Liontown falls 20% in ongoing lithium retreat. Is the sell-off now overdone?

Every ASX lithium producer is suffering right now. 

But Liontown (ASX: LTR) was dished out special punishment last week for expanding production.

Its share price fell around 20% from Wednesday lunchtime to Thursday's close, after the board approved a $389 million expansion of Kathleen Valley. 

The stock is now down roughly 70% from its May high and is the worst-performing ASX lithium producer this year.

The sell-off makes sense on one level. Spodumene prices have dropped about a third from their May peak, and brokers are cutting their forecasts. Kathleen Valley is still ramping up, and Liontown is committing a lot of capital before the current operation is fully proven.

But at around 80 cents, the market may be overreacting.

Why Liontown fell 20%

There are three reasons.

First, timing. Investors did not expect the board to approve an expansion while lithium prices were falling. Spending $389 million is a vote of confidence in the long-term lithium market, and investors don't necessarily share it.

Second, money. Liontown will pay for the expansion from its own cash and cash flow. At the more bearish end of broker forecasts, Goldman Sachs estimates total spending across FY27–29 will reach $1.0–1.1 billion once sustaining and other growth capital is included. It expects Liontown to slip briefly back into net debt. 

Third, execution. Underground mining is still ramping towards 2.8 million tonnes a year, and the expansion takes that to 4.1 million. Spodumene production should rise from about 500,000 tonnes a year to roughly 780,000 tonnes from FY30. The details also disappointed the market. Production in FY28 and FY29 will be lower than analysts expected, and long-term costs came in 5–10% higher.

What the market may be missing

The expansion itself is good value. Liontown is adding about 280,000 tonnes of annual capacity for $389 million. By comparison, Wesfarmers recently approved a $1.3–1.4 billion expansion at Mt Holland that adds 380,000 tonnes. Liontown can do it more cheaply because Kathleen Valley's processing plant was designed for the bigger rate from the start. The expansion mostly needs more ore from underground, not a new plant.

Bigger volumes should also push costs down. Liontown expects unit costs to fall about 25% to $840–920 a tonne, which would put Kathleen Valley in the second quartile of the global cost curve. It will also make a higher-grade product, which earns a better price.

Liontown has room to adjust. It finished June with $561 million in cash, or $192 million net of debt, and it can slow, defer or accelerate spending depending on prices. Most of the extra tonnes are not yet sold under contract. That leaves Liontown free to sell them on the spot market or into new deals linked to the lithium price if prices rise.

The rerating catalyst is higher lithium prices

The share price assumes a weak lithium market. Goldman says the stock is pricing in a spodumene price of about US$1,225 a tonne, well below today's levels. Bell Potter values Liontown at $1.70 a share if prices simply stay at spot, more than double where it trades now.

The lithium market is not as grim as the share price suggests. JP Morgan expects lithium to stay in deficit through 2028, with inventories low enough that buyers will need to restock in 2027. Demand from energy storage batteries is up 96% this year, and supply in China has been tightening since June. Lithium prices are volatile, and inventories are thin, so even a small shortfall can move them sharply.

There are three things that could trigger a rerate. First, Liontown needs to hit 2.8 million tonnes a year of mining by mid-2027. One of the market’s biggest worries is ramp-up risk over the next six to twelve months, so every quarter on target removes some of it. Second, once the spending ends, Goldman forecasts free cash flow yields of around 12%. Third, and most important by far, lithium prices need to stop falling.

The bull case is simple. If lithium prices keep falling, Liontown has taken on more risk and spending for limited reward. But if the market tightens, Liontown will enter it with nearly 60% more production, lower costs and a better product, all bought cheaply.

At 80 cents, investors are seeing all the negatives and none of the positives. If lithium prices turn, one imagines Liontown could rerate hard and fast.

Lithium miners ETF

For those wanting a more diversified approach to lithium investing, the ETFS Global Lithium Miners ETF (ASX: VOLT) may provide one solution. VOLT invests in global lithium companies that produce lithium as their main business.