The Ripple from Lake Resources: Lithium market faces ‘biggest ever shortage’; global EV sales seen topping 6 million; analysts hike LKE price targets

“Where will new lithium supply come from in 2022?”

That was the headline from analysts Benchmark Mineral Intelligence (BMI) as supply concerns escalate.

“The lithium market faces its biggest ever shortage in tonnage terms this year as labour shortages and border closures due to COVID-19 hinder mine expansions in a market already suffering from a lack of new supply,” BMI said in its February 4 report.

“Project ramp-ups are at the risk of delays that could result in a supply shortfall of around 26,000 tonnes of LCE [lithium carbonate equivalent] this year,” it added.

Lithium prices have surged on the back of strong growth in electric vehicle (EV) sales, which more than doubled last year.

BMI has reported continued new record highs for battery-grade lithium carbonate prices. In a February 15 report, it said “EXW China” battery grade carbonate prices had reached an average of 386,000 Chinese renminbi (RMB) a tonne (approximately US$61,100), with transactions ranging up to 407,000 RMB. In February 2020, BMI quoted an average price of US$7,025.

Lithium hydroxide prices have also risen in February, with BMI reporting prices of up to 349,000 RMB per tonne, amid tight supply and additional demand from producers.

Upgrading its forecasts, broker Credit Suisse recently described the “unprecedented margins” being enjoyed by lithium miners on the back of surging prices.

“Demand rose swiftly in 2021 while mines were still curtailing, and supply cannot keep pace,” analyst Saul Kavonic told the Australian Financial Review.

Kavonic has raised his spot price forecasts for spodumene, carbonate and hydroxide prices out to 2025 by 8 to 33 per cent, pointing to strong lithium-iron-phosphate battery demand in China and tight supply.

On February 26, BMI’s lithium index was showing a 344.9 per cent year-on-year rise, with its carbonate index up 401.7 per cent and hydroxide up 297 per cent.

Demand for lithium from batteries is expected to reach 468,000 tonnes of LCE in 2022, up 22 per cent from last year, according to BMI forecasts.

Yet without sufficient investment, BMI projects a lithium market deficit of nearly 300,000 tonnes of LCE by the end of the decade.

’40 new mines needed by 2030′

Commenting on the supply challenge, BMI’s managing director, Simon Moores tweeted on February 6: “On this basis, in 2022 [we] are now looking at needing 40 new mines over the next 10 years.

“Of course, planned operations and existing mines are increasing capacity. Being generous, this number could be 15 new mines in the next seven years to find [an extra] 1m tonnes lithium for EVs.”

Similarly, UBS analyst Tim Bush has estimated the lithium supply deficit will reach 3 million tonnes by 2030, amid increasing EV penetration globally.

Lithium analyst Joe Lowry has pointed out the supply problem facing the industry.

“The fact that lithium supply can’t keep up with demand is validated by the price trends you have been seeing since late 2020. The real question now is what strategic plans will battery makers and OEMs put in place to deal with a problem that is here to stay for an extended period,” he said on LinkedIn.

Lowry added: “The question to ask OEMs hyping their EV model portfolios is “where is your lithium (and other battery metals) coming from?”

“Just a couple of years ago the CEO of a large German OEM was asked about lithium. His response was “that’s not my problem” feeling it was a “battery supplier issue”. Really?”

Bank of America analyst Jack Gabb has described a “scramble for resources” among mining majors seeking to grow their presence in battery metals, with average prices paid for lithium reserves in corporate transactions doubling over four years.

In December 2021, Rio Tinto announced the US$825 million acquisition of the Rincon lithium project in Argentina, while Prospect Resources sold an 87 per cent stake in its Arcadia project in Zimbabwe to China’s Zhejiang Huayou Cobalt for US$377 million.

In announcing the Rincon acquisition, Rio Tinto noted the “direct lithium extraction technology proposed for the project, [which] has the potential to significantly increase lithium recoveries as compared to solar evaporation ponds.”

Mercedes-Benz CEO Ola Kaellenius has warned that scarce supplies of key battery metals could delay the transition from fossil fuel-burning vehicles to electric cars.

“The industrialisation of mines and refinery capacities may not progress as quickly as demand increases. Should that happen, it would only delay e-mobility, but not prevent it,” Kaellenius said.

In January, the German automaker unveiled an EV capable of driving more than 1,000 kilometres with a battery half the size of its current flagship.

Pointing to moves by Tesla, POSCO and other companies to invest directly in raw materials supply, analysts are indicating supply shortages for “the entire EV battery supply chain.”

“At this point, stakeholders in the electric vehicle market that have been slow to catch up, including automakers and battery manufacturers, can’t just begin to lay claim to future supply – they may get left behind,” commented Bloomberg’s Anjani Trivedi.

“They’ll have to think years ahead and start investing way down the value chain, not just in fancy tech gadgets and batteries as a whole.”

Steve Promnitz, managing director of clean lithium company Lake Resources, said the supply issues would not be solved overnight.

