After more than two years in a bear market, between mid-2018 and late 2020, the spot price of lithium carbonate has begun to recover strongly.
The price of lithium carbonate is extremely sensitive to general economic conditions in China as well as those pertaining to the electric vehicle (EV) market in particular. Initially, demand for EVs in China softened from Q2 CY18 on account of a more stringent Chinese policy towards EVs that supported higher battery energy density and range. As a consequence, the price of lithium carbonate in China, which had previously traded at a c 100% premium to the world market level, began to decline to the point at which the China CIF price and the China spot price were at close to parity by Q219. This trend of a weakening price was then further exacerbated by a slowdown in the domestic Chinese economy throughout 2019, coupled with rising trade tensions with the United States, to result in the domestic Chinese market undergoing a long period of destocking throughout 2019 to the point at which China had become a net exporter of lithium carbonate by the end of the year. This destocking occurred despite attempts by the Chinese authorities to implement generally favourable policies in support of the EV industry (which it regards as a strategic priority), including penalties, in the form of higher taxes, on the production of internal combustion engine cars and new emissions standards on cars in the provinces. The period of destocking in China also coincided with a period of restocking the rest of the world, to result in a situation in which stocks were high in the rest of the world by the end of 2019, but optimism was also high, despite the relatively low price, on account of the perceived long-term effect of a major shift in the world economy away from fossil fuels, in particular, and towards electrification and battery technology. Then coronavirus hit and, although it hit the prices of all base metals initially, the effect on lithium was generally much greater than on any of the others, owing to its much greater dependence on 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 the year close to its low (rather than high as for most other metals) for the period. Unsurprisingly, 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 – especially in China – superimposed onto a background of previously depleted inventories throughout the supply chain, causing lithium prices to bounce sharply, if also belatedly. Anecdotally, we understand that prices as high as US$13,000/t have been achieved on the spot market in China and that, selectively, the price of lithium carbonate has traded at a premium to lithium hydroxide recently. Similarly, we understand that cathode manufacturers have increased order volumes by 10–20% and, as contracts roll over and new contracts are agreed for 2022 and 2023 (typically in the September to November period), we would naturally expect to observe contract pricing increases on a quarter-by-quarter basis.
Where before we had assumed a long-term price for lithium carbonate of US$10,000/t, we are now predicting a long-term lithium carbonate price of US$12,000/t, supported not only by long-term demand trends but also inflationary price pressures that have acted to increase the cost curve (and therefore the level below which it is difficult for the price to drop).
Lithium hydroxide monohydrate price
We first adopted US$14,021/t as our long-term lithium hydroxide price forecast in February 2019 (see LiOH production beckons, published on 25 February 2019). At the time, both the lithium carbonate price and the lithium hydroxide price were relatively high (see Exhibit 3, below) and the premium of the latter over the former relatively low (Exhibit 4):
Exhibit 3: Lithium hydroxide price and lithium carbonate price, January 2013 to present (US$/t)
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Exhibit 4: Lithium hydroxide price premium vs lithium carbonate, January 2013 to present (US$/t)
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Source: Bloomberg, Edison Investment Research
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Source: Edison Investment Research. Note: Underlying data from Bloomberg and Edison Investment Research.
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Exhibit 3: Lithium hydroxide price and lithium carbonate price, January 2013 to present (US$/t)
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Source: Bloomberg, Edison Investment Research
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Exhibit 4: Lithium hydroxide price premium vs lithium carbonate, January 2013 to present (US$/t)
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Source: Edison Investment Research. Note: Underlying data from Bloomberg and Edison Investment Research.
