Lithium prices have taken a painful tumble this year, not just once, but twice.
According to TradingEconomics, the global spot price for lithium carbonate plunged below the CNY170,000 per tonne mark in April, recovered over the Australian winter, but has plummeted to that trough again now.
"The concerning macroeconomic backdrop for the Chinese economy also translated to low consumer spending for electric automobiles, driving 10 Chinese new-energy vehicle producers to offer price cuts to reduce the supply glut."
The European Union also recently flagged economic action against Chinese electric car makers for flooding its territory with price-competitive vehicles.
Despite all this gloom, Wilsons equity strategist Rob Crookston is in no doubt about the long-term demand for ASX lithium shares.
"The structural outlook for lithium remains intact, which should support attractive long-term lithium prices and, by extension, significant cash generation from lithium producers," he said in a memo to clients.
"Therefore, current weakness in the lithium sector should be seen as an attractive buying opportunity for investors."
So if that's the case, which stocks are Crookston's team backing right now?
Tripling production with $1 billion in the bank
Crookston and his analysts specifically look for three qualities within a lithium miner:
- Production growth: "Firms poised to become industry leaders with reduced dependency on elevated prices to increase cash flow"
- Cash generation: "Investors in this fledgling sector are cautious about potential capital raises"
- Low production costs: "A crucial factor for sustaining cash flow during challenging periods"
The Wilsons team is excited about the prospect that Allkem will triple its production by 2026 then increase it further to the end of this decade.
"Even with capex associated with growth, Allkem is expected to generate a free cash flow (FCF) yield of 7.7% in FY24.
"Allkem also has ~US$1 billion of cash on the balance sheet, and in a net cash position."
Another bonus is that the bulk of Allkem's production is from lithium carbonate.
"Lithium carbonate is lower cost than hard-rock spodumene."
Meanwhile, Mineral Resources is forecast to double its production by 2025.
"Balance sheet has $1.4 billion of cash and net debt/EBITDA at 1x.
"Substantial capex costs this year, but we think the balance sheet is manageable, albeit tight. MIN shareholders will reap the rewards from FY25 onwards."
There is a caveat for Mineral Resources though.
"Management needs to execute this half. We are wary that management strategy has been relatively unpredictable," said Crookston.
"Disciplined delivery will be key to unlock value. If management cannot do this over the next quarter, it will be a red flag to our investment thesis."