Is the Allkem share price selloff a buying opportunity?

is the Allkem share price weakness a buying opportunity for lithium investors?

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Key points

  • Allkem's shares have fallen heavily this week
  • Concerns over the outlook for lithium prices have been weighing on its shares
  • One broker sees major upside in the Allkem share price at the current level

The Allkem Ltd (ASX: AKE) share price is having a week to forget.

Since the start of the week, the lithium miner’s shares are down 17%.

Why is the Allkem share price falling?

The Allkem share price, along with almost all lithium shares, have come under pressure this week for a number of reasons.

These include a broker downgrade by Credit Suisse, Argentina setting a lithium reference price of US$53 per kilo, Goldman Sachs reiterating its view that lithium prices will fall heavily in the coming years, and BYD planning to buy six lithium mines in Africa.

The latter is likely to be the biggest driver of the selling. Particularly given that the Warren Buffett-backed electric vehicle company is understood to be expecting these mines to produce approximately 1 million tonnes of lithium carbonate each year.

That would be enough to build at least 27.78 million electric vehicles, which covers the automaker’s expected demand for the next decade.

If everything goes to plan for BYD, this will increase overall lithium supply and take a major buyer of lithium out of the chain. This could ultimately have a negative impact on lithium prices.

How will falling prices impact Allkem?

While falling lithium prices is not what Allkem shareholders want to see, it is worth noting that the company has low operating costs.

During the most recent quarter, Allkem reported a cash cost per tonne of US$349 for its Mt Cattlin spodumene concentrate and US$3,811 per tonne for its Olaroz lithium carbonate.

Goldman Sachs has been forecasting a long-run average of US$800 per tonne for lithium spodumene concentrate and US$11,500 per tonne for lithium carbonate.

This means that even if prices crumble to Goldman’s long term estimates, Allkem is still a highly profitable machine.

Is this a buying opportunity?

According to a recent note out of Morgans, its analysts have an add rating and $16.98 price target on the company’s shares.

Based on the current Allkem share price of $11.63, this implies potential upside of 46% for investors over the next 12 months.

Motley Fool contributor James Mickleboro has positions in Allkem Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. 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 Scott Phillips.

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