High sale prices for lithium assets suggest lithium company stocks may have corrected too much

Despite the recent disappointing performance of most lithium stocks, the largest lithium producer Albemarle Corporation (NYSE:ALB) to start-up producers like Lithium Americas Corp. (NYSE:LAC), each down about 30% in just six weeks, lithium carbonate prices remain near all-time highs and have risen more than 400% in the past year. The demand for silver metal in the electric vehicle (EV) battery industry remains high.

So far this summer, lithium stocks have been unable to shake off a pessimistic industry report released by Goldman Sachs in late May. The company expects “lithium prices to continue to correct for the remainder of the year and remain under pressure from increased supply over the next several years.”

Source: Trade Economics.

Recent anecdotal evidence suggests that demand for developable lithium projects remains robust. On July 11, Ganfeng Lithium, China’s largest producer of lithium compounds, agreed to buy privately held Lithea, Inc. for $962 million. Lithea owns the rights to two lithium salt lakes in the Argentine province of Salta. Ganfeng also owns a 51% stake in Lithium Americas’ flagship Cauchari-Olaroz lithium brine project in Argentina; Cauchari should begin its commissioning in 2H 2022.

In addition, Rio Tinto (NYSE: RIO) completed its US$825 million acquisition of the Rincon lithium brine project in Argentina in late March 2022. Rincon is also located in the province of Salta and is located quite close to Lithium Americas’ Cauchari project.

Finally, at the end of May 2022, GCL Energy Technology, a developer of clean energy projects and owner of an electric vehicle battery exchange service, paid approximately US$437 million (including transaction commission fees and transaction-related debt) for a 54.3% stake in the Dechenonba lithium mine in China’s Sichuan province. This equates to approximately US$1,112 per tonne of Dechenonba’s lithium carbonate equivalent (LCE) reserves.

This price paid for reserves, which will take many years to develop and require substantial dollar investments, represents 40% of Lithium Americas’ total enterprise value. Keep in mind that Lithium Americas’ flagship lithium project could enter commercial production in perhaps nine months, and the company is concurrently working on the development of another lithium project – the Thacker Pass lithium project, owned 100% in the US state of Nevada.

Clearly, lithium suppliers to the EV battery industry value lithium far more expensive than stock market investors. Given that industry players likely have access to timely information on supply and demand dynamics, it seems reasonable to believe lithium stock valuations could catch up to the commodity.

Information for this briefing was found via Edgar and the sources mentioned. The author has no security or affiliation related to the organizations discussed. Not a buy or sell recommendation. Always do additional research and consult a professional before purchasing a title. The author holds no license.

About Vicki Davis

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