The indicator that proves the lithium sell-off is overdone

"Evidence at the coal face suggests customer demand remains incredibly strong," says Pilbara Minerals (ASX: PLS) managing director Dale Henderson, as detailed in the following wire.

We discuss the record sale as the market prepares for news of Liontown's third major lithium offtake deal. And look at what's happening as Mincor banks its first cheque from BHP (ASX: BHP), along with plenty of smoke billowing from Nimy's nickel hunt in Western Australia.

Lithium producer Pilbara has served up the best rejection to date of last month’s call by Goldman Sachs that the bull market in battery metals was over because of an outsized supply response by the industry.

Pilbara’s rejection came in the form of its advice to the market that its latest spot sale of lithium-bearing spodumene concentrate for shipment in July covering 5,000t had gone off at a record $US7,017/t on an adjusted basis.

Pilbara began auctioning off spot cargoes in July last year on its BMX platform, with the first cargo going off at an adjusted $US1,420/t. Again reflecting the wall of demand, the latest cargo was sold ahead of the next planned BMX auction.

The buyers could not wait it seems. They obviously did not read the Goldman note.

Remembering that production costs for the spodumene concentrate producers are well below $US1,000/t across the WA industry, the record price says the boom is alive and well, and that the sell-off in the lithium stocks has been overdone.

The Goldman call that the boom was over was followed up by a similar assessment by Credit Suisse, and when combined with the general market selloff on interest rate/recession fears, the double-whammy effect pulled the rug on ASX lithium equity valuations.

Spot sales are not reflective of the realised prices, which continue to be dominated by fixed-price contracts. But the industry is quickly moving to increase the component of spot/index pricing with their customers. Pilbara’s development of the BMX platform is part of that process.

It means that the lithium producers will be capturing a greater share of the massive margin that spodumene convertors are enjoying after the 500% increase in prices for the battery precursors of lithium hydroxide/carbonate they produce to around $US70,000/t.

Pilbara’s incoming MD Dale Henderson put the record price for the spodumene shipment into a broader context:

“This is an exceptional outcome which provides further evidence of the unprecedented demand for battery raw materials being experienced across the global lithium-ion supply chain at this time."

"Contrary to recent suggestions that the market has peaked, the evidence we are seeing at the coal-face with our customers, including this pricing outcome, suggests that demand remains incredibly strong, with a continued healthy outlook for the foreseeable future.”

Pilbara shares nevertheless closed a shade lower in Thursday’s market at $2.05. That’s down from the 52-week high in January of $3.89 which goes to the suggestion that the sell-off in the lithium stocks has likely been overdone.

Canaccord summarised the record price achieved by Pilbara, saying lithium pricing keeps on giving. It has a $3.60 price target on the stock.

While the news from Pilbara was clearly heartening stuff for the sector, it has to be remembered that there is also nothing homogenous about the sector. The absolute thrashing of Lake Resources (ASX: LKE) highlights that in no uncertain terms.

What was a $3.5 billion company earlier this year is now valued at just $960 million.

There is a component in there from the broader market sell-off, and the second hit all lithium stocks took in the wake of the Goldman missive. But the collapse in Lake’s share price is very much stock-specific, the main factor being the shock departure on Monday of its MD Stephen Promnitz.

Unexplained departures of MDs never go down well. It means Lake has become a short-sellers plaything, and that investors have been left to ponder where to next in its aggressive development planning for its Kachi lithium project in Argentina, one based on an adapted water treatment technology yet to be proven for lithium extraction at commercial scale.

Liontown:

Pilbara’s tonic on just where the lithium market is at did not spark a broad rush back into the sector.

So it seems the other lithium stocks are going to have to do some heavy lifting themselves to begin to recapture the higher ratings they had before the Goldman report landed, and before the general market sell-off.

Positive newsflow is what it is all about and according to a diary note, Liontown (ASX: LTR) could soon deliver on that front.

