Big swings – the lithium price
The prices of both lithium carbonate and lithium hydroxide have increased sharply since our last note on Lepidico, as the market has been squeezed upwards having previously been in the doldrums notably longer than almost all other metals, owing to its much greater exposure to the EV sector. Thus, whereas the prices of other base metals recovered from approximately March 2020 onwards, the price of lithium carbonate continued to decline until late October and barely recovered to finish close to its low for the year (rather than high, as for most other metals). As a consequence, exploration and mine development was severely curtailed in the period 2018–20, with the result that the long-term thesis in support of lithium remains, to all intents and purposes, unchanged (ie EV demand to account for nearly half of all cars sold by 2030, battery power to increase 13x relative to today and lithium demand to sextuple from 2019 to 2030), but after two years of ‘lost’ time and investment in the interim. As a degree of normality has returned to the world economy in 2021, therefore, there has been a period of restocking of lithium chemicals and concentrates – especially in China – superimposed onto a background of previously depleted inventories throughout the supply chain, causing lithium prices to bounce sharply. Moreover, this trend has accelerated into the New Year, as evidenced in the graph below of benchmark prices in North and South America.
Exhibit 1: Lithium hydroxide and lithium carbonate prices, January 2013 to present (US$/t)
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Quarterly contract pricing increases (negotiated in the September to November period) have similarly been observed for 2022, and spot prices in China have recently exceeded US$50,000/t.
Our previous price assumption for lithium hydroxide (Lepidico’s principal product) had been based on an assumed long-term lithium carbonate price of US$12,000/t and a 25.8% price premium of the former over the latter, driven by the statistically significant relationship between that premium and the latter’s price since February 2016. However, as the following graph makes clear, this correlation now appears to be in the process of either breaking down or shifting to a ‘new paradigm’.
Exhibit 2: Lithium carbonate price (US$/t) versus lithium hydroxide price premium (%)
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Source: Edison Investment Research
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One justification for the apparent shift in the observed relationship between the lithium carbonate price and the lithium hydroxide price premium is that, historically, the bulk of lithium was produced from South American brines, which are typically processed into lithium carbonate. This could then be further processed into lithium hydroxide, albeit at a cost which was recouped in the form of the lithium hydroxide price premium. Hence, lithium hydroxide almost invariably traded at a premium to lithium carbonate to reflect the cost of conversion. At present, however, the majority of new lithium capacity is in the form of hard rock mining to produce spodumene concentrate and thence to lithium hydroxide without the need for a lithium carbonate intermediate product. Hence, in future, unlike the past, there will be no (or, at least, a reduced) expectation of a causal relationship between the price of lithium carbonate and the price of lithium hydroxide. That being the case, and in recognition of the current squeeze in the market, the continuation of the secular trend towards increased lithium demand and the two-year period of ‘lost’ investment between 2018 and 2020, we have now revised our short- and long-term forecasts for lithium carbonate and lithium hydroxide prices to those shown below.
Exhibit 3: Lithium price forecasts (US$/t)
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2022 |
2023 |
2024 |
2025 |
2026 |
2027 onwards |
Previous |
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Lithium hydroxide (US$/t) |
15,091 |
15,091 |
15,091 |
15,091 |
15,091 |
15,091 |
Lithium carbonate (US$/t) |
12,000 |
12,000 |
12,000 |
12,000 |
12,000 |
12,000 |
Hydroxide price premium (%) |
25.8 |
25.8 |
25.8 |
25.8 |
25.8 |
25.8 |
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Current |
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Lithium hydroxide (US$/t) |
25,000 |
25,000 |
25,000 |
22,000 |
20,000 |
18,000 |
Lithium carbonate (US$/t) |
24,000 |
24,000 |
24,000 |
21,000 |
19,000 |
17,000 |
Hydroxide price premium (%) |
4.2 |
4.2 |
4.2 |
4.8 |
5.3 |
5.9 |
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Increase (%) |
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Lithium hydroxide |
+65.7 |
+65.7 |
+65.7 |
+45.8 |
+32.5 |
+19.3 |
Lithium carbonate |
+100.0 |
+100.0 |
+100.0 |
+75.0 |
+58.3 |
+41.7 |
Source: Edison Investment Research
While the near-term increase in our price forecasts for lithium hydroxide may appear large in percentage terms, they should be considered in the following context:
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At least one well-known metals trader believes that the price of lithium hydroxide could tighten to US$100,000/t over the course of the next two years and that it will then settle back to US$30–40,000/t until 2030, with US$17,000/t representing only the low point of prices over the course of the next cycle.
