Lithium spotlight: Albemarle upgrades FY22 earnings, Wednesday selloff and Pilbara bounce

A broad-based rally on Wall Street and earnings upgrade from US-listed lithium giant Albemarle are the likely catalysts behind a bounce back for ASX lithium stocks. 

Albemarle Q1 recap

Albemarle is one of the top five largest lithium miners in the world based on market cap. For ASX investors, the company is most known for the Wodgina lithium mine joint venture with Mineral Resources (ASX: MIN).

Albemarle earnings increased 88% to US$432m in the March quarter, supported by higher lithium pricing and the benefit of a one-time sale of spodumene from the initial start of Wodgina.

The most encouraging piece of news from Albemarle was its upgraded FY22 earnings outlook, now expected to be up between 200% to 225%. Just three months ago, the company was expecting just 65% to 85% earnings growth for FY22.

The upgrade was primarily driven by renegotiated variable price contracts and increased market pricing.

Albemarle noted potential upside if market pricing remains strong or any advantageous renegotiations in ongoing contracts.

The key drivers and sensitivities to earnings were: 

• Energy storage (~70% of lithium sales): Primarily driven by EV sales in Europe and China

• Specialties and TG (~30% of lithium sales: Primarily driven by consumer spending and industrial production

Albemarle shares were up 9.3% overnight and added another 15.1% in after-hours trade.

Wednesday: A brutal day for lithium leaders

Market conditions were brutal for the new emerging lithium leaders including:

• AVZ Minerals (ASX: AVZ) -19.2%

• Sayona Mining (ASX: SYA) -14.5%

• Essential Metals (ASX: ESS) -12.8%

• Arizona Lithium (ASX: AZL) -8.6% 

• Critical Resources (ASX: CRR) -6.3% 

Both AVZ and Critical Resources both released positive market sensitive announcements.

AVZ announced it had been awarded the mining licence for its Manono Project in Democratic Republic of Congo.

The widely expected news drove a 19% rally as the market opened, but progressive selling pushed its shares to an ugly -19% close. The stock experienced a massive -34.8% swing from intraday highs to lows.

AVZ Minerals intraday chart for Wednesday, May 4 (Source: TradingView)

Its interesting to see that the market used the widely expected news as a liquidity event to exit the stock.

This is perhaps a warning for investors that amidst a fragile and cautious market, news that would otherwise pump a company's share price might be short lived and vulnerable to reversals and profit taking.

Large caps

Towards the larger end of town, names like Pilbara Minerals (ASX: PLS) and Allkem (ASX: AKE) are trying to stabilise after topping out in early April.

Pilbara Minerals is bouncing off the 200-day and $2.60 level - a key area that has provided plenty of support in the past.

Source: TradingView, Annotations by Market Index

The bigger picture

The VanEck Rare Earth/Strategic Metals ETF had a brief moment of euphoria in early April, breaking out to all-time highs. Only to crash almost -30% over the next three weeks.

The ETF provides exposure mainly lithium and other strategic metals. Its top 5 holdings include Lynas, Pilbara Minerals, Allkem and two Chinese players.

Rare Earth/Strategic Metals ETF (NYSE: REMX) (Source: TradingView, Annotations by Market Index)

The ETF was in a very grim place last week after slicing through the 200-day (blue line) and $96 support area (red band).

It's somewhat encouraging to see it bounce in the last two sessions, though the chart remains far from bullish, given the recent selloff- a lot more work is needed.