What’s happening to lithium miners?
The Syrah and Galaxy share prices are down 23.8% and 28.8%, respectively in 2019 on the back of operational setbacks and the broader macroeconomic environment.
Both of these companies saw their share prices fall sharply yesterday after one of the world’s largest lithium producers flagged higher demand and lower lithium prices in its annual report on Tuesday.
Chilean producer SQM said it expects global lithium demand to grow at least 20% in 2019 compared to 2018 levels, largely driven by batteries for electric vehicles.
While you’d think this is good news for lithium input producers such as Syrah and Galaxy, SQM also flagged an oversupplied lithium market in Q1 2019 due to new supply entering the market despite recent production disruptions.
The company said that it does not believe that all lithium supply entering the market is suitable for all customers, which seems to have spooked investors in the Aussie alternative miners.
The forecast looks particularly grim for Syrah, which currently owns the world’s largest graphite mine in the world by way of its Balama operations in Mozambique.
Will the lithium sector bounce back?
While I am personally bullish on Syrah’s long-term prospects, the big question mark that remains is how the company will maximise profitability without diluting the market and oversupplying the graphite/lithium market in the process.
The Galaxy share price is currently trading at $1.56 per share, but was trading at $4.24 as recently as January 2018, while Syrah is similarly a long way shy of its record $6.46 valuation at just $1.18 per share at the time of writing.
I think that these companies will become solid when they become free cash flow positive and as their respective operations mature, however, it’s really a question of how to achieve strong returns by picking the right time to jump into the sector.
A slightly less speculative play might be to make the most of the recent resources resurgence by investing in the likes of BHP Group Ltd (ASX: BHP) or Fortescue Metals Group Ltd (ASX: FMG) which have been steadily climbing higher in 2019.
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Motley Fool contributor Lachlan Hall owns shares of Syrah Resources Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.