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As recently as 2022, well-known consultants, Roskill, forecast average contract battery-grade carbonate prices of US$23,609/t (in constant 2021 US dollars) over the 2021–36 period and US$24,683/t for domestic China spot prices over the same time period.
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Notwithstanding the above divergence of views, a broad consensus that the lithium market will be in deficit for the remainder of the current decade and that prices may exhibit volatility, but should in general be supported by increases in the global cost curve of existing producers sustaining prices at higher levels for longer.
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Piedmont recently calculated its reserves (typically with a requirement to be ‘conservative’ in accordance with the strictures of S-K 1300 and JORC Code reporting) based on a fixed price of US$18,000/t for battery-quality lithium hydroxide.
Note that, within this context, Lepidico, which had calculated its reserves previously based on a price of less than US$13,000/t, is expected to re-calculate them again mid-year at a yet to be determined (but likely higher) price.
In the light of the ‘big swings’ and ‘small roundabouts’ discussed previously, we have made the following adjustments to our financial model of Lepidico:
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Whereas previously, we had assumed that Lepidico would make its first shipment of product in early CY23, we now assume that it will occur in early CY24. This will have the effect of shifting first revenue from FY23 to FY24.
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We have adopted the updated lithium hydroxide price forecasts presented in Exhibit 3.
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We have assumed an additional US$10m in capex (plus contingency) and an associated increase in future equity funding from US$14.0m/A$19.6m (net) to US$41.8m/A$58.3m (gross) over the course of the next 12 months at the prevailing share price of 3.4c (cf 3.7c previously).
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We have updated our forex rate from A$1.3878/US$ to A$1.3936/US$.
All other assumptions and forecasts remain unchanged.
Project
Lepidico’s DFS (see our note, Developing to the (L-)Max, published on 29 May 2020) calculated a project NPV8 for the integrated Karibib mining and chemical plant operation of US$221m, or A$310m (5.0c/share on a pre-funding basis and 3.9c/share on a post-FY22 equity funding basis) at the current foreign exchange rate of A$1.3936/US$.
In our report Gold stars and black holes, published in January 2019, we calculated a mean enterprise value for companies with projects at the DFS stage of development of 30.9% of project net present value (NPV), ranging up to 133.5%. This alone would imply a pre-funding valuation for Lepidico of 1.5c/share, ranging up to 6.7c/share.
Company
Our valuation of Lepidico varies from our value of the integrated Karibib mining and chemical plant project in that it takes into account Lepidico’s 80% interest in the Namibian mine (but 100% of the Abu Dhabi chemical plant), which will give rise to both a tax-paying position in Namibia and a minority interest in the profits generated from mining operations. It also assumes ongoing corporate costs in the order of A$3.1m per year.
In our last note on the company, we calculated a value for Lepidico’s shares of 5.43c plus 0.27c for the value of an envisaged loan to the minority shareholders in the upstream Namibian operation to give a total valuation for the company of 5.70c/share. In the wake of the changes discussed above, our (discounted) valuation of Lepidico’s future (maximum potential) dividend stream to shareholders has now increased by 18.0%, from 5.43c to 6.41c/share in FY21, rising to a peak of 8.98c/share on the cusp of the company’s first material dividend in FY26, as shown in the graph below:
Exhibit 4: Edison estimate of future Lepidico EPS and (maximum potential) DPS
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Source: Edison Investment Research
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To this valuation of 6.41c/share should then be added the value of Lepidico’s envisaged future loan to the minority shareholders in the Namibian mining and concentrating operation, which we estimate at 0.23c/share (fully diluted), to result in a total value for Lepidico’s shares of 6.64c/share (cf 5.70c/share previously), based solely on its Phase 1 project. A ‘bridge’ chart, showing the transition in valuation from 5.70c/share to 6.64/share by component is provided below.
Exhibit 5: Lepidico valuation bridge, December 2021 to February 2022
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Source: Edison Investment Research
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To this valuation of 6.64c/share may then be added an (updated) potential risk-adjusted 0.73–1.77c/share (fully diluted) for a conceptual 20,000tpa LCE Phase 2 plant (see pages 4-6 of our note, Phase 2 coming into view, published on 18 June 2021, updated for a long-term lithium hydroxide price of US$18,000/t), to take the total aggregate conceptual valuation to 7.37–8.41 cents per share.