Jarden says earnings expectations for lithium miners may have become too exuberant, leaving elevated valuations vulnerable to disappointing earnings.
"In our view, current lithium prices are unsustainable. Jarden earnings forecasts are generally some 30-50% below consensus over the next three years," said Jarden analysts Ben Lyons and Jon Bishop in a Monday report.
" ... Given challenging valuations, we expect the market to derate materially as consensus estimates are revised lower."
"Despite our underweight sector stance, we acknowledge the positive long-term electrification narrative and large benchmark weightings for the lithium sector," the analysts said.
The New Zealand-based broker said it has a preference for 'high-quality, low-cost, vertically integrated operates' like Allkem (ASX: AKE), Mineral Resources (ASX: MIN) and IGO (ASX: IGO) - all three of which are Buy rated.
Some interesting comments about the three Buys include:
Allkem: "... superior valuation upside, growth profile and the quality of its portfolio, which boasts resources that can be measured in centuries rather than decades."
Mineral Resources: "We consider MIN the enigma of the large cap lithium investment universe. Are investors willing to accept an investment in a high-cost, low-grade swing iron ore producer in exchange for gaining exposure to a world-class lithium business?"
IGO: "The established nature, size, grade and cost structure of Greenbushes combined with the first-mover advantage on the lithium hydroxide processing capacity in Kwinana informs our Overweight [rating]."
Pilbara Minerals (ASX: PLS) was hit with a Sell due to its expensive valuation.
Ticker | Company | Rating | 12m target price |
---|---|---|---|
AKE | Allkem | Buy | $17.71 |
IGO | IGO | Overweight | $16.59 |
MIN | Mineral Resources | Overweight | $83.14 |
PLS | Pilbara Minerals | Sell | $3.65 |
Three stocks were shortlisted for Jarden's coverage of the lithium developer universe.
Ticker | Company | Rating | 12m target price |
---|---|---|---|
LLL | Leo Lithium | Buy | $1.19 |
LTR | Liontown Resources | Neutral | $1.86 |
CXO | Core Lithium | Sell | $0.53 |
Some interesting comments about the diverging ratings include:
Leo Lithium: "... boasts the most valuation appeal, due to the discount currently being ascribed by the market due to country risk (Mali) and perceived overhang of its largest shareholder (Firefinch)."
Liontown: "... importantly boasts 100% equity in the deposit and, in our view, greater exposure to potential sector consolidation."
Core Lithium: "... we view the asset quality, permitting, cost structure and elevated valuation as significant hurdles."
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