Analyst Recommendation IA Capital Markets analyst Puneet Singh expects a tighter lithium market in the near term with prices trending higher as more supply appears.
In a research report starting coverage of the sub-sector released Wednesday, he emphasized the potential for increases relies heavily on the adoption of electric vehicles, and predicts demand will slowly grow globally beyond China’s current dominance.
“The market was oversupplied in 2018, but through curtailments at many Australian assets due to low lithium prices and also because no new mines came on-line last year, the market achieved balance,” he said. “Brine deposits in the lithium triangle of Chile/Argentina and hard-rock projects in Australia dominate supply. Chinese companies are increasingly forming JVs with operators and developers in efforts to corner the market and be long-term downstream suppliers to auto manufacturers. Producers have begun work on additional capacity, and longer term (2025+), more supply could be brought on as the market necessitates. Political conditions in key producing countries such as Chile may potentially be a supply bottleneck
“In the early part of the last decade, EVs (passenger EVs, commercial EVs, electric buses, etc.) accounted for 20 per cent of demand. Last year, EV demand was 30 per cent of overall demand and by 2025 we expect EVs to account for 60 per cent of overall lithium demand with passenger EVs alone accounting for 40 per cent of the demand. Tesla is no longer the dominant player and other automakers are introducing EV models in droves. Battery technology is also improving such that average range, a hiccup for consumer adoption previously, is increasing as efficiency and energy density of batteries are increasing along with it. In our assumptions, we presume passenger EV lithium demand to grow at an average 35 per cent (higher growth in 2021/22) growth rate per annum to 2025 and sales to account for 16 per cent of the total passenger vehicle market by then (2020: 4%). China has been a first mover, but we would expect the EU/US to catch up as countries incentivize automakers and consumers to adopt EVs to meet their climate goals.”
Mr. Singh called the lithium equity market “niche,” however he said it’s seen an increased funds flow over the past year, pushing some stocks to all-time highs. After a slowdown in prices thus far in 2021, he now sees an enticing entry point for investors “as lithium prices are signaling robust demand.”
In conjunction with the report, he initiated coverage of a pair of lithium project developers that are “edging” toward production.
Mr. Singh called Neo Lithium Corp.’s (NLC-X) Tres Quebradas project in the Lithium Triangle of Argentina as “world class” and said a September 2020 investment by Chinese battery manufacturer Contemporary Amperex Technology, which now owns an 8-per-cent stake on the company, was a “giant endorsement” of itsnpotential on many metrics.
Accordingly, he set a “buy” recommendation for Toronto-based developer.
“The 3Q project is the third highest-grade project in the world and has amongst the lowest impurities,” the analyst said. “This combination puts 3Q on the lower end of the global cost curve for lithium mines. Pilot scale ponds (running since 2018) and processing have yielded 99.891-per-cent battery grade lithium.”
“Given the size of the resource and Neo Lithium’s recent new discovery, we believe the current mine plan and our initial target price are conservative. Our rough numbers on a potential expansion to 40ktpa LCE show NLC could be worth double our initial target. We expect the Company to re-rate higher as a construction decision is approved, funding is secured for the project, and 3Q heads into production (iA estimate: 2023).”
Mr. Singh set a $5 target, which falls 77 cents below the average.