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Morningstar | Lithium Stocks Fall on Price Concerns; We See an Attractive Entry Point as Our Outlook Is Unchanged

On Dec. 20, shares of all three lithium stocks we cover traded sharply lower, as junior lithium producer Orocobre announced its outlook for lower prices into 2019. We already expected lithium carbonate prices on a Chilean-export basis to fall from $12,000 per metric ton in 2018 to $10,000 per metric ton by 2020. However, we reiterate our view that prices will recover thereafter.

Due to our above-consensus electric vehicle outlook, we forecast 19% annual demand growth for lithium over the next decade. This will ultimately require higher-cost lithium supply come online to meet demand. As such, we expect lithium carbonate prices to rise back to our long-term forecast of $12,000 per metric ton by the end of 2022.

With our outlook unchanged, we maintain our $130 per share fair value estimate for narrow-moat Albemarle, our $18 per share fair value estimate for narrow-moat Livent, and our $65 per share fair value estimate for narrow-moat SQM. All three stocks are trading at a significant discount to our fair value estimates. In short, we think the market is over-reacting to declining prices for lower-grade lithium carbonate.

Additionally, we note that half of Orocobre's sales come from technical-grade lithium carbonate, which is currently purchased as a feedstock by lithium hydroxide producers in China. On Orocobre's conference call, management said the weakness in pricing was coming from the technical-grade product due to lower demand from lithium hydroxide producers, while also stating that battery-grade lithium carbonate prices were flat.

In our view, lower technical-grade lithium carbonate prices are an indication of an evolving lithium hydroxide market. As spodumene production ramps up in Australia, lithium hydroxide can be made at a lower cost using high-grade spodumene as a feedstock over technical-grade lithium carbonate. As such, we expect prices for technical-grade lithium carbonate to fall to a level that would make lithium hydroxide production costs equivalent to those associated with the use of spodumene feedstock. We estimate $10,000 per metric ton.

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."