The Lithium Sector is a Mine Field
Investors need to be extremely wary of lithium development projects right now.
The team at Mangrove Investor are working hard to understand the vulnerability of lithium mining companies to lower lithium prices. And so far, the data says these companies are massively overvalued.
The current lithium price is around $13,600 per metric ton according to the Daily Metals Price website. Yet a recent preliminary economic analysis (PEA) report on a popular Nevada project used $13,400 per metric ton as their base case in the economic model.
In other words, they didn’t show us the value of the project at the 10-year average price (which is around $12,800 per metric ton). The reason is that this project’s value collapses quickly with lower lithium prices.
And here’s the thing, lithium prices spent the first half of the last decade below $10,000 per metric ton. The metal averaged $8,400 per metric ton as recently as 2020. Lower lithium prices are not only possible, but they are also likely.
That should terrify investors, because the lithium price in China fell 69% over the past 12 months. And there are rumblings that sodium batteries offer similar performance, with significantly lower cost. Multiple electric vehicle (EV) makers now offer sodium batteries. That means lithium lost its moat as the only battery metal available for EVs.
And ExxonMobil recently announced a new business division to produce lithium from oilfield brine. They have an innovative technology that allows them to produce lithium cheaper and faster than existing techniques. They pull the lithium out of the brine and put the brine back into the ground – no evaporation ponds and no mining necessary.
New competition in batteries and lithium supply should continue to push lithium prices lower. If you own a company developing a lithium project, it’s time to sell. But that shouldn’t be news…lithium stocks fell hard for the last two years. You can see the trend in this chart of the Global X Lithium Exchange Traded Fund:
Don’t let the recent price jump fool you, this sector is in trouble. Lithium prices could fall further. In 2023, Grandview Research put the lithium market at $8.2 billion. They projected a 12.8% annual growth rate to 2030.
However, the aggregate market value of lithium producers is over $42.6 billion. In other words, the current market value of lithium producers is more than 5 times the value of the current market.
That’s a serious valuation problem, especially with the potential price risks. Investors should beware – 2024 may not be an auspicious year for lithium.
We see development projects as the most likely sources of over-valuation. The PEA’s that use lithium prices of $30,000 per metric ton are fantasies. If a company doesn’t show a project’s value at lower prices, don’t walk away – run away.
For the Good,
The Mangrove Investor Team
Numbers You Need to Know
Over 70% of global lithium production comes from only two countries. (Elements)
Possibly world’s largest lithium deposits found in the USA. Discovered in an extinct volcanic crater on the border of the US states of Nevada and Oregon. The deposits, spread over the area around Thacker Pass, hold 20 to 40, with a maximum of 120 million tons of lithium. (Electrive)
The last 12 months have revealed a growing standoff between governments, civil society organizations and climate scientists on one hand, and the oil and gas industry and their partners in the financial sector on the other. (Corporate Knights)
Prioritization of energy stocks over decarbonization goals a barrier to ESG investment metrics: survey
Nearly two-thirds (63 per cent) of institutional investors believe the emphasis of energy stocks over decarbonization goals is the biggest detractor of the progress surrounding environmental, social and governance investment metrics. (Benefits Canada)
Video Of The Week
Sweden’s NEW Sodium-Ion Battery SHOCKS The EV Industry!
Northvolt claims to have achieved a breakthrough with its new sodium-ion battery technology and it plans to start mass production soon.