The ASX lithium stocks have rebounded strongly after the world’s top lithium producer, Albemarle announced a halt in construction of additional processing capacity and second-quarter results that were ahead of analysts’ expectations. In last week’s final three trading sessions:
- Galaxy Resources Ltd (ASX: GXY) share price was up 20%
- Orocobre Ltd (ASX: ORE) share price was up 15%
- Pilbara Minerals Ltd (ASX: PLS) share price was up 15%
All three have opened morning trade down slightly, but the boost in sentiment last week provided relief for the Australian lithium sector that has been making new 52-week lows on a monthly basis. However, the question remains, is this just a temporary bounce?
I believe a stable or consolidating lithium spot price is needed for a sustainable rebound in lithium stocks. Contrary to the lithium miners’ share price movements, lithium is still a crowded market dominated by producers selling at lower prices to boost sales. At the same time, buyers anticipate this weak downstream market outlook and are reluctant to close long-term deals.
China, as a key driver in the consumption of lithium through electric vehicles, has also recently announced that it is scaling back subsidies on electric vehicles to encourage local manufacturers to rely on innovation rather than government assistance. The subsidy for pure battery electric vehicles with driving ranges of 400 kilometres and above will be cut by half from 50,000 yuan (AU$10,500) to 25,000 yuan.
While underlying fundamentals are looking weak for lithium producers, they are still very undervalued in my opinion. Galaxy Resources, Orocobre and Pilbara still have plenty of cash in the bank, with US$176.3 million, US$248.0 million and US$63.6 million, respectively.
Galaxy Resources recently announced a record production that exceeded its production guidance while placing its project as one of the lowest cost lithium concentrate operations in the world.
Pilbara also cited that it was receiving a price of US$644/dmt (dry metric tonnes) at a cash operating cost of US$528/dmt. It aims to have costs lowered towards US$320-350/dmt by Q4 FY20 with further improvements in material recovery, plant stability and optimisation.
Any commodity-related company will experience the ebb and flow of the market. I believe Galaxy Resources is most strongly positioned to weather the lithium bear market with its strong cash position and low costs.
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Motley Fool contributor Lina Lim has no position in any of the stocks mentioned. 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