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Our February 2019 long-term lithium hydroxide price was derived from a long-term lithium carbonate price of US$12,000/t and an anticipated lithium hydroxide premium of 16.8% per tonne. As discussed previously, the price of lithium carbonate declined after February 2019 and, while the price of lithium hydroxide initially declined in tandem, its premium widened materially. As the reverse has happened since October 2020 and the price of both has risen, the premium of hydroxide over carbonate has once again narrowed (Exhibit 4). Note that in terms of lithium metal units alone, all other things being equal, lithium hydroxide monohydrate would be expected to trade at a discounted price relative to lithium carbonate in the ratio 74:84 based on the different masses of the two salts per mole of lithium ions. The fact that it trades at a premium to lithium carbonate and that it has a lower volatility is, to some extent, indicative of its attractiveness as a raw material for lithium-ion battery manufacturers. It also reflects the fact that the majority of lithium hydroxide production has historically been derived from lithium carbonate produced from brines.
One potential interpretation of this apparent behaviour is that the lithium hydroxide price premium (in percentage terms) is inversely correlated with that of lithium carbonate (ie a high lithium carbonate price correlates to a low lithium hydroxide price premium and vice versa) and this is borne out by statistical analysis. A regression analysis between the two (Exhibit 5, below) reveals a Pearson product moment (correlation) coefficient of -0.62 which, given the number of data points in the analysis, is statistically significant at the 5% level (ie there is less than a 5% chance that the observed relationship occurred by chance).
Exhibit 5: Lithium carbonate price (US$/t) vs lithium hydroxide price premium (%)
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Source: Edison Investment Research
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However, if data points prior to February 2016 (when the market might be said to have been immature) are excluded, the correlation coefficient improves to a much more significant -0.88, as shown below. Note: effectively, this knocks off the ‘spur’ observed in the lower left of Exhibit 5:
Exhibit 6: Lithium carbonate price (US$/t) vs lithium hydroxide price premium (%), February 2016 to present
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Source: Edison Investment Research
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As can be seen from the above regression analysis, a long-term lithium carbonate price of US$12,000/t corresponds to a lithium hydroxide price premium of 25.8% and therefore a long-term lithium hydroxide monohydrate price of US$15,091/t. Note that the curve entitled ‘Required’ shows the premium required for the lithium hydroxide price to be US$15,091/t at the lithium carbonate price shown. Thus:
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Any long-term lithium carbonate price above US$10,250/t could be consistent with a lithium hydroxide price at or above US$15,091/t.
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A long-term lithium hydroxide price of US$15,091/t is consistent with a long-term lithium carbonate price of US$12,000/t and a lithium hydroxide price premium of 25.8% (the intersection of the ‘Required’ curve with the linear best-fit regression line).
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A lithium carbonate price above US$13,000/t almost guarantees a lithium hydroxide price above US$15,091/t.
One risk to this analysis is the potential for the lithium hydroxide price to diverge from its historical relationship with the lithium carbonate price. Currently, lithium hydroxide may be formulated either from brines (with the production of lithium carbonate as an intermediate product) or via the alkaline conversion process from spodumene concentrates. Production of lithium hydroxide from brines and therefore via lithium carbonate necessarily requires lithium hydroxide to command a premium price given the expense of the conversion. However, direct production of lithium hydroxide from spodumene concentrate does not. In the event that the market bifurcates into lithium carbonate production from brines for mass-market lithium battery applications (eg mass-market cars) and lithium hydroxide production from spodumene (eg for prestige cars with greater battery power density), the current (close) relationship between lithium carbonate and lithium hydroxide prices may break down and a new relationship be established between the lithium hydroxide price and the price of spodumene concentrate. Note however that the cost to convert spodumene concentrate into lithium hydroxide is currently estimated to be in the order of US$2,500/t lithium carbonate equivalent alone and that the overall AISC for spodumene concentration and conversion into lithium hydroxide is much higher than for brine so, from a margin perspective, it is still entirely possible that lithium hydroxide will maintain its pricing premium relative to lithium carbonate. As discussed previously, readers should note that in terms of lithium metal units alone, all other things being equal, lithium hydroxide monohydrate would be expected to trade at a discounted price relative to lithium carbonate in the ratio 74:84 based on the different masses of the two salts per mole of lithium ions. On the other hand, lithium hydroxide remains a ‘premium’ product appropriate for use in higher-specification, higher-power density batteries destined for use in premium automobiles.