The diary note was made two weeks ago when Liontown’s MD Tony Ottaviano gave a strong hint that the lithium developer was close to securing a third offtake agreement for its Kathleen Valley development in WA, following on from the two already in the bag with Tesla and Korea’s LG.

The former BHP(ASX: BHP) senior executive told the Resource Rising Stars conference on the Gold Coast that the company was in deep discussions on a third and final offtake for the project.

“I can see their eyes (albeit) across the virtual table. They don’t wave the Goldman Sachs report at me."

As might be expected given the quality of counterparties in the first two offtakes, and his BHP background, Ottaviano said Liontown was being “very deliberate around our offtake strategy (the first production is possible in two years)”.

“We have learned from the mistakes of the first generation of lithium producers – the quality of your counterparty is crucial.” Given a final investment decision on Kathleen Valley is planned by the of this financial year, the naming of the third “quality” off-taker can’t be far off now.

Liontown closed 8% lower in Thursday’s market at 88c. That compares with its 52-week high of $2.19. Another big name offtake partner won’t hurt its share price rebuilding cause.

Mincor:

Talking about quality off-takers, Mincor (ASX: MCR) has no less than BHP’s Nickel West nickel unit as its customer for its restarted Kambalda nickel business.

It has just received its first cheque from Nickel West ($25.3m) for concentrate deliveries, and it has confirmed that against the odds, it completed the restart on schedule and under budget.

There was only a small celebration in Mincor’s share price, which put on 3% to $1.66, leaving the stock well short of its recent peak of $2.84 a share. Funnily enough, RBC has a price target on the stock of $2.85 a share now that the cash is flowing in.

Key to a re-rating from here will be the acceptance that elevated nickel prices are here to stay, not at the crazy levels of earlier this year when China’s Tsingshan was caught out in a short-squeeze on the LME, but elevated, nevertheless.

Mincor’s feasibility study released in March 2020 in support of an economically-robust Kambalda restart was based on a A$22,500/t nickel price assumption.

And here we are with the nickel price sitting at $A36,175/t. Over the initial five-year life of mine for the restart (63,000 tonnes of nickel-in-concentrate), the revenue difference would be worth more than $860m.

That goes to the suggestion last week that there was a disconnect between commodity prices and resource company equity prices. The disconnect has narrowed with price falls in iron ore and other commodities, but it is holding true in nickel.

Beyond the acceptance of higher-for-longer nickel prices, Mincor’s next re-rate event will be off the back of a maiden resource estimate next month for the previously-unexplored ground between its Durkin North and Long mines.

It will start the market thinking about mine life extending well beyond the five years initially planned, a sure-fire re-rate event.

Nimy (NIM):

The exploration juniors have been particularly hard hit in the broader market sell-off, even if commodity prices, on the whole, have remained supportive.

There are plenty of examples of 80% share price hits. But there are not so many where interest in a particular project has enabled the junior to either swim against the tide, or at least hold on to much of the higher levels that prevailed before the big sell-off got going.

Nickel explorer Nimy Resources (ASX: NIM), mentioned here at its 20c a share IPO last year and in April when it was commanding 50.5c a share, is in the latter category with its no-complaints close on Thursday of 40c a share.

That’s because of interest in Perth mining circles around drilling results from its flagship Mons nickel-copper project, 140km north of Southern Cross in WA.

It covers a lightly explored 80km northern stretch of the Forrestania nickel belt.

The latest drilling at the Dease prospect within the broader Mons project area tested a conductive anomaly that returned elevated copper, silver, and zinc sulfide mineralisation values over a thick intersection.

It was followed by a deeper and thicker ultramafic interval carrying nickel and copper mineralisation, as was the case in earlier drilling at Godley prospect.

Early stages but a lot of smoke building up in the hunt by the lightly capitalised Nimy across what can now be said to be multiple mineralisation styles at Mons.