ASX lithium stocks: where next as Liontown Resources rejects Albemarle?

Liontown Resources (ASX: LTR) shares have risen by over 100% since the start of the year, representing a positive upwards story in a sector beset by falling lithium prices and short-seller attacks.

The near-AU$6 billion ASX lithium company has yet to enter production but has still chosen to reject titan Albemarle's (NYSE: ALB) recently improved bid. This may simply be a negotiating tactic but serves as a reminder that valuing lithium sector stocks is not an exact science.

ASX lithium stocks: where next?

ASX lithium stocks are unsurprisingly anchored to the falling price of lithium. And there’s bad news on this front — as the price has crashed this year — and both Goldman Sachs and Citi are positing bearish views for the near term.

In Goldman’s data report ‘Australian Lithium Coverage,’ the investment bank is predicting a 79% fall in the average lithium carbonate price from US$53,300/t this year to US$11,000/t next year, where it could stay through 2025.

It’s worth noting that the bank was the first to sound the alarm on booming prices in mid-2022, and while prices continued to rise until November last year, the bank was eventually proved right.

Citi, meanwhile, notes that ‘carbonate prices breached our three-month price of US$40,000/t, and we see prices remaining under pressure in the near term as supply chains continue to destock accumulated inventory.’

However, its notes that there should be ‘support for battery grade carbonate prices around US$25,000/t as most non-integrated chemical producers should be loss making at those levels.’ And the bank considers that restocking of the battery supply chain in H2 could see a fresh rally.

However, these are predictions, not certainties.

Lithium is a relatively novel market compared to iron or oil, and huge volatility is to be expected. There is currently little depth in the market, with even larger producers relatively young by mining timescales.

Further, CATL’s pricing strategy together with Chinese withdrawal of certain state-subsidised EV investing incentives are acting as depressants on lithium. These may be short-term issues; CATL’s current stockpiles are being depleted as EV production continues to ramp up, while new Chinese incentives may be in the pipeline as the country struggles to return to pre-pandemic growth.

Moreover, the most recent edition of Resources and Energy Quarterly from the Australian Department of Industry claims that the total value of Australian lithium will be equivalent to thermal coal within five years, predicting that both industries will export AU$19 billion of goods by 2028.

Of course, the report may be overly pessimistic for coal prices and optimistic for lithium. But the key takeaway is that the lithium market is in its nascency; firm long-term price predictions may not be particularly reliable given the rising demand for EV batteries and relatively limited present global supply.

Liontown Resources takeover?

Albemarle’s third bid for Liontown represents another solid improvement — it offered AU$2.20 per share in October 2022 and AU$2.35 per share on 3 March. The latest proposal is for AU$2.50 per share in cash, valuing the enterprise at AU$5. billion.

Lithium has more than halved in price and costs have only inflated since that first bid, yet Albemarle considers an increased offer to be good value for shareholders and its wider strategy.

Security of supply may be more important than near-term lithium pricing — a position that BHP may also be considering given recent indications from BHP Xplor vice president Sonia Scarselli, in a pivot from prior policy.

Liontown has rejected the bid — which has seen shares surge to AU$2.66 — citing opportunistic timing given lithium’s weakness and the pre-production nature of the company’s flagship Kathleen Valley Project.

The site is widely considered to be one of the largest and highest-grade lithium deposits in the world and is particularly valuable for the regulatory safety and in-place infrastructure of its Western Australian location. It is expected to deliver circa 500,000 tonnes of 6% lithium oxide per annum when at peak production, with production due to start in 2024.

And Liontown has already inked supply deals with Tesla, Ford, and LG Chem. However, the cost of getting Kathleen to production has almost doubled to $AU895 million since the initial 2021 estimate — Albemarle’s market power must be attractive to shareholders in this context.

But the current share price suggests that investors either think another improved bid could be in the offing, or else that Albemarle has brought attention to what was previously an undervalued ASX lithium company.

As a final note, many of the best ASX lithium stocks have been subject to short attacks in 2023. This may have been a sound idea — but consolidation of the industry could make shorting individual companies a dangerous strategy when the next takeover bid comes.

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