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Should you buy lithium miners Galaxy, Orocobre, & Pilbara Minerals?

James Mickleboro
Lithium mine shares

The market be charging higher again on Thursday, but the same cannot be said for Australia’s leading lithium miners.

Here is the state of the play in the battery ingredients industry this afternoon:

The Galaxy Resources Limited (ASX: GXY) share price is down over 2% to $1.31. This means the operator of the Mt Cattlin project in Western Australia has seen its shares lose 57% of their value over the last 12 months.

The Orocobre Limited (ASX: ORE) share price has dropped 2.5% to $2.76, stretching its 12-month decline to a disappointing 49%.

The Pilbara Minerals Ltd (ASX: PLS) share price is the worst performer on the ASX 200 on Thursday with a decline of over 6% to a 52-week low of 48 cents. This means its shares have now tumbled 47% lower since this time last year.

Why are the lithium miners being smashed?

These lithium miners have been smashed over the last 12 months due to a collapse in the price of the white metal.

Lithium prices have come under significant pressure due to increasing supply and lower than expected demand.

In fact, demand has been so much lower that some companies have opted to hold back production in order to preserve cash flow.

Unfortunately, for these lithium miners and their shareholders, one broker that thinks there is still more pain to come is Macquarie Group Ltd (ASX: MQG).

According to a note out of Macquarie Wealth Management, courtesy of The Australian, its analysts believe there is now a danger that some lithium producers could go out of business in the near term.

This is because there is evidence of a significant oversupply in the market at a time when demand just isn’t there.

Speaking about demand, the broker said: “Not only [are] electric vehicles slowing but energy storage system demand contracting outright; not just hydroxide weakness, but also carbonate; not just a problem with salts, but also rock oversupply.”

But knowing which lithium producers will fall from grace isn’t easy.

It analysts added: “Our initial view had been that the large South American brines producers would be best placed to survive due to their costs, but that was on a carbonate basis, which is the lower priced material. Then we began to view the Australian miners with the foresight to build hydroxide plants as contenders too, but the delays to high-nickel cathode adoption has made this material’s demand less certain at least nearby, as we see from the price spread compression.”

In light of this, I continue to believe investors should stay away from the lithium producers until supply and demand balance and there has been a sustained uptick in prices of the metal.

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Motley Fool contributor James Mickleboro owns shares of Galaxy Resources Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019