“Tough market conditions” not limited to Core Lithium

As a market analyst, quite often I’ll report on a “surprise” company announcement. Unfortunately for Core Lithium (ASX: CXO) shareholders, there were few surprises in this morning's announcement it would be suspending mining and some development activities at its flagship Finniss lithium operation in the Northern Territory.

Citing an 85% fall in the price of spodumene concentrate over the last year, which includes a more acute decline of 50% since October, Core intends to “temporarily” suspend mining operations at Grants Pit – currently its only producing asset. Mining would recommence “should market conditions improve”.

Processing of ore stockpiles from Grants Pit would continue, however. Core noted it had 280,000 tonnes of ore stockpiles, which it expects should be sufficient to maintain production at its concentrator until “mid-2024”.

Core’s development project, BP33 which is presently at the early works stage, will be placed on care and maintenance, but work continues on an updated pre-Feasibility study. On exploration, Core noted it had completed its 2023 campaign, and it continues to analyse this data. Results would be announced in the “coming months”.

CEO Gareth Manderson described the current market conditions for the company as “tough”. The decision to suspend mining operations was part of a broader Strategic Review which aims to “reduce costs and “preserve business value and optionality”.

The company plans to update the market with revised operating costs, exploration, studies, and capital expenditure guidance for the rest of the 2024 financial year when it releases its December quarterly report at the end of this month. An impairment of the carrying value of Finniss was flagged, with details to be released in Core’s first half results due in February.

No surprises here, thanks Kerry! 👍

The reason I say there are few surprises in today’s announcement from Core, is I am an avid reader of everything my learned colleague Kerry Sun writes! In a great article where he outlined the cost curve for several ASX lithium stocks all the way back in November, Kerry noted Core was the company most likely to come under pressure at then-current prices.

At the time of that article, the price of spodumene concentrate was around US$1,400-US$1,800 a metric tonne depending on which data provider you were looking at. Kerry noted core produced at around $1,225 a metric tonne in the September quarter. Spodumene concentrate prices are now around US$950-US$1,000 a metric tonne. The maths speaks for itself. (If you’re looking for daily lithium prices and charts, I post these daily on X / Twitter!).

It's worth noting the production costs of other major ASX lithium producers. By Kerry’s reckoning, at current spodumene concentrate prices, there’s still some meat left on the bone for each producer he surveyed. Pilbara Minerals which produces at around US$400 a metric tonne, and IGO which produces at a world-class US$173 a metric tonne remain the pick of the bunch, whereas Piedmont Lithium / Sayona Mining’s margins are starting to look a little razor thin…

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ASX lithium stocks production costs (September quarter converted at 0.65 AUDUSD where applicable, Mineral Resources June quarter guidance)

But this assumes spodumene concentrate prices won’t go lower. As a technical analyst, and more specifically a trend following technical analyst, I have to say I have some reservations over this possibility when I look at the chart below.

The trend in the spodumene concentrate price doesn’t appear to be the friend of lithium investors

Keep in mind though, trend followers are always wrong at the top and the bottom! So while the strength of the current trend leads me to believe lower spodumene concentrate prices are most likely in store, there’s no reason we don’t print the exact low today and never look back.

Smacks of the uranium commodity price cycle

On the last point, I am reminded of similarities between the current lithium price cycle and the recent uranium price cycle. Since Adam was a boy, commodities like lithium and uranium have experienced boom and bust cycles.

Commonly referred to as the “commodity price cycle”, it describes the process of scarce resources rising in price during times of increased demand. Often demand suddenly explodes for whatever reason (e.g. Tulips are pretty, everyone wants a Tesla etc.) causing prices to skyrocket. Speculators looking to strike it rich often push prices exponentially higher.

The lithium carbonate price appears to show traits of the commodity price cycle

The massive increase in the price of the commodity stimulates greater production of the commodity as companies engaged in its exploration and development enjoy easier access to funding. Those companies not engaged in exploration and development of the commodity drop what they’re doing, retool, and start engaging in exploration and development of the commodity!

Long story short, often we end up with a supply glut which dutifully ends the price boom. Often, the price falls so far it becomes uneconomic to produce the commodity, which causes many producers to scale back production (i.e., Core Lithium), and others go out of business completely (let’s hope not!). At this point, supply declines and sets the market up for the next commodity price cycle!

Uranium appears to be in a different part of its price cycle compared to lithium

Uranium’s fortunes have turned after the exact commodity price cycle described above played out since the Fukushima Nuclear Disaster in 2011. This is not meant to be a discussion on uranium – I have written several articles on this for you to investigate – but it does beg the question: When will the lithium price cycle turn?

On this, I draw upon a chart I recently saw on Market Index’s sister site Livewire, in an article by Mark Gardner from MPC Markets. Mark suggests the market for lithium minerals could remain in surplus until 2029. From there though, he notes a combination of increasing demand from the EV industry and an acute lack of long term production would likely swing the lithium minerals market back to substantial deficit by 2030 which could get “ugly”.

Source: Mark Gardner available from: https://www.livewiremarkets.com/wires/traders-vs-titans-the-2-8-billion-lithium-bet

There are many similar charts of near-term surplus / long term deficit for lithium minerals, and as a student of markets for over thirty years now, I fully expect the lithium price cycle will turn eventually. This means we will at some stage once again read headlines about booming lithium prices. The problem in my experience is, the turn may come after many investors have given up and moved onto the next shiny new commodity price cycle!