Battle of the ASX lithium heavyweights: Who comes out on top?

Up until recently, the lithium wave has been a rising tide that has lifted all boats. And whilst the tide is not going out as such, the market is starting to become more discerning when it comes to sorting the winners from the losers.

That’s because lithium prices have rolled over, sharply, after peaking in November. And the latest set of company results are just starting to show the impact of the lower price.

It means investors are starting to focus more on operational efficiency, cost management and project development, as any cracks in these factors are no longer so easily papered over with a surging price.

This sentiment is shared by Michael Wayne from Medallion Financial, who sat down with me to discuss the results from Allkem (ASX: AKE) and Pilbara Minerals (ASX: PLS).

He said of those companies the following;

PLS: The major positive surprise was the announcement of their maiden dividend six months ahead of schedule. That's a good indication that, operationally, they've been progressing very well.

AKE: On the flip side, the surprises for Allkem were probably more negative. Operationally they have seen some cuts in production guidance for Mt Cattlin. There have also been some delays in the stages for Sal de Vida.

And on both, Wayne offered the following;

Ultimately, these companies are price-takers and they are heavily reliant on the lithium price. And lithium price has been under enormous pressure. 

• NPAT of US$222.5 million vs. expectations of US$249.7 million

• Revenue of US$557.9 million vs. expectations of US$573.7 million
• EBITDA of US$401.5 million vs. US$97.8 million in 1HFY22
• Discontinued operations cost of -US$3.2 million in the period
• Final continuous operations profit of US$219.23 million

Pilbara (ASX: PLS) Full-year Key Results

• Production of 309,255 dry metric tonnes of spodumene, up 83%

• Shipments of 286,876 dmt of spodumene, up 68%
• Sales revenue of $2.18 billion, up 647%: In line with $2.20 billion expected
• Statutory net profit of $1.24 billion, up 989%
• Cash balance of $2.23 billion compared to $591.7 million a year ago
• Inaugural dividend of 11 cents per share

Key company data for Allkem

Key company data for Pilbara

What were the key takeaways from this result?

Pilbara Minerals is a lot more developed at this stage than AKE. 

Allkem has a lot of production runway to come in the outer years, whereas PLS is really capitalising on the high prices in the here and now. 

Investors need to understand and maybe distinguish the different risk categories that both those companies fall into. We have been monitoring what's been going on with China and the fact that the Chinese government ended a decade-long subsidy for electric vehicle purchases in the back end of last year. That's potentially creating some uncertainty. 

Would you buy, hold or sell AKE  and PLS on the back of these results?

Rating: HOLD

We're happy holders of both PLS and AKE on a longer-term time horizon. We still like the long-term thematic in the lithium space.

What’s your outlook on AKE and PLS and the sector over the year ahead? Are there any risks to this company and its sector that investors should be aware of?

They talk about in Europe, 70% of the cars on the road could be electric by 2030. That's a pretty big tailwind. You've got battery storage capacity increasing as well. 

They're definitely businesses that we want to be in over the long term.

However, in the short term, there have been some changes in the policies out of China. We've also seen the world's largest battery maker, CATL, offering big discounts to Chinese automakers and big discounts on lithium pricing. 

That's been interesting for the last couple of months to observe, and that suggests the biggest battery maker in the world is pretty cautious about the lithium outlook, at least in the short term. So, they're some of the things that we're monitoring at the moment, which make us a little bit cautious in the short term.

From 1-5, where 1 is cheap and 5 is expensive, how much value are you seeing in the market right now? Are you excited or are you cautious on the market in general?