Staying overweight and upgrading the lithium sectorOn the back of our in-depth, bottom up analysis of the lithium supply side (link) where we reviewed >100 projects, we have upgraded our long term lithium prices (10-38%). We expect lithium demand to grow 8x by 2030e and a supply side struggling to keep up. A supply response is coming but is higher cost and comes with increased risk. We retain a preference for producers over developers for their lower risk profile and leverage to current very high prices. We remain BUY rated on AKE (PT $18.60/sh +22%), IGO (PT $15.85/sh +22%) and MIN (PT $83.00/sh +17%).More shape in the curveOur analysis of the supply side considered 1) spodumene mines, 2) conversion, 3) brines and 4) new sources of primary supply (i.e. sedimentary deposits and micas/lepidolites). Across the board we saw increased cost and risk but all projects are required in such a short market lifting incentive prices. Spodumene mines are increasingly smaller, lower grade, higher cost, in higher risk jurisdictions, plan/will produce lower grade concentrates and many developers have overly optimistic operating assumptions. Conversion facilities being built out in the west are costing 3x that of China and are still to be de-risked. Risks are increasing across LATAM brine production highlighted by permitting and royalty regime change in Chile. Supply is required from new(er) sources i.e. sedimentary deposits (Li/B projects and clays) and micas/lepidolites but we don’t see them as disruptive as our peers and believe they too will add more and more shape to the cost curve, underpinning higher long term prices.AKE the most leveraged, IGO the highest qualityOn our modelling AKE show the most leverage to higher (and lower) long term prices with a 10% change moving our valuation by 13%, while with more diversified businesses and more integrated lithium divisions, IGO moves by 6% and MIN by 7%. We remain BUY rated on all three names but lean to IGO's for its high quality portfolio and pending upgrade cycle on contract repricing.Earnings beyond FY23 up >20% and valuations >17%Our AKE valuation has increased 22% to $18.60/sh and it is now trading on 4.8x FY23 EV/EBITDA, our IGO valuation has increased 22% to $15.85/sh and is now trading on 3.5x FY23 EV/EBITDA and our MIN valuation has increased 17% to $83/sh and is now trading on 3.1x FY23 EV/EBITDA. Valuations are based on our upgraded long term prices of US$1,100/t Spodumene SC6.0 CFR China, US$15,000/t battery grade lithium carbonate, US$16,000/t battery grade lithium hydroxide and 75c AUD:USD.
AKE Price at posting:
$13.75 Sentiment: Buy Disclosure: Held
