Introduction:

Lithium Mining Star Stock Refuses Albemarle's High Premium Takeover

Lithium Mining Stocks Under Pressure, Prices Still Have Support

New Energy Vehicles Take the Opportunity to Invest in Lithium Suppliers

The Cost Doubling of Australia's Major Lithium Mines Becomes a Risk Factor

Valuation Returning to Reasonable Levels for Further Attention

Tesla and South Korea's LG Energy Solution's Australian lithium supplier, Liontown Resources, is currently facing a tough battle with Albemarle Corporation.

As a giant in the commodity industry, Albemarle previously extended a high premium takeover offer to the Australian lithium mining star stock, Liontown, with the acquisition price increasing from 2.2 Australian dollars per share to 2.5 Australian dollars, driving its stock price to soar after the market closed. However, all three bids were rejected by Liontown.

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On one hand, the board of directors of Liontown Resources is still patiently waiting for the emergence of more potential competitors to bring higher bids. Liontown controls two major lithium deposits in Western Australia, including its flagship Kathleen Valley project, which is one of the world's largest and highest-grade hard-rock lithium deposits.

On the other hand, Albemarle's global merger and acquisition ambitions have not diminished. In the view of Australian financial investment research, the latest acquisition proposal is "opportunistic," coinciding with a softening valuation in the lithium industry and the Kathleen Valley project's production start-up before generating profits.Looking at the global landscape, due to the weakening demand for electric vehicles in China, the demand for lithium mines will decrease. Coupled with the current downward impact of the macroeconomy, various logics indicate that Australian lithium mining stocks will face pressure this year.

Since last September, the stock prices of lithium mining companies have been falling all the way. Except for Liontown, which was offered a bid, the stock prices of several other major lithium mining companies have shown a significant decline.

Austrac Investment Research believes that in the overall downturn of the lithium mining industry, there is a clear difference in the degree of capital recognition among companies in the industry. The trend of corporate stock prices also shows differentiation, which further increases the confusion in investor decision-making.

To this end, the Austrac Investment Research team has specially written this article, starting from the three direct factors affecting stock prices: lithium mine prices, lithium mine output, and production costs, to analyze Australian lithium mining stocks.

Lithium mine price trend: still has support

When it comes to the price of lithium mines, it is inevitable to mention the Australian lithium mine giant Pilbara Minerals (ASX:PLS). The lithium mine selling price of PLS has always been regarded as the "lithium price weathervane."

Previously, the sales model adopted by PLS was auction, which allowed PLS to maximize profits in the short-term supply and demand imbalance of lithium resources. For overseas lithium mine buyers, their purchase cost can be calculated using the following formula:

This model allowed lithium mining companies to enjoy the dividends brought by the continuous rise in auction prices, and stock prices also rose all the way. However, since last November, lithium mine prices have continued to fall, and PLS's previous auction model has become unsustainable. Therefore, on February 20, PLS announced a pricing reform.

PLS announced that the spot price will be linked to the price of lithium hydroxide, and the selling price of its lithium mines is determined based on the future selling price of lithium hydroxide after being converted into lithium hydroxide. Expressed in the formula as follows:

Under this pricing model, lithium mining companies can still obtain the maximum profit, and the intermediate processing companies, although they do not have to bear the loss brought by the fluctuation of lithium prices, their income becomes fixed, and in fact, they have become the "affiliated departments" of lithium mining companies.The revenue of lithium mining companies, by calculating the intermediate processing costs, can actually be inferred from the price of lithium hydroxide.

The main raw material for lithium hydroxide production is spodumene, and the main auxiliary materials are sulfuric acid, soda ash, caustic soda, and calcium carbonate, etc.

From the annual report, PLS achieved an average price of $4,993 per ton in the first half of the 2023 fiscal year, corresponding to a lithium ore grade of 5.2%-5.5%.

After changing the pricing method, without considering the processing fees, based on the current lithium hydroxide price of 298,400 RMB/ton and a value-added tax of 13%, the theoretical price of 6% grade lithium concentrate is $5,138 per ton, and the price corresponding to a grade of 5.2%-5.5% is $4,452-4,709 per ton.

Therefore, from the perspective of selling price, the price of lithium ore still has strong support. Compared with the average realized price of $1,232 per ton in the first half of the 2022 fiscal year, the price of $4,452 per ton is still a significant increase. Even if the price of lithium hydroxide may continue to decline, lithium mining companies still have a large buffer space.

