Morningstar | SQM's Australian JV Resolves Lithium Mining Dispute; Shares Remain Materially Undervalued. See Updated Analyst Note from 10 Dec 2018
On Dec. 10, Kidman Resources announced that it has settled a regulatory dispute tied to the Mount Holland spodumene and lithium hydroxide operation. Kidman and SQM are partners in the Mount Holland operation, in a joint venture named Covalent Lithium. The resolution clears the way for Covalent to start construction of the spodumene and lithium hydroxide operation, which we expect to begin next year. We had already assumed Covalent would be able to resolve the regulatory dispute and, with no changes to our outlook, we maintain our $65 per share fair value estimate for narrow-moat SQM.At current prices, SQM is materially undervalued, as the company has now reduced the political risk in Australia related to its low-cost lithium hydroxide operation. The regulatory dispute stemmed from an Australian regulation requiring mine leaseholders to spend a minimum amount on development in order to maintain their leasing rights. The spending threshold was not met from 2014 to early 2016, a period before Kidman acquired the mining rights to Mount Holland and before SQM was involved. Kidman applied for an exemption, but the Western Australian Department of Mines recommended the exemption not be granted. If the dispute had not been resolved, Covalent might have had to forfeit mining rights to the Mount Holland site. At the very least, project delays would have ensued.
We view SQM as undervalued, as the market assumes long-term lithium prices below our estimates. We contend that higher-cost lithium supply will be needed to meet demand due to our above-consensus electric vehicle adoption forecast. By 2028, we forecast electric vehicles achieve 15% global penetration. In addition to greater EV adoption, hybrid vehicle sales and increased battery demand for uses such as grid storage and e-Buses will result in lithium demand growing from 220,000 metric tons in 2017 to over 1.5 million metric tons by 2028, a 19% CAGR.
For more information on our lithium outlook, please see our Nov. 30 report, "Put the Pedal to the Metal for Lithium Stocks: SQM and Albemarle offer attractive upside given our above-consensus electric vehicle adoption forecast." For more information on our electric vehicle forecast, please see our Sept. 24 Observer, "Electric Vehicle Sales in China and Europe Will Leave U.S. in the Dust, Driving Above-Consensus Global Adoption Rates."
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
We have operations in 27 countries.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.