M&A appetite of leading lithium players is valuable insight into their bullish outlooks

For a while there, the cashed up lithium producers couldn’t believe their luck.

The halving of lithium prices from last November’s high caused the share prices of owners of undeveloped lithium assets to be pummelled, even though lithium prices remained at fantastic levels.

So in stepped US lithium giant Albemarle with a $5.5 billion big-premium bid for Kathleen Valley developer Liontown (LTR). But Liontown founder Tim Goyder and his mates accounting for 40% of the stock said no thanks.

Liontown on Thursday remained well ahead of Albemarle’s third indicative offer of $2.50 a share by trading at $2.72. Will Albemarle come back with a higher offer? Time will tell.

Then there was the $136m January bid at a big premium by the Tianqi/IGO joint venture for Pioneer Dome owner Essential (ESS). It got killed off on Thursday in an 11^th blocking action by Chris Ellison’s Minerals Resources (MIN) at a meeting of Essential shareholders to approve the bid.

MinRes – which is a partner in lithium mining and processing in WA with Albemarle - recently acquired a 19.55% Essential stake at prices of up to 55.8c – well ahead of the 50c Tianqi/IGO bid.

Will it now bid to wrap Pioneer Dome into its regionally-close Mt Marion lithium mine joint with Ganfeng or will Tianqi/IGO come back with a higher offer that the ever-practical MinRes will accept? Time will tell.

The bigger point here is that there has now been $5.63 billion in (stymied) bids by big-name lithium producers for lithium developers (Liontown) and explorers (Essential) at what were big premiums to the pre-bid market prices.

So the question is this. Does the broader lithium sector, which is still carrying the scars from the big sell-off in the opening months of the year, deserve a re-rating, notwithstanding lower spodumene/lithium prices?

On the assumption that Albemarle, Tianqi, IGO and MinRes are not fools, the answer would seem to be yes. In making their bids, they obviously saw sharply higher long term value in Liontown and Essential that the market did not.

They also have a deeper understanding of where the lithium market is headed than the average equities analyst does.

And more importantly than this market perhaps appreciates, they have a better appreciation of how the value of WA spodumene/lithium has increased because of the Biden administration’s pump priming of EV sales through the Inflation Reduction Act (IRA).

Even without the impact of the IRA – Europe can be expected to follow - and the $5.63 billion in lithium takeover bids, there were signs that the equities market was coming around to the idea that the sell-off in the opening months of the year had been overdone.

As most equity analysts have all along assumed spodumene/lithium prices would fall from last November’s peak to about where they are now, their stock valuations are again well ahead of the non-takeover bid lithium stocks because of the sell-off in the opening months of the year. And that is without knowing what the producer bidders know.

That came through in a note during the week from UBS. Its price target on Pilbara (PLS) was $4.60 compared with Thursday’s close of $3.89. IGO’s PT was $19.10 ($13.89), Allkem’s (AKE) PT was $16.30 ($11.64), MinRes’s PT was $94 ($79.71) and Liontown’s PT was $2.80 ($2.72).

The price target calls were after UBS simultaneously increased its long-term lithium price assumptions by 20% while taking short-run prices down by 15-30%.

For an explanation of why short-term weakness gives way to long-term strength, there is no need to go any further than Allkem’s assessment of the lithium market contained in its quarterly report, released on Thursday.

“’The fundamentals underpinning lithium demand remain very strong: EV sales continued to grow during the March quarter, with Chinese EV sales increasing by 25% y-o-y and sales in the US and Europe also posting strong growth and higher than expected penetration against ICE vehicles,” it said.

“Despite a slow start to the calendar year, global EV sales forecasts remain at about 14m units, implying a steady acceleration during the remainder of 2023.”

“EV demand is strongly supported by government targets and policies, including the EU’s parliamentary agreement that all new vehicles registered in Europe must be zero emission by 2035; and the more recently announced US EPA rule that will require 60% of new car sales to be EVs by 2030, and 67% by 2032.”

It’s a whole new world. But no one is sure if the supply challenge can be met.

Sunstone:

It’s a struggle for junior explorers to command much attention from analysts. Nice to see then that Taylor Collison has continued on with its coverage of Sunstone Metals (STM).

It has the company as a speculative buy, without a price target. Sunstone last traded at 3.1c for a market cap of $82m.

In its latest note, Taylor Collison highlighted the recently reported hit of epithermal gold mineralisation (176.7m at 0.97g/t gold with silver) at the Limon prospect, part of the broader Bramaderos porphyry gold-copper project in southern Ecuador.

Bramaderos itself has an initial resource estimate of 156Mt grading 0.53g/t gold equivalent for 2.7Moz of gold equivalent, and an additional 3.3-8.6Moz in the exploration target category. So it has the potential to become a typically low-grade but bulk-tonnage, and long-lived, porphyry development in its own right.

Taylor Collison’s point was that with more work confirming a sizeable and near-surface epithermal resource overprinting the porphyry mineralisation, Sunstone could have a “starter”’ development on its hands, one with a quick payback to contribute to funding a bigger porphyry development. It is why the Limon epithermal hit could well be a game changer.

Rare earths:

There is not a day that goes by without there being a rare earths junior posting a big percentage increase in its share price in response to some exploration results.

The leveraged response is despite underlying rare earth prices not doing much more than bouncing along at what most consider to be the bottom.

But because rare earths too are plugged into the EV boom – and the Western world’s desire to move away from a dependence on supplies from China – investors are alert to the longer-term outlook for the strategic materials.

That came through in a big way in the price run up in Australian Rare Earths (AR3). It recently announced an increase in the resource estimate for its Dovetail ionic clay-hosted deposit at its Koppamurra project in South Australia to 101Mt grading a handy 818ppm.

It also set an exploration target for the broader Koppamurra project of up to 1.4 billion tonnes, which really got the juices flowing.

What was a 24c stock on April 3 on news of the resource upgrade took off to as much 81c. It was helped along by a favourable news report in a national broadsheet and Sprott’s assessment back on April 3 that the stock was worthy of a $1.05 price target.

With a run up like that, any explorer worth their salt would be tapping the market in an equity raising. That’s just what AR3 is doing to accelerate its work at confirming Koppamurra is something special in the rare earths space, and to get it on the quick and low capital intensity development pathway that ionic clays can offer.

Talking about something having the potential to be something special, Tolga Kumova’s Meteoric (MEI, trading at 14c) is within a week or two from announcing a maiden resource estimate for its Caldeira ionic clay-hosted project in Brazil.

Argonaut said this week that it considers Caldeira to be the most significant ionic clay rare earths discovery outside of China. Needless to say, the maiden resource estimate is keenly awaited.