“Lake has long warned of the looming supply issue facing the EV and battery industry, particularly for battery-grade lithium supply,” Mr Promnitz said.

“Having failed to invest in expanding battery metals output in previous years, there is no magic wand that can quickly solve the problem. However, we are starting to see a response, with investors and financiers increasingly supportive of new projects, particularly those capable of delivering ESG benefits such as Lake’s.

“There has never been a better time to advance our clean lithium production based on the proven ion exchange method, which can fast-track output in an environmentally sustainable manner.”

Global EV sales are surging as policymakers in Asia, Europe and North America back an industry seen crucial to decarbonisation. Consumers are voting with their wallets, with EV makers rolling out a raft of new models and new entrants seeking to capitalise on the demand.

Analysts Gartner see global EV sales accelerating this year, with car sales up 35 per cent to more than 6 million (battery electric and plug-in hybrid). Electric heavy truck and van sales are expected to rise by around 50 per cent each to more than 22,000 and 126,000 units respectively, while electric bus sales are seen increasing by 20 per cent to nearly 200,000 vehicles.

China is seen leading with shipments of some 2.9 million EVs in 2022, followed by Western Europe at 1.9 million units and North America at 855,000.

“The EU’s plans to cut CO2 emissions from cars by 55 per cent and vans by 50 per cent by 2030 is a catalyst to the uptake of EVs in Europe,” said Gartner research director Jonathan Davenport.

Chinese sales of “new energy vehicles” hit 3.4 million units in 2021 and are expected to climb further to 5 million this year, nearly four times the level of sales in 2020. Some observers see NEV sales in the world’s second-largest economy racing past 6 million in 2022 ahead of anticipated price rises.

In Western Europe, battery-electric vehicle (BEV) passenger car registrations reached 1.2 million in 2021, accounting for 11.2 per cent of the total, with the final quarter seeing a record of more than 408,000 BEVs, according to Schmidt Automotive Research.

Significantly, BEVs surpassed diesel cars for the first time in December 2021, the researcher said. German automaker VW Group’s premium brands Bentley and Porsche both enjoyed record global sales volumes, although Tesla took the crown as the top BEV brand in Western Europe.

In the United States, EV sales surged 83 per cent in 2021 to more than 430,000 vehicles, accounting for 3 per cent of the market, while gasoline-electric hybrid sales hit a record of more than 801,000 vehicles. The surge in hybrid sales helped Japanese automaker Toyota Motor overtake General Motors as the top-selling automaker in the United States.

Japan’s Nissan Motor plans to end the development of internal combustion engine (ICE) vehicles in all its major markets except the United States and focus on EVs, becoming the first major Japanese automaker to make such a break, according to the Nikkei.

Similarly, Honda Motor has announced its entire line-up of cars will be electric by 2040.

New entrants to the EV market include Japanese electronics conglomerate Sony, which announced in January it would form a subsidiary, Sony Mobility Inc, focused on EVs.

BloombergNEF expects global sales of battery electric and plug-in hybrid EVs to surpass 10.5 million in 2022, around 4 million above 2021 levels.

By 2040, the global ZEV (BEVs and fuel-cell vehicles) fleet could top 677 million, up from 495 million in its 2019 forecast, the researcher said.

“Underpinning these stronger forecasts are a range of factors, including improving battery technology and costs, faster roll-outs of charging infrastructure, a wider range of vehicle models on offer to customers, and longer range and faster charging speeds available on the newest vehicles,” it said.

Significantly, automakers committed to reaching 100 per cent ZEV sales by 2035 now account for 32 per cent of the global auto market. U.S. state-level targets to phase out sales of ICE vehicles now cover a quarter of total auto sales.

“Additionally, the combined national targets, ICE phase-out targets and interim ZEV sales targets of China, India, and the U.S., reach nearly 41 per cent of the global passenger vehicle market. This is up from just 8 per cent in 2019,” it said.

However, BloombergNEF notes the “surge in EV demand is putting unprecedented pressure on supply chains, and we expect prices for raw materials like lithium and nickel to remain high.”

This comment was echoed by Tesla, which has described supply chain challenges as “the main limiting factor” to its growth. Analysts suggest the U.S. EV maker could have delivered up to 20 per cent more vehicles in the last quarter of 2021 without supply issues.

The conclusion for battery metals demand is obvious.

“EV demand for battery metals is accelerating yet supply is trailing behind in its wake. For producers of key battery metals such as lithium, the outlook is extremely bright – the industry simply can’t get enough of our product and it needs sustainably sourced, ESG friendly supply,” Lake’s Mr Promnitz said.

New investor research on Lake has highlighted the opportunity for investors as the company advances its clean lithium development at its flagship Kachi project, together with its emerging Olaroz, Cauchari and Paso projects.

Describing Lake as offering “incredible value,” Orior Capital has upgraded its share price targets for Lake amid the emergence of a lithium “super-cycle.”

“Revised estimates are prepared for NPV and earnings that reflect management’s January 2022 decision to build Kachi to 50,000 tpa LCE, and higher lithium prices,” analyst Simon Francis said in the February 28 report.

