Lithium miners experienced a short period of grace after the opening of Tesla’s Giga factory in Shanghai – a monstrous 850,000m² facility that will produce battery cells along with Tesla Model 3 and Tesla Model Y cars. But this revival is now but a distant memory, as economic activity came to a grinding halt following the outbreak of COVID-19.
Given the current state of the lithium sector and the ASX lithium miners’ depressed share prices, could there be a long term buying opportunity?
Lithium spot price update
A research report written by Fastmarkets in February outlined that a drop in demand for electric vehicle battery materials from China could extend to producers in South America and Australia, but disruptions to Chinese exports could tighten global supply for processed lithium, especially for Japan and South Korea. It outlines that the market is still in a state of significant oversupply where stocks of ore and spodumene are high globally, but production cuts are being made at the raw material end.
It suggests that China’s demand for imported battery raw materials may fall, causing a further increase in stockpiles in South America and Australia. While the deterioration in vehicle sales, household and business confidence may cause depressed demand to persist in the short-term.
Production outlook and capital position
Galaxy has pivoted to lower output at its flagship Mt Cattlin to complement inventory levels and utilise the low-grade stockpiled ore for processing. It has positioned itself in a flexible manner such that it can promptly ramp up mining should market conditions improve. The company outlined that it possesses US$143.2 million in cash and financial assets as at 31 December 2019, which is quite significant given its market capitalisation of approximately $320 million at today’s prices.
Orocobre has lost a total of 21 days of production this quarter following a national mandatory quarantine in Argentina. In light of the current uncertainties with production in Argentina and disruption of future demand in global markets, the company has withdrawn its previous production guidances. As at 20 March 2020, the company has approximately US$164 million of cash.
ASX lithium producers have responded appropriately to challenging conditions by curbing expenditure and maintaining a strong balance sheet.
While the lithium market was showing some signs of optimism in January this year, COVID-19 has trampled any recovery hopes. As the world continues to battle the pandemic and ever so slowly return to normal, lithium investors will need to do what lithium investors do best – which is to keep on waiting.