a panel discussion at Fastmarkets’ recent Lithium Supply and Battery Raw Materials event.
“There will be a fundamental shortfall (in lithium) and (all type of) investment has to continue, otherwise any delays will extend project timelines that are massively long already,” said Berrie, who previously worked at Tesla (NASDAQ:TSLA), Allkem (ASX:AKE,OTC Pink:OROCF) and Rio Tinto (ASX:RIO,NYSE:RIO,LSE:RIO).
What factors should lithium investors consider in today’s market?
For Berry, cutting through the noise in the current environment is incredibly difficult. “That’s because if we’re sitting here today, and the lithium spot price is, let’s say US$41,000 to US$42,000, and contract prices are generally higher, when you think about those numbers and then you look at the entire lithium cost curve, literally every single project is economic,” he said. “So what you have to do is you have to weigh the distinct risks, the non-economic risks for specific projects.”
For his part, Hooper said investors still need to be very cognizant of global macro factors. “We get a little bit of a myopic view of our sector,’ he said, ‘and we’ve seen different headwinds — inflation, the Russia-Ukraine war, possible recession and so on — actually affect the lithium market when the fundamentals within the market have looked to be sound.”
He added that it is important to remember that lithium is not a commodity, but a specialty chemical.
“I think investors would do well to take money off the table when they’ve had substantial returns and look to reenter when shares have been beaten down,” he said. “I think to ‘buy and hold’ you need to be brave. It’s not to say you shouldn’t, it’s just that there are buying and selling opportunities given the world that we live in.”
For Howard Klein, Hooper’s partner at RK Equity, the lithium market is a stock-picking market right now.
Joe Lowry of Global Lithium also shared insight on how to cut through the noise when it comes to investing in lithium companies.
“I think the red flags are really, if you learn how to analyze this business, you see in the prefeasibility studies there’s always more optimism than is warranted. It’s endemic to the industry,” he said. “You need to look at the milestones and see when the first milestone slips; then you start looking at the next one and the next one.”
When it comes to investing in lithium stocks, Lowry said investors have to have the strength of their convictions.
“But I also think you have to adjust your thinking for circumstances,” he said. “Don’t get married to prejudices or assumptions that you have — be flexible and always go for quality.”
How to evaluate lithium projects?
When asked about how she chooses lithium projects, Rojas said she prefers brine projects due to her experience, but she is also interested in hard-rock assets.
Aside from type of deposit, she looks at grades above 500 milligrams per liter in brine with low impurities, and 1 percent in spodumene ore, ideally with known deposits in the vicinity.
“Going a step further, even when early, is important to understand what management’s preliminary plans for extraction are,” Rojas said. “Although evaporation ponds have been a workhorse and are commonly used, I’m excited to see what direct lithium extraction (DLE) can bring.”
There are some deal breakers for Rojas when assessing lithium projects.
“I prefer to stay away from low grades — although new technologies will close the gap soon, I believe, and there are alternatives such as resins and DLE variants, which potentially can make a big difference there, so I’m keeping an eye,” she said.
She also avoids OTC listings, and in terms of jurisdictions, Rojas said she stays away from anything outside of Australia, Argentina, Chile, Brazil, the US and Canada.
Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.