By William Adams
Lithium producer share prices have diverged with the
"Traditional 5" remaining near the bottom of their 52-week
ranges, see chart 1, while others have become more buoyant, led
by the next-in-line producers and followed by some of the
Australian hard rock producers that started production last
Australian conglomerate Wesfarmers’ bid for
lithium producer Kidman Resources has excited the market once
again and boosted interest in the share prices of those lithium
producers, both newly in production and next in line, that are
still open to investment or partners.
Wesfarmers announced the proposal on May 2. The 100%
acquisition was valued at $776 million and is subject to due
diligence, approvals and final board agreements. The deal
includes a 50% stake in Mount Holland lithium project in
Western Australia, with the other 50% owned by leading lithium
producer Sociedad Quimica y Minera de Chile SA (SQM).
Other new producers and junior mining projects that have
already found partners, such as Mineral Resources which formed
a joint venture with Albemarle for the Wodgina project and
Lithium Americas with Ganfeng, have not been that affected by
the Wesfarmers bid, as their share prices had already been
boosted by their individual partnering announcements.
Other miners still open to investment have seen share prices
rise since Wesfarmers’ bid for Kidman Resources,
see chart 2. For example, Pilbara Minerals is considering
partners for an uncommitted stage 3 offtake, chemical plant
participation and potentially a 20-49% minority ownership of
the project. When it announced it was looking for stage 3
partners on March 28, share prices rallied some 16%, but then
fell back when there was no fresh news of actual partnerships.
The price rallied again on the back of Wesfarmers’
bid for Kidman Resources since the bid may signal that other
large corporations may start to get more interested in merger
and acquisition activity in the lithium space.
Share prices of junior lithium miners Birimian Ltd, Bacanora
Lithium, Sigma Lithium and Neo Lithium, among others, also rose
on the back of the Wesfarmers bid.
This shows M&A activity has potential to breathe life
into those miners and projects that could still benefit form
fresh investment, as in the case of Kidman Resources. If the
Wesfarmers bid goes ahead, Wesfarmers will also invest its
share of the extra project capital needed to bring the Mount
Holland project into operation. Wesfarmers estimates its share
of that project capital could be $600 million, so M&A
activity is likely to remain a lifeline to those projects that
still need financing.
The rising tide from the Wesfarmers bid has not lifted all
boats, the "Traditional 5" producers from South America have
all remained under pressure, especially Livent who issued a
sales warning on May 8.
Generally, lower spot and new contract prices and increased
competition is weighing on these traditional producers.
Fastmarkets forecasts the spot lithium carbonate price, cif
China, Japan and Korea, to average $10.25 per kg in 2019, after
a range last year of between $14 and 17.60 per kg. The price
was recently assessed at $11-13 per kg.
The traditional producers may even have to take the lead in
restricting supply to underpin prices. SQM announced its 2019
sales would be some 10,000 tonnes of lithium carbonate
equivalent (LCE) below its production, meaning it will
stockpile material and Albemarle has said it would only sell
spodumene from the Wodgina project if there was demand for it
and they could get their required margin – these both
seem proactive steps to help avoid too much
The other equities that have underperformed have done so for
various reasons: Advanced Metallurgical Group (AMG) is a
well-established diverse producer and therefore not a pure
lithium play and Nemaska Lithium is still struggling following
its announcement in February that it needed extra financing.
Nemaska is now following a dual-track financing action plan to
raise equity, and/or look at M&A opportunities.
While Wesfarmers is an outsider investing in the lithium
supply chain, there are many potential companies that will need
lithium that could also be interested in securing supply, or
indeed have access to lithium at the cost of production. As
such, we do expect M&A activity to pick-up and for that to
boost the share prices of those involved. That said, share
prices might rise into any M&A event, but then subside once
a deal is done - this is because the more M&A that is done
the more likely those projects will come on stream sooner
rather than later and that could push the next supply deficit
further down the road.
Our outlook is bullish for demand for electric vehicles and
energy storage systems and we expect strong compound average
growth rates (CAGR) of 35% and 42% for each respectively. But,
not wanting to over simplify the situation too much, the sudden
pick-up in new lithium production in 2018, which will ramp up
this year with more of the new material getting qualified,
means the market has suffered a significant supply response in
a short period of time and it will take demand, even at 35%
CAGR, time to catch up.
So while lithium prices look set to remain depressed due to
current oversupply, M&A activity in the industry may well
step up a gear when potential buyers, and those looking to
secure supply, take advantage of this low price