Lithium spot and futures contracts reached another record high by the end of December, marking a 486% leap in 2021.
Demand for lithium remains sky-high amid tightening supply, as the COVID-19 pandemic continues to play havoc on global supply chains and as suppliers race to build stockpiles of the battery metal and lock in better prices into the future.
JP Morgan updated its forecasts on the direction of the ASX lithium sector in December. The investment bank notes lithium prices outperformed internal expectations prompting it to upgrade baseline forecasts by 30-70% over 2022-23.
"Looking forward" JP Morgan says, "the demand outlook remains compelling, and it is hard to see a catalyst for prices to correct".
The Australian lithium sector was a significant outperformer in 2021 with several names swooping returns in the triple digits.
As such, going forward JP Morgan is overweight on IGO Ltd (ASX: IGO) and Allkem Ltd (ASX: AKE), whilst remaining neutral on Pilbara Minerals Ltd (ASX: PLS) and Mineral Resources Limited (ASX: MIN).
Why is JP Morgan bullish on ASX lithium shares?
Analysts at the firm note that there is no change to its view of the lithium market "remaining in perpetual deficit", and subsequently forecast a compound annual growth rate (CAGR) of 24% through until 2030.
Moreover, the broker says that EV sales momentum is driving ongoing positive sentiment across the sector, and ever-tightening markets appear to still be short of supply.
In the note from December last year, JP Morgan forecasts Lithium Carbonate and hydroxide seaborne contracts to gain 47% by the end of 2022, whereas it expects spodumene to rise by 71% per tonne by the same time.
This bullish momentum is likely to bode in well for ASX lithium shares, the broker says.
Out of its coverage, IGO is JP Morgan's "key pick", seeing as it screens "well from a valuation perspective" and offers attractive dividend forecasted yields circa 4%–6% in FY23–FY24.
The firm also says IGO recently added quality lithium assets to its portfolio via key investments in the Greenbushes spodumene mine and Kwinana hydroxide plant. This makes IGO a "one-stop stock for EV raw materials".
While it likes fellow lithium player Allkem for its discount to valuation, the firm notes its near-term earnings multiples are relatively expensive "as it builds out its project pipeline with production to quadruple from FY21 levels over the decade".
Not only that, but Allkem's recently completed merger gives the newly formed entity access to more spodumene and brines.
This, alongside other growth levers, sees JP Morgan bake in a substantial dividend growth and return of assets (ROA) of 20% for the company in FY23/24.
What names is JP Morgan weary of?
Meanwhile, the firm isn't as rosy on the Mineral Resources share price, and holds a neutral stance on the stock with a $46 per share price target.
However, it acknowledges that the company has crushing contracts with "some of the world's largest mining companies in iron ore, gold and lithium operations, as well as its own operating assets".
While the crushing business (CSI) has been the "long-term core business, [the company] has unlocked significant value in its lithium assets" it says.
Mineral Resources is also "ramping up production at its iron ore assets" according to the broker's analysis. It remains neutral on the company on the grounds of valuation only.
Finally, Pilbara Minerals offers the greatest leverage to spodumene, the broker says, and also trades the cheapest on earnings multiples. It recently raised its Pilbara Minerals price target by 26% to $2.90, however, remained neutral on the shares, citing terms of valuation.
Lithium pricing by all accounts looks set to remain top heavy for the foreseeable future. This bodes in well for players within the industry alongside adjacent markets like battery technology, according to the broker.
