Lithium spring on the cards as green shoots emerge

Using Pilbara Minerals (ASX:PLS) as a proxy, the ASX-listed lithium sector has been on the skids since March 2022. Its share price fall in the year-to-date alone has been a painful 23% in response to the crash in lithium prices.

But there should be no surprise that at this dark time in the lithium space, green shoots are popping up everywhere. Individually they don’t signal the lithium market has bottomed, but you’ve got to wonder.

Given the equities market is now pricing lithium stocks as if there will be no recovery, the leverage to even modest improvements in prices for spodumene/lithium chemicals is building by the day.

While the green shoots are popping out everywhere, there are three that stand out as potential turners of the tide.

First up there was the commentary from Rio Tinto, no less, that it was in the market for more lithium assets to build a more meaningful presence in lithium as a diversification mechanism. It thinks the market is at a cyclical low, otherwise if wouldn’t be in a buying mood.

And it doesn’t care where prices for lithium are at present, with its boss Jakob Stausholm saying likely growth in demand was double-digit compared with the 1%-3% growth to be found in iron ore, copper, and aluminium.

“We really have to think about what's going to be the average (lithium) price over the next 10, 15, 20 years. I think it's fairly given that the world will need lithium because you do need lithium for at least high-performance batteries,” he said.

“And the world needs more batteries.”

Another green shoot is the recent mine closures by small producers and pull back in development and expansion plans by industry heavyweights like Albemarle and Arcadium, among others.

It means the timing of the market switching back to undersupply, because of the double-digit growth in demand Rio pointed to, will arrive sooner than is currently anticipated, forcing a cyclical kick in prices to the higher levels needed to incentive a supply response.

The last of the green shoots to be mentioned today covers off on the very reason that the lithium market is as beaten up as it is today – China’s creation of an oversupply situation by its sponsorship of low quality material from Africa and from its domestic sources.

Those operations are said to be dropping off as they can’t make money at these prices. The quality of the material has been causing headaches in the chemical conversion plants which was okay when lithium prices were stronger, but not at current prices.

Brinsden:

The pullback in low-grade material from China and Chinese-funded African sources is the most important of the green shoots, if there is such a thing.

It was a theme that Australia’s “Mr Lithium” Ken Brinsden – the guy who built Pilbara’s Tier 1 Pilgangoora operation and who now heads up the dual-listed Patriot Battery metals (ASX:PMT) - addressed at Diggers & Dealers in Kalgoorlie during the week, and on his return to Perth.

“China has probably overplayed their hand,” Brinsden said. “They worked really hard at coming up with some novel sources of supply and it worked in correcting the price.

“But they probably went over the top with some pretty crap products which has had the effect of crushing the price as compared with achieving a more moderate price.”

Brinsden said the African material, and some Chinese domestic production, was already starting to fall out – a green shoot for sure.

There is another related one, with Brinsden saying the novel sources of supply to crush lithium prices had served to build out the right hand side of the cost curve.

“That is not good for the purposes of their long run supply of low cost material. You could reasonably expect in the long run, higher lithium prices because what has been built out on the right hand side of the cost curve,” he said.

On the demand side, Brinsden said while China had zero competitive advantage in lithium raw materials, it had a massive competitive advantage in just about every other segment of the downstream supply chain.

They have been putting it to good use too, with lithium battery cell costs in the LFP category halving in the past 12 months.

“The outcome is that the addressable market in the lithium-ion battery world is ballooning. That translates to the next wave of demand which is what we should all be looking forward to,” Brinsden said.

“Have a look at what has happened to cost of EVs in China because the cells have got cheaper. It is now economically compelling to buy an electric vehicle because it is cheaper.

“In the West we dream of that. But they are already doing that in China. So China is going to steal market share from the west just about everywhere else they can, that’s for sure. That’s why we can be optimistic about demand.”

And when it comes to supply of raw materials, the demand for quality and lower cost inputs from the west will get carried along for the ride.

Patriot:

Now it wouldn’t be a D & D without a presentation that included a big chunk of company self-promotion.

It was no different when Brinsden swapped his industry spokesman hat for that of company man.

Like the rest of the sector, Patriot’s share price has been under the pump, taking its market cap down to $C570m.

Brinsden said Patriot’s Shaakichiuwaanaan (formerly Corvette) discovery in Quebec is a “really amazing discovery”.

“And as much as Pilgangoora is close to my heart, and a fantastic project, actually Patriot’s Shaakichiuwaanaan (the new name is a nod to the local Cree nation) is more like Greenbushes than it is Pilgangoora,” he said.

That’s saying something because as good as Pilgangoora is for the $9 billion Pilbara, it is Greenbushes (owned by Tianqi/IGO and Albemarle) that is the world’s best hard-rock source of lithium, due to its high-grade and scale of resource.

Ahead of D & D, Patriot upgraded the resource at its project to 142Mt, with 80Mt at 1.44% in the indicated category and 62Mt at 1.31% in the inferred category, with the former to be fed into a feasibility study due in September next year.

The resource update entrenched the project as the world’s eighth biggest hard-rock lithium resource, and one with above-average grades. But there is likely much more to come, with Patriot able to report a compliant exploration target of an additional 146-231Mt at 1-1.5%.

It is the sort of scale and grade Rio will be looking for in its hunt for additional lithium assets. Chris Ellison’s Mineral Resources (ASX:MIN) is on the Patriot register with about 3.5% of the company and Albemarle has continued on with its 5% stake.

Should a shootout develop for control of Shaakichiuwaanaan, the likelihood is that the starting price will be well north of the 44c a share price of the ASX-traded Patriot. Shaw and Partners followed up the release of Patriot’s upgraded resource by reaffirming its 12-month $1.80 price target on the stock.

A scoping study on Shaakichiuwaanaan is expected this quarter, so the potential of the high-grade and infrastructure blessed project, and its value to Patriot – or a would-be acquirer/partner - is about to come in to sharper focus.