Core Lithium Ltd (ASX: CXO) shares are having a poor start to the week.
In morning trade, the lithium developer's shares are down 4% to $1.08.
Why are Core Lithium shares falling?
The weakness in the Core Lithium share price today appears to have been driven by ongoing concerns over the future direction of lithium prices.
This follows the release of a note out of Goldman Sachs, which reveals where its analysts expect the price of the battery making ingredient to be heading in the coming years.
And with Goldman continuing to believe that prices are heading sharply south, it has reaffirmed its sell rating and 95 cents price target on its shares. This implies potential downside of 12% from current levels.
But what if lithium prices didn't fall, would Core Lithium shares be fairly priced or even cheap?
If lithium prices remained strong
While Goldman Sachs continues to forecast major declines in lithium in the coming years, it has provided investors with an idea of what could happen if they didn't.
Firstly let's take a look at the forecasts and current spot prices.
According to the note, the broker expects spodumene prices to average US$4,330 a tonne in 2023, US$800 a tonne in 2024 and 2025, before settling at a long term average of US$1,000 a tonne. This compares unfavourably to the current spot spodumene price of US$5,970 a tonne.
Based on these forecasts, Goldman expects Core Lithium to post an underlying net profit after tax of $340 million in FY 2024 and just $50 million in FY 2025.
However, if the spodumene price remained at current spot levels through to 2025, Goldman believes Core Lithium would deliver an underlying net profit after tax of $720 million in FY 2024 and just $830 million in FY 2025.
That's more than double in FY 2024 and approximately 16 times greater in FY 2025, which goes some way to demonstrating why Core Lithium shares are so volatile. If you're bearish on lithium prices then Core Lithium is expensive, if you're bullish on lithium then Core could prove to be dirt cheap based on its potential profits.
Time will tell which is the case.
