9 lithium market themes for ASX investors to watch in 2023: Bell Potter

2023 has turned into a rollercoaster ride for the once smooth sailing and upward trending lithium sector.

Things got dark rather quickly, with Chinese EV subsidies drying up in January, Chinese spot prices tanked more than 50% from recent peaks and short interest began aggressively rising for several ASX-listed lithium companies.

Adding to the volatility was the left-field bid from Albemarle, which spiced up the lithium sector on Tuesday. It’s so far turned into a three-day relief rally for most names. 

Bell Potter published a deep dive into the lithium sector on Wednesday, and within it, its themes to watch in 2023. 

Bell Potter’s Lithium Market Themes for 2023

#1 Capital and operating cost inflation

It’s not surprising to see a number of lithium companies flag a sharp increase in development and expansion costs. Some recent culprits include:

• Pilbara Minerals (21 December 2022): P680 Expansion Project capital costs increased 36% from $298m (June 2022) to $404m

• Liontown (20 January 2023): Pre-production capital costs increased to $895m from June 2022 FEED estimates of $545m

• Pilbara Minerals (29 March 2023): FID for P1000 Project set to cost $560m

#2 Lithium and EV market volatility 

“Current lithium price indices are still relatively immature and illiquid, adding the risk of price volatility with flow through to equity market sentiment,” said Bell Potter.

“EV sales data and commentary from major auto and battery manufacturers (Tesla, CATL, BYD) provide another volatile short term indicator impacting market sentiment.”

Source: Bell Potter

#3 Early DSO sales and cash flow 

Bell Potter notes several companies selling or planning to sell lithium bearing pegmatite ore to customers in Asia – This process is known as Director Shipping Ore or DSO for short. Some notable players include:

• Core Lithium (October 2022): Completed a sale of DSO at grades of 1.4%, priced at US$951 per dry metric tonne

• Liontown: Identified 0.8 to 1.2 million tonnes of potential DSO inventory

• Red Dirt: Expects to commence mining at its Mt Ida Project in late 2023 and plans to initially sell DSO to customers

#4 M&A activity heading up

There have been three ASX-listed deals announced so far this year:

• IGO and Essential Materials: The IGO and Tianqi joint venture proposed to acquire Essential Materials at 50 cents per share or $136 million

• Azure Minerals and SQM: SQM invested $20m for a 19.99% stake in the company. Azure operates the Andover Project which has identified ‘very high grades of lithium from spodumene-rich pegmatites at multiple prospects.’

• Liontown and Albemarle: The announcement revealed two additional offers from Albemarle of $2.35 on 3 March 2023 and $2.20 on 20 October 2022

#5 Market not geologically constrained 

“We view the lithium market as not geologically constrained and expect a stream of pegmatite discoveries, maiden Mineral Resource Estimates and MRE upgrades over 2023,” the analysis said.

The race to build Mineral Resources inventories will also lead to fast-track scoping and feasibility studies over 2023. 

“However, key constraints to project development will likely be permitting activities (environmental and native title/first nation agreements).”

#6 Greenfield developments on the verge of production

A number of projects are expected to hit production status in the next 0-12 months:

• Core Lithium: Finniss shipped its first DSO on 5 January 2023

• Argosy Minerals: Rincon Project is in preliminary ramp-up stage

• Allkem: Olaroz Stage 2 Expansion set to enter production by June 2023

• Wesfarmers-SQM: Mt Holland Project expects first production in 2024

• Liontown: Kathleen Valley on-track to hit production status in mid 2024

#7 Big brownfield expansions

Brownfield expansions were viewed as ‘low-hanging fruit’ opportunities to bolster production. Notable upcoming expansions include:

• IGO: Greenbushes to grow spodumene production from 1.2m tonnes in 2022 to approximately 2.2m tonnes by 2027

• Pilbara Minerals: Various growth initiatives for Pilgangrooa to grow spodumene production from 450,000 to 1m by 2026

• Mineral Resources: Mount Marion spodumene production to grow from FY23 guidance of 300-330,000 tonnes to 900,000 tonnes in 2023

• Mineral Resources: Wodgina spodumene production to grow from 250,000 in 2022 to 750,000 by mid-2023 

#8 Challenges with downstream

Bell Potter notes there are currently three spodumene to lithium hydroxide plants currently under construction or ramp up in Western Australia by IGO, Wesfarmers-SQM and Albemarle.

Producing a high-value product is easier said than done as “we understand that there is a steep learning curve to achieving full capacity utilisation at these facilities,” the analysts said. 

 “There are also risks associated with the disposal of process by-products (e.g. sodium sulphate).”

#9 Midstream processing to boost project economics

Midstream refers to processes that occur after lithium is extracted from its ore but before its used in final products such as batteries. This includes processes such as refining, purifying and converting the lithium into high-purity lithium compounds such as lithium phosphate or lithium sulphate.

Midstream activities allow domestic companies to capture “a component of the chemical margin and improving logistics efficiency,” says Bell Potter. 

“Midstream processing facilities are expected to have materially lower capital costs compared with lithium hydroxide or lithium carbonate facilities.”

Pilbara Minerals is currently completing a scoping study for a potential midstream processing facility with its JV partner Calix (ASX: CXL).