Strong lithium cashflows to be key highlight of imminent quarterlies

The lithium stocks are on show next week with the release of their June quarterlies which by and large should detail the return of robust margins for the sector in response to prices for the key battery material rebounding from last year’s rock bottom prices.

That expectation came through in Thursday’s market when the sector strongly out-performed the broader market.

But the share price gains only partially recovered the recent share price hits on the sector following the retreat in the spot spodumene concentrate price (6% lithia) from near US$3,000/t in mid-May to a little more than US$2,000/t this week.

Just as the lithium stocks ran hard on the price recovery from last year’s lows for spodumene of $US575/t, they have fallen hard in response to the retreat in prices since the mid-May peak of near US$3,000t.

Even with Thursday gains, PLS (ASX:PLS) remains down 15% on its level at the start of the month. Liontown (ASX:LTR) is down 24% while the lowest cost producer from its stake in Greenbushes mine in WA, IGO, has fared better with a 6% retreat.

Quarterly reports due next week include those from IGO (Tuesday), Mineral Resources (ASX:MIN) and Liontown on Wednesday, with sector heavyweight PLS due on Thursday.

In a lithium sector quarterly review, UBS said it expects the June quarter results to “highlight a meaningful step-up in free cash flow as stronger realised lithium prices drive robust margins’.’

Running through its share price targets in the July 16 report, UBS set a share price target on PLS of an unchanged $5.60 a share. It was a $4.23 stock after bagging a 1.9% gain in Thursday’s market.

Similar share price upside was implied for other lithium stocks (MinRes was not covered in the report). Assuming spodumene/lithium carbonate/hydroxide prices hold at or near current levels, share price recovery could be a near-term feature of the sector.

Next week’s quarterly reports and company commentary around demand/price expectations shapes up sector re-rerating event.

The recent retreat in lithium prices to a level which still delivers robust margins given production costs are generally below US$1,000/t is a response to the resumption of CATL’s Jianxiawo mine in China, Zimbabwe resuming exports and the emergence of sodium-ion batteries, albeit with the technology’s energy density shortcomings.

All have been factors in the retreat in prices since mid-May. But there is at least half a dozen reasons to suggest that the case for continued growth in demand for lithium has never been stronger.

There is the on-going growth in demand from passenger and commercial vehicles, energy storage systems and rising battery energy density.

Then there are the two growth areas only just taking off but with enormous potential – the sodium-ion battery-free world of robotics and eVTOLS, the latter requiring its long-form of electrical vertical take-off and landing aircraft.

So expect commentary in next week’s quarterlies about confidence in demand growth – something the ASX lithium sector has already clearly demonstrated with recent announcements on mine restarts and expansions, even with the price retreat since mid-May.

The restarts and mine expansions do not change the supply outlook from what was already baked in to forecaster models.

If anything, the pace of mine expansions is not as fast as previously indicated, most notably the doubling of capacity at Mount Holland in WA by the SQM/Wesfarmers partnership. First production from the $1.4 expansion won’t arrive until 2030.

On the developers front, the recovery in prices from last year’s rock bottom prices has given their projects fresh momentum. Their share prices have nevertheless been beaten up since mid-May, more so than the producers.

PMET (ASX:PMT) is an example. Its Thursday price of 47.5c was down by one-third on its mid-May level of 71c.

Momentum at its Shaakichiuwaanaan project in Canada ratcheted up a notch during the week thanks to the signing of a non-binding Letter of Intent with the Cree Nation of Chisasibi covering a framework for engagement, information-sharing, discussion, and process clarity in respect of the proposed project.

Macquarie said it was a positive sign for the permitting of the project. It has a 70c price target on the stock.

Gold:

The gold price is holding up at more than $US4,000/oz courtesy of the flare-up in the Middle East and the cost to the US budget of its excursion in to the region.

It means that there has been a return of buying in the ASX gold sector to take advantage of the drastic fall in share prices since gold fell from its all-time (nominal) record of US$5,589/oz in late January.

Like the lithium sector, the June quarterlies are confirming big cash builds in the period and the prospect of ongoing healthy margins, albeit lower than when gold was running hot.

And again like the lithium sector, it is natural enough for investors to focus their return to buying in the first instance on the producers.

At some stage the buying will drift towards the developers and explorers, assuming the near-term maintenance of a US$4000/oz-plus gold price.

Developers and explorers have been hit particularly hard in the selloff in gold equities in line with gold’s price slump. But leveraged exposure to what remains a historically high gold price will see buyers return to the over-sold developers and explorers once the value story in the producers tops out.

Fully funded explorers with active exploration programs are already showing signs of buyers returning.

Great Southern Mining (ASX:GSN) is today’s example. It was a 5.5c stock in January when the gold price was hot but subsequently drifted lower to 2c at the start of the month on the fall in the gold price. It was a 2.2c stock in Thursday’s market for a market cap of $25.7 million.

Where it tracks from here is largely independent of the gold price as it has exposure to two potentially high impact programs where drilling is underway – the Duketon gold project down the road from Regis’ Garden Well operation, and the Mt Dillon gold project in northern Queensland in a joint venture with South African gold giant Gold Fields.

Success with the drill bit at either could move the needle in a major way for the company given its modest market cap.