Why this broker is bullish about ASX lithium shares

UBS thinks higher lithium prices could lift ASX lithium shares including Galaxy Resources Ltd (ASX: GXY) and Orocobre Limited (ASX: ORE)

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Cut outs of cogs and machinery with chemical symbol for lithium

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ASX lithium shares Galaxy Resources Limited (ASX: GXY)Orocobre Limited (ASX: ORE) and Pilbara Minerals Ltd (ASX: PLS) have slumped across the board after posting triple-digit returns late-last year. 

Some of the weakness in ASX lithium shares could be attributed to factors such as a crashing Tesla Inc (NASDAQ: TSLA) share price and a slump in the Global X Lithium & Battery Tech ETF (NYSEARCA: LIT) which comprises of companies around the world involved in the lithium cycle, from mining and refining through to battery and electric vehicle production. 

While ASX lithium shares have slumped this year, UBS thinks you should stay bullish on higher lithium prices. 

Shares to leverage higher material prices 

Lithium prices bottomed out late last year after more than two years of spiralling lower. Fastmarkets, which tracks lithium prices, has provided the following commentary on the latest lithium price movements:

  • The ex-works China battery-grade lithium hydroxide price hit a 19-month high after producers offered aggressively in response to limited supply.
  • China’s domestic battery-grade lithium carbonate price also rose, supported by continuing shortage in the spot market.
  • The rest of the world’s battery-grade lithium spot prices continued in an uptrend with most suppliers insisting on higher prices.

UBS bullish on ASX lithium shares 

As lithium markets continue to improve, UBS sees potential upside in the Galaxy and Orocobre share price. 

On 5 March, UBS rated Galaxy as a buy with a $3.90 price target. The broker acknowledges the company’s intentions to ramp up Mt Cattlin to full production rates which should translate to a return to profitability. It estimates Galaxy to deliver FY21 earnings per share of 7.06 cents. At today’s prices, this would translate to a price to earnings of roughly 32.

On the same day, UBS also rated Orocobre as a buy with a $6.70 price target. It notes that Orocobre has improved its cost base from US$4,266/tonne last year to US$3,623/tonne in its most recent half-year result, which reflects the company’s ability to tackle operational challenges.

More broadly speaking, UBS expects lithium prices to be approximately 10-15% higher in 2021. 

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Motley Fool contributor Kerry Sun has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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