Macquarie suggests lithium price upturn could be imminent as M&A frenzy continues

It is all happening in the ASX lithium space.

Gina Rinehart is taking on US giant Albemarle in a potential shoot-out for Liontown (ASX: LTR) and Chris Ellison’s Mineral Resources (ASX: MIN) has picked up the Bald Hill mine from the administrators, as well as somehow becoming the dominant force at Delta Lithium (ASX: DLI) with a holding of only 17.44%.

Then there was the confirmation that no less than Chile’s state-owned copper company Codelco was taking the country’s renewed nationalistic fervour seriously by putting Lithium Power (ASX: LPI) in its sights, fuelling a 9c price spike to 35c for LPI.

All that in just a week and at a time when lithium stocks generally have been under the pump since early August on weakening lithium prices.

Normally it might be expected that M&A action would be parked up while lithium prices bottom out from their fall from the extraordinarily high levels witnessed last year.

But clearly the belief is that the supply challenge, one that Rio Tinto suggests means 85% of expected supply growth from 2023-2050 will have to be met by new mines, has not gone away.

And the current lithium price weakness could be swept away soon anyway as the weaker prices are beginning to knock out higher-cost Chinese supply, opening up a widening supply gap.

It is a theme that Macquarie picked up on during the week with a market intelligence report suggesting that the weaker prices could accelerate the lithium market’s rebalancing.

“Given lower lithium prices, we note production cuts from both lithium carbonate (-0.6% month-on-month to 45,000t) and lithium hydroxide (-1.6% to 15,000t) in China in August,’’ Macquarie said.

“By contrast both cathode and battery makers are planning to lift production slightly in September. Given limited potential for destocking, the production plan mismatch could result in a supply gap in China, which could in turn, drive lithium raw materials demand, in our view,’’ the analysts said.

There is some history worth remembering.

“A continuous supply deficit will ultimately drive up lithium prices, and the time lag for a price response depends on downstream inventory levels,’’ Macquarie said.

“It was not until lithium inventory from cathode players fell from 0.68 months in July 2022 to 0.21 months in October (12,000t of LCE) that lithium prices began to rise rapidly.’’

And here we are now, with the cathode inventory falling back this August to the same level of 0.21 months after three months of de-stocking. Whether the priced response is as explosive as it was last time remains to be seen.

What is known is that lithium remains about the only interest in the mining and exploration sector, with explorers of particular investor interest as they'll be at the forefront of delivering new mine development opportunities if there is any hope of the supply challenge outlined by Rio being met.

As a result, while the gold sector on the ASX has been tanking on the yellow metal’s dive below $US1900/oz in response to US interest rates/strong dollar, the lithium explorers have been absolutely popping.

JAMES BAY:

James Bay Minerals (ASX: JBY) is an example. Mentioned here back on August 4 when it was in the process of raising $6m in an IPO at 20c a share, the company has since taken off to 39.5c, with a gain in Thursday’s market alone of 3.5c or 9.7%.

It helped that the company reported it had found a large outcropping pegmatite at its LaGrande project area in its namesake lithium hotspot in Quebec, and along trend from Patriot’s (PMT) world-class Corvette discovery.

It’s very early days (no confirmation yet it is lithium-bearing) but finding an outcropping “whaleback’’ in the first weeks of a maiden exploration program is just what the company could have hoped for.

PIONEER LITHIUM:

Another example of the elevated interest in the lithium juniors was on display in Thursday’s market when the $5m (20c a share) IPO of Pioneer Lithium (ASX: PLN) went off like a cracker. The shares closed on Thursday at 36c, which is some debut.

It is another with a focus on Canada, namely in Ontario (Root Lake, near a project of the same name where Green Technology Metals (GT1) has been kicking goals), and in Quebec (LaGrande, 14km from Corvette).

Airborne surveys, mapping and sampling is underway to generate drill targets.

RARE EARTHS:

It has been a horror year for the rare earths stocks, the only exception being Meteoric (ASX: MEI) because it is on to a world-class discovery in Brazil which it will either develop itself, or it will get taken over by an incumbent like Lynas (ASX: LYC) first.

Just as the lithium market has the long-term decarbonisation/supply shortages working away in the background, so too does the rare earths space, one that the western world is determined to see China’s dominance of diminished.

And just like the lithium market, where lower prices are leading to a rebalancing after a short period of weaker demand and destocking, things look like they are on the improve in the near-term on the price front.

Macquarie said this week that the NdPr price bottomed at $US59.90/kg in July and has since moved higher to $US71.70/kg in September. It is not the $US100/kg-plus pricing for the magnet material that would really fire things up, but the trend could well be the friend of the beaten rare earth stocks in coming months.

Leverage to the improving price outlook rests with the junior explorers which, as is the case in the lithium space, are being relied on to come up with the new developments needed to meet the seemingly impossible task of matching future supply growth to demand growth.

CODRUS:

Codrus (ASX: CDR) is a relative newcomer to the rare earths space, only adding the Karloning clay-hosted project near Mukinbudin in WA’s wheatbelt to its existing portfolio of WA gold/nickel and US gold projects last year.

Karloning has quickly developed a following in Perth circles, although Codrus’ low market cap on a 6.3c share price suggests the market wants to see more confirming work before getting too excited.

It has been a great start at Karloning, with a maiden drilling program returning thick, near-surface and high-grade hits. Best results reported recently included 20m grading 1,503ppm total rare earth oxides from 8m in the clay zone.

But it was a standout 29m hit grading 5,915ppm from 12m in the weathered granite zone below the clay zone that really got the excitement going.

Feldspar and quartz for the construction industry has been mined in a quarry at Karloning historically, with the pegmatite host – suspected to have a 1.5km strike length - being of the niobium-yttrium-fluorine type.

Additional AC drilling is being planned, and samples have been collected for the all-important leaching test work on the clay zone mineralisation.