“Valuing Kachi at NPV8 could support a valuation a year from now of A$5.90/share, more than 6x the current share price.”

The Hong Kong-based analyst added: “Kachi is expected to start-up in 4Q24, and to reach full production in 2026. EBITDA is estimated at US$735m in 2025, US$1,194m in 2026, and US$1,225m pa in 2027-2050.

“Assuming the project is financed 70% with debt, that Lilac Solutions contributes its 25% of the equity, and that remaining equity is raised at A$1.80/share, applying an EV/EBITDA multiple range of 15x to 25x suggests Lake could be valued at A$12.70/share to A$21.47/share. This represents 14x to 24x the current share price.”

Francis pointed to structural drivers from the growth of EVs and energy storage, supply constraints and Lake’s planned use of direct lithium extraction technology, together with its planned expansion to 100,000 tonnes per annum of lithium production by 2030.

“The lithium market is entering a new ‘super-cycle’ in which prices are expected to remain at much higher levels than previously anticipated. With five lithium projects, Lake Resources stands to be a major beneficiary. The stock looks incredibly undervalued at current levels,” he concluded.

Other analysts have also made bullish forecasts for Lake.

In a January 19 report, Red Cloud mining analyst David Talbot raised his price target on Lake shares to A$2.20 from A$1.25 per share previously, citing the company’s move to increase production at Kachi from 25.5 kilotonnes per annum (ktpa) to 50 ktpa LCE.

“We view this production increase very positively, as the PFS which utilised a 25.5 ktpa scenario had already shown robust economics. We anticipate the DFS to demonstrate even stronger economics and are therefore increasing our target price,” he said.

Other analysts have pointed to the benefits of Lake’s project pipeline outside Kachi.

In a December 16 report, AllianceGlobalPartners analyst Jake Sekelsky said Lake’s planned exploration program at its Olaroz, Cauchari and Paso projects was “setting the stage for additional projects to come online after Kachi.”

He noted that “significant upside to our valuation exists should Lake have success in positioning additional assets in its portfolio to come online after Kachi.

“Further, we believe management is positioning the company to become a top independent global producer of lithium through the development of its own assets and are supporters of the company’s decision to de-risk its development pipeline in tandem with the development of Kachi.”

Recently, on February 17, Bell Potter increased its valuation of LKE to A$1.82 per share, up from its previous A$1.40, following material upgrades to its lithium pricing forecasts.

“Our demand model suggests annual LCE (lithium carbonate equivalent) demand could grow from around 500kt currently to over 1.1Mt by 2025 and over 3.2Mt by 2030,” analyst Stuart Howe said.

“Even with record prices incentivising new supply, there are technical challenges and the lead-times to production are only increasing with permitting, supply chain, geopolitical and ESG restrictions. Brownfield expansions will be similarly constrained and easily accommodated by the growing demand,” he added.

Lake is poised for its “best year yet” in 2022 as the company achieves a number of key milestones. That was the message from Chairman Stu Crow at the company’s January 25 annual general meeting.

While 2021 was a standout year for Lake in its sharemarket performance, 2022 could see the company hit new highs, Crow said.

This year will “surpass any in the company’s history in terms of growth and achievement to date,” Crow told shareholders at the AGM.

He pointed to upcoming milestones including an on-site demonstration plant at Kachi, potential off-take agreements, definitive feasibility study, ESIA and permitting, the completion of project financing and construction activities, leading to the production of high purity lithium carbonate at Kachi by 2024.

“The year ahead, whilst challenging, I suspect will be the company’s best year yet as we move into construction phase of the Kachi project and continued development of other projects,” Crow concluded.

Meanwhile, Lake has attracted further favourable media attention, including being listed among the top 10 ASX stocks for 2022 in a widely published article in News Corporation publications on February 5.

The company also continues to provide regular updates to investors, with upcoming events including Roth Capital Partners’ annual conference to be held in person in California, USA from March 13-15, together with the Noosa Mining Conference from July 20-22.

Please check our website for details of the latest company webinars and presentations.

These include a recent video update by Lake’s Managing Director, Steve Promnitz on the company’s “Target 100” strategy and its bright outlook amid the surging demand for battery-quality, ESG friendly lithium.

And if you haven’t already, keep up to date with Lake’s progress by subscribing to our e-news service or follow us on our Facebook, Twitter and LinkedIn pages for the latest Lake and industry news.

———————————————————————————————————

Yours sincerely

Steve Promnitz
Managing Director
Lake Resources

Email: hello@lakeresources.com.au
Phone: +61 2 9188 7864

Follow us on Facebook: https://www.facebook.com/LakeResources
Follow us on Twitter: https://twitter.com/Lake_Resources
Follow us on LinkedIn: https://www.linkedin.com/company/lake-resources/
Join Lake’s mailing list for the latest ASX announcements and other news via this link: http://eepurl.com/gwA3o9

Interested in finding out more about Lake Resources and and our sustainable, high purity lithium based on direct extraction technology? Please subscribe to our e-news list via http://eepurl.com/gwA3o9, or contact us for further information.