Could climbing costs crash the ASX lithium share party?

What does the latest news for lithium shares mean for investors?

Mitchell Lawler

Mitchell stumbled upon the concept of investing when in high school, devotedly urging his parents to put some money into a handful of technology companies with increasingly popular products among his demographic – many of which have gone on to great success. It wouldn’t be until 2017, some five years later, that Mitchell became an investor of his own money. Having studied and worked as a mechanical engineer in the building services industry, Mitchell takes a methodical and analytical approach to evaluating businesses. Rather than relying purely on numbers, Mitchell drills beyond a company’s metaphorical mantle to unearth obscure patterns or competitive advantages that would go otherwise unnoticed. His expertise resides within areas such as software, consumer goods, and building services equipment. However, his quest to find quality companies that set the industry standard and flex some degree of an impenetrable position has no limits – small cap to mega cap, cosmetics to healthcare – if it’s an exceptional business it’s on his radar.

Published February 9, 2022 3:25 pm AEDT

A shot has been fired across the bow of ASX lithium shares today following a concerning admission from Mineral Resources Limited (ASX: MIN).

Troubling high costs for lithium exportation were revealed in the mining company's half-year results this morning. Consequently, the lithium producer took a wrecking ball to its profits during the period. The outcome was a 96% reduction in net profits.

What could this mean for ASX lithium shares more broadly?

A sad and flat battery — Image source: Getty Images

Inflation takes its pound of flesh from ASX lithium shares

Investors have been quick to pile into the growth opportunity presented by ASX lithium shares. This has been driven by an underlying native of attractive supply and demand dynamics. Many estimates put supply ahead of demand over the coming years.

This investment thesis has left lithium investors smitten during the last 18 months, as the projections have played out in real-time. In the last year alone, the price of spodumene concentrate has increased by nearly six-fold. Unsurprisingly, many ASX-listed lithium shares have moved multiples higher in response.

However, today's news from Mineral Resources reminds the market that there's more to consider than the sale price of a commodity. The other piece of the financial puzzle takes shape in the form of costs.

Ultimately, the difference between these two variables is what determines the success of a mining company. In a worrisome development, one of the biggest Aussie lithium producers has indicated a drastic change to its cost structure.

According to its results, Minerals Resources experienced a 60% increase in lithium production costs year on year. The company's spodumene mine, Mt Marion, recorded costs of $570 to $615 per tonne during the period. Additionally, increased shipping costs constituted 40% of the increase in costs.

Evidently, the pressure of beefed expenses paired with a reduction in overall revenue has hit this ASX lithium share's price today.

No doubt investors will be watching with bated breath over the coming weeks as more lithium shares reveal whether inflationary pressures have been taking a bite out of mining profits.

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