It has been a painful ride for ASX lithium investors as the sector continues to make lower lows on the back of slumping lithium prices. The share prices of major players like Pilbara Minerals Ltd (ASX: PLS), Orocobre Limited (ASX: ORE) and Galaxy Resources Limited (ASX: GXY) are all currently sitting just shy of their 52-week lows, trading for $0.46, $2.71 and $1.21 per share, respectively.
It adds insult to injury when the S&P/ASX 200 (INDEXASX: XJO) index has been simultaneously soaring to 11-year highs.
Despite the excitement surrounding this sector as major manufacturers announce significant investments into R&D for electric vehicles and new forecasts of a rising electric vehicle user base are reported, this excitement has not translated to a lift in share price for the ASX lithium miners.
Lithium miners, like all material stocks, move in tandem with their underlying commodity price. With that in mind, one can already assume that the lithium spot price has not been a strong performer. An extract from Orocobre's quarterly updates from 2018 to the most recent March quarter shows the average price received (US$/tonne) slumping from $13,533 to $9,451, while the cost of sales has remained steady around the $4,000 mark.
Is this a buy opportunity, or should we wait?
I believe investors that are interested in the renewables and lithium sector should sit on their hands and wait for the sector to find a bottom. In this scenario, the trend is truly your friend, and it would be unwise to fight against it.
The underlying problem is that the lithium spot price continues to edge lower and lower. In Pilbara's quarterly update, it highlighted issues such as "China's domestic pricing under pressure for the last 18 months as a function of central government subsidy changes" and "ex-China pricing weakening (even in the face of increasing demand) as export capacity comes out of China to Japan and Korea." It is truly a buyer's market for lithium and this trend looks to continue for the foreseeable future.
Despite the doom and gloom, Galaxy, Orocobre and Pilbara are all quality lithium producers.
Galaxy's recent quarterly report announced a record production that exceeded its production guidance while placing its project as one of the lowest cost lithium concentrate operations in the world. The company also had cash of US$176.3 million and zero debt on hand as at 30 June 2019.
Likewise, Pilbara is in a production growth phase having started its stage 1 production back in August 2018. The company is receiving a price of US$644/dmt (dry metric tonnes) at a cash operating cost of US$528/dmt. It aims to have costs lowered towards US$320-350/dmt by Q4 FY20 with anticipated improvements in recovery, plant stability and optimisation. The company had $63.6 cash in the bank as of 30 June 2019.
Foolish takeaway
The trend in the lithium spot price does not look like it will change overnight. However, lithium heavyweights Galaxy, Pilbara and Orocobre are all quality producers that can still maintain reasonable margins while prices are low. The companies are looking to optimise and scale production while securing long-term off-take agreements with key electric vehicle players. I believe these companies have the finances necessary to survive this low spot price environment and an opportunity should emerge when the fundamentals improve.
