ASX lithium shares, Orocobre Limited (ASX: ORE), Galaxy Resources Limited (ASX: GXY) and Pilbara Minerals Ltd (ASX: PLS) all soared more than 50% in November. Could this be the beginning of a new lithium run?
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A long road ahead for lithium prices
While ASX lithium shares were running hot in November, the lithium spot price continued to sit near multi-year lows. Fastmarkets highlights a potential bottom for lithium prices with a recent small recovery. China's battery-grade lithium carbonate prices started to uptrend on tight supply and bullish market sentiment. Overseas, lithium hydroxide prices moved up in both European and United States markets.
To add some perspective, Orocobre was selling its lithium at an average price received of US$3,102 per tonne while its cost of sales was US$3,974 per tonne for the quarter ending 30 September 2020. Its gross cash margins for the quarter were negative at US$872 per tonne, but the company expects these to improve with better pricing in the second quarter of FY21.
Global EV adoption to drive lithium demand surge
Galaxy Resources raised $161 million last week to enable the company to accelerate its developments to take advantage of the emerging European and North American electric vehicle (EV) growth surge.
In the company's capital raising presentation, it pointed to COVID-19 supply-side interruptions and strong recovery in EV sales as drivers of lithium prices.
Iron ore markets faced similar supply-side disruptions causing spot prices to push higher. In the case of lithium producers, not only have they faced supply-side interruptions and challenging spot prices, but also financial-related challenges that have pushed producers to the brink of collapse. Pilbara Minerals, for example, has entered into an agreement to acquire the shares in Altura Lithium Operations Pty Ltd.
According to Galaxy, global EV sales are forecast to grow as high as 30% compounded annual growth rate in the next decade. This plays into the narrative of a phased reduction in CO2 emissions mandated in China and much of Europe. Government stimulus and country-level subsidies are also expected to support EV and renewables adoption.
Ready to pounce at higher prices
ASX lithium companies have largely curbed production due to poor market conditions. However, they remain ready to pounce at the prospect of improved prices. Pilbara has opted to moderate its production over the last 15-18 months, aligning production to sales and inventory, and preserving working capital. Similarly, Galaxy's flagship mine, Mt Cattlin, has been producing at 50% to 55% of its nameplate capacity and examining the potential ramp up to full capacity, subject to market conditions and inventory.