Lithium ore production and demand: steadily increasing

In the past few years, lithium ore can be described as a "crazy stone". The price of lithium ore has been soaring, and lithium mining companies have been expanding to cope with the rising demand. Even now, although the price of lithium has fallen, lithium mining companies have not stopped.

After all, the myth of "stones turning into gold" continues. PLS announced that it is expected to expand the Pilgan plant in 2023 (see the figure below), increasing the annual output by 100,000 dry metric tons, and a few days ago passed a resolution to further increase investment, allowing the annual output of spodumene at the Pilgan plant to reach 1 million tons.

Liontown is also accelerating the development of the Kathleen Valley lithium project, which is expected to start production in the second quarter of 2024. The mine has proven lithium ore reserves of 109 million tons, with an expected annual output of 3 million tons. It is reported that Tesla's order and LG's order each account for about one-third of the annual production capacity after the Kathleen Valley lithium project starts production.

The main reason why lithium mining companies dare to increase production boldly is that the long-term market demand remains strong.Following the initial decline in lithium prices last year, which led to a drop in the stock prices of lithium mining companies, automakers led by Volkswagen and Mercedes-Benz expressed their desire to acquire stakes in some lithium mining companies or mines to ensure the supply of lithium and battery minerals.

Mercedes-Benz's CEO, Ola Källenius, stated at a public conference that the automotive group had made a basic decision that if there were opportunities for "deep procurement"—directly sourcing lithium mines or companies—they would act without hesitation.

In China, BYD Auto, with the support of Warren Buffett, has taken a stake in Chengxin Lithium Industry, the country's third-largest lithium supplier.

In fact, to not fall behind in the global electric vehicle race, automakers worldwide are doing their utmost to secure lithium supplies. Compared to signing long-term supply contracts with mining companies, equity investments are becoming increasingly common.

In addition to this, aerospace companies are also major customers for lithium, semiconductors, and battery minerals. Power systems are the most critical part of spacecraft, requiring substantial battery storage and ensuring stable operation under harsh environmental conditions. For instance, the energy storage capacity of Musk's spacecraft is expected to exceed 1 megawatt-hour to support manned space missions and deep-space exploration.

Lithium mining production costs: Doubling as a risk factor

Amidst strong long-term market demand, the biggest challenge lithium mining companies currently face is the uncertainty of development costs in the process of developing mines.

Influenced by overall inflation in Australia and a shortage of contractors, new lithium mine construction costs have skyrocketed, with some bidding project prices increasing by more than 30%. Consequently, the cost of building large-scale lithium mines in Australia has doubled in just three years.

Take Liontown's Kathleen Valley as an example; its construction cost was estimated at 473 million Australian dollars in the 2021 feasibility study. After a reforecast in June 2022, the cost rose to 545 million Australian dollars. In the latest calculations, the cost has soared to 895 million Australian dollars for smooth development.

PLS also announced shortly before Christmas that the cost of its project in Western Australia had surged by nearly 40%. However, PLS can use its existing cash flow from lithium mining to offset the soaring costs. Pilbara's mine production and export volumes have increased consecutively in each of the past three quarters, with its cash balance increasing by 851.1 million Australian dollars over the past three months, reaching 2.22 billion Australian dollars.In comparison, Liontown, which has not yet generated revenue, may need an injection of capital before the end of this year to complete the construction of Kathleen Valley on schedule, which is also part of the reason why Albemarle is making its move now.

Australian Financial Investment Research Viewpoint

At this juncture, although Albemarle's offer to Liontown is very "opportunistic," the cash offer proposed by Albemarle can indeed reduce the risks associated with project development and operations for Liontown shareholders, and it is actually worth considering.

The reason behind the continuous rejection of the offer by Liontown's board is nothing more than a bet on Albemarle's expectations for lithium prices. If Albemarle anticipates that lithium prices will rebound by 2025, the offer for Liontown will also increase; on the contrary, Albemarle may abandon the acquisition.

Therefore, in the long term, the lithium mining industry is supported on both the price and demand sides. The excellent performance of lithium batteries makes them the most popular batteries under the global trend of decarbonization, with important applications in new energy vehicles and the aerospace field. In the medium and short term, the uncontrollable development costs and market expectations of falling lithium prices have become the main reasons for suppressing current stock prices.

However, as the overall market for the lithium mining industry declines, the valuations of some companies have returned from high premiums to a reasonable range. Combined with Albemarle's continuous increase in the acquisition price for Liontown, investors can actually screen some companies with strong fundamentals, such as low debt and high cash flow, and start to pay more attention.