Until any reconfiguration of the market therefore and as a consequence of the above analysis, we have increased our long-term lithium hydroxide price to US$15,091/t (cf US$14,021/t previously) to reflect a long-term lithium carbonate price of US$12,000/t (cf c US$10,000/t previously). Note that this compares to the pricing assumed in its Phase 1 Plant project DFS (dated 28 May 2020 and provided by BMI) of US$13,669/t lithium hydroxide over the life of the project, reverting to a long-term real price of US$12,910/t from 2030.
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$293m (5.7c/share on a pre-funding basis and 4.8c/share on a post-FY21 equity funding basis) at the current foreign exchange rate of A$1.3267/US$ (cf A$1.2831/US$ at the time of our last note in April 2021).
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 1.7c/share (ie subscribers to the rights/entitlement offer at 1.3c/share bought into the project at a below average price) and a post-FY21 equity funding valuation for Lepidico of 1.5c/share, ranging up to 6.4c/share (excluding cash).
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.
Our company model assumes that Lepidico will raise the balance of the required equity of A$18.0m (cf A$15.1m previously) at a price of 2.9c/share (as set out in our report Valuation update pending feasibility study, published on 6 April 2020). This price is at a 142% premium to the current share price of 1.2c. However, given that Lepidico’s shares reached 2.8c in March 2021 and 3.4c in January 2021 and that they have nevertheless appreciated by 100% from their level of 0.6c in June 2020 and by 20% from their level of 1.0c in December 2020, we do not believe that a medium-term share price of 2.9c is unreasonable, especially in the event of the successful conclusion of additional offtake negotiations and/or US DFC debt funding on preferential terms (see our note Enter the US government, published on 5 November 2020). In addition, management has indicated that it would be unlikely to commit to raising new equity at much below this price. Hence, we continue to show the results of our analysis on this basis. However, we also show the results of the analysis with equity raisings conducted at a series of different prices under ‘Future equity funding price’ in the ‘Sensitivities’ section of the note, below.
In our last note on the company (see Fine tuning the mine and chemical plant, published 21 April 2021), we calculated a value for Lepidico’s shares of 4.48c plus 0.29c 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 4.76c/share. We have now updated our valuation to take account of the following in our financial model:
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the current one for seven rights/entitlement offer to raise A$9.6m via the issue of 741.1m shares (plus 370.6m options) at a price of 1.3c/unit;
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the top-up placement to raise an additional A$2.9m via the issue of an additional 223.1m shares plus 111.5m options also at 1.3c/unit;
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an expanded A$18.0m equity raise in FY22 (cf what would have otherwise been A$15.1m on a like-for-like basis previously);
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an updated long-term lithium hydroxide price of US$15,091/t (cf US$14,021/t previously); and
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an updated current and future FX rate of A$1.3267/US$ (cf A$1.2831/US$ previously).
In the wake of these changes, our (discounted) valuation of Lepidico’s future (maximum potential) dividend stream to shareholders has increased by 4.9% to 4.70c/share in FY21, rising to a peak of 6.89c/share in FY25 when we estimate that the company could pay a maiden dividend, as shown in the graph below:
Exhibit 7: 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 4.70c/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 to be 0.26c/share to result in a total value for Lepidico’s shares of 4.96c/share (cf 4.76c/share previously), based solely on its Phase 1 project. A ‘bridge’ chart, showing the transition in valuation from 4.76c/share to 4.96/share by component is shown below.
Exhibit 8: Lepidico valuation bridge, April 2021 to June 2021
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Source: Edison Investment Research
To this may then be added a potential risk-adjusted 0.61–1.53 cents (post-FY21 equity funding) for a conceptual 20,000tpa LCE Phase 2 plant (see pages 5–7), to take the total conceptual aggregate valuation to 5.57–6.49 cents per share. |