Goldman takes another stab at lithium: Buy Allkem, sell Core Lithium

Goldman Sachs is shaking up the lithium space again, initiating coverage on six local heavyweights.

Source: Goldman Sachs Research (December 2022)

Three key themes to watch

Goldman Sachs expects the outlook for the sector to be driven by three key themes over the next 12 months.

1. Lithium price decline from 2H23: "While we see earnings support for the Australian stocks over 12-18 months on price lags, on a 12 month view we expect lithium stock prices to fall as lithium price decline from record peaks."

2. Vertical integration: "Moving downstream from spodumene into lithium chemicals offers a margin accretive opportunity for producers with longer life, higher grade resources, particularly with emerging uncontracted volumes."

3. Low costs: "With the pricing backdrop, we prefer low-cost producers with quality resources to underpin growth optionality and vertical integration over developers."

Why prices might decline in 2023

Chinese EV subsidies have pulled forward battery demand by at least 12-24 months, according to Goldman.

"The team believes the battery maker overcapacity, on the back of accelerated capacity build-out amid a decelerating growth of new energy vehicles sales will eventually weigh on lithium prices," the analysts said.

This dynamic is forecast to come into play in the second half of 2023.

Buy Allkem, Sell Core Lithium

Goldman has a preference for Allkem as a player that's trading at a discount to peers with the ability to grow its lithium production by more than fourfold by FY27.

On the flip side, Core Lithium was viewed as a stock that's "run ahead of fundamentals, trading at 1.5 times net asset value or pricing ~US$2,400/t long-term spodumene."

Most ASX-listed lithium stocks are red on Thursday, but the Goldman report is driving quite a divergence across share price performance.

Core Lithium is down -5.6% at noon while Allkem is -2.2%.