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Stock Strategist Industry Reports

Lithium Price Concerns Result in Buying Opportunity

Our long-term outlook for lithium carbonate is unchanged.

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On Dec. 20, shares of all three lithium stocks we cover traded sharply lower as junior lithium producer Orocobre announced its outlook for lower prices into 2019. We already expected lithium carbonate prices on a Chilean export basis to fall from $12,000 per metric ton in 2018 to $10,000 per metric ton by 2020. However, we believe prices will recover thereafter.

As a result of our above-consensus electric vehicle outlook, we forecast 19% annual demand growth for lithium over the next decade. This will ultimately require higher-cost lithium supply to come on line to meet demand. As such, we expect lithium carbonate prices to rise back to our long-term forecast of $12,000 per metric ton by the end of 2022.

With our outlook unchanged, we maintain our $130 fair value estimate for narrow-moat  Albemarle (ALB), our $18 fair value estimate for narrow-moat  Livent (LTHM), and our $65 fair value estimate for narrow-moat  Sociedad Quimica Y Minera De Chile (SQM). All three stocks are trading at significant discounts to our fair value estimates. We think the market is overreacting to declining prices for lower-grade lithium carbonate.

Additionally, we note that half of Orocobre’s sales come from technical-grade lithium carbonate, which is currently purchased as a feedstock by lithium hydroxide producers in China. During Orocobre’s conference call, management said the weakness in pricing was coming from the technical-grade product as a result of lower demand from lithium hydroxide producers, while also stating that battery-grade lithium carbonate prices were flat.

In our view, lower technical-grade lithium carbonate prices are an indication of an evolving lithium hydroxide market. As spodumene production ramps up in Australia, lithium hydroxide can be made at a lower cost using high-grade spodumene as a feedstock over technical-grade lithium carbonate. As such, we expect prices for technical-grade lithium carbonate to fall to a level that would make lithium hydroxide production costs equivalent to those associated with the use of spodumene feedstock. We estimate this at $10,000 per metric ton.

Seth Goldstein does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.