In recent times, ASX-listed lithium stocks have faced a significant downturn, prompting questions about whether they now present a bargain for investors. Garimpeiro believes this could be the case, but with a selective approach and an assumption that lithium prices have hit bottom, signaling a gradual recovery as the projected supply deficit around 2028 looms.
The certainty of the supply deficit has increased due to the crash in lithium prices, leading to the elimination of higher-cost production. The decline also means that new projects must be top-tier to secure financing and offtake agreements.
Garimpeiro suggests caution until there is confirmation that lithium prices have turned around. He advises steering clear of lithium explorers lacking a proven resource, as many may struggle to endure the current downturn and may need to reinvent themselves as uranium or gold explorers.
However, a different scenario may unfold for lithium developers, particularly those with established large-scale resources. The significant growth in electric vehicles, reaching 14% of the market last year, suggests that the current lithium oversupply could be temporary.
The demand for new large-scale and long-life lithium projects is expected to rise, attracting support from lithium chemical makers and the global auto industry. Smaller projects may not survive this shift.
Similar situations have played out before, such as in the iron ore industry during the original China boom. Only a handful of junior iron explorers on the ASX became producers, while others had to reinvent themselves, leading to significant market cap losses.
This pattern is likely to repeat in the junior lithium sector in 2024, with only those possessing large-scale deposits expected to thrive. Standout companies include Liontown (ASX:LTR) and Azure (ASX:AZS), both with Tier 1 discoveries in Western Australia.
Despite initial market caps below $100 million, Liontown now boasts a $3.3 billion market cap, and Azure's Andover discovery is valued at $2.86 billion. The rewarding outcomes for Tier 1 discoveries are exemplified by the involvement of Gina Rinehart, who holds a significant stake in both companies.
Contrastingly, Patriot Battery Metals (ASX:PMT), owner of the Corvette discovery in northern Quebec, has seen its market cap halved to just over $1 billion in the lithium market downturn. Despite the setback, the Corvette discovery ranks as the biggest lithium find in North America and the eighth largest globally.
Patriot's strategic 4.9% stake by US lithium giant Albemarle indicates potential interest, especially considering Albemarle's focus on supporting the North American car industry amid the China challenge. As Patriot continues its drilling programs, its scale and location position it favorably for potential bids.
In conclusion, while some lithium stocks may be in the bargain basement, caution is advised, and investors should consider the scale and resources of the companies in question. The shifting landscape in the lithium sector demands resilience and adaptability from market players, as seen in the experiences of various companies mentioned. As always, independent financial advice is recommended before making any investment decisions.
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