Are you wanting to take advantage of the recent weakness in the battery materials space to pick up some ASX lithium shares?
If you are, then it could be worth listening to what Goldman Sachs is saying about the industry.
Especially given how it has correctly called the collapse in lithium prices this year, which has caused the aforementioned weakness.
What is Goldman saying about ASX lithium shares?
I have good and bad news for you. The bad news is that the broker sees potential for ASX lithium shares to continue to fall as the price of the battery-making ingredient softens further.
The good news is that it feels that "producers may be beginning to approach medium-term fair value."
But that's not necessarily all producers just yet. The two ASX lithium shares it likes at current levels are Allkem Ltd (ASX: AKE) and IGO Ltd (ASX: IGO). It has a buy rating on them, but a neutral rating on Core Lithium Ltd (ASX: CXO) and Pilbara Minerals Ltd (ASX: PLS) shares.
Goldman explains:
In the short-term, on a FY24E spodumene price range of US$1,250-2,500/t (spot ~US$2,200/t) we see the lithium producers pricing in a multiple range of ~3-9x EV/EBITDA, where PLS remains at a premium to AKE/IGO (likely in part on ramp up of P1000, though others also executing growth projects). On further price declines into FY25E to US$800-1,200/t (GSe ~US$800/t) we see the lithium producers pricing in a wider multiple range of ~5-12x EV/EBITDA, with IGO/AKE implying multiples broadly in line with our applied sector premiums.
With lithium stocks having briefly traded in a range of 7-9x before the last lithium price decline, producers may be beginning to approach medium-term fair value, though in the interim may likely trade further with commodity pricing sentiment as declines come through realised pricing/earnings on a lagged basis.
It is a similar story for Goldman when it uses its long-term pricing model. It continues to see Allkem and IGO as the only truly attractive options at current prices. The broker adds:
Alternatively, on LT pricing, we see the sector trading at ~US$1,200/t, where with the expectations that lithium prices decline further to CY25, we continue to expect producers with low costs & growth optionality to be best placed. For near-term cash generation we prefer IGO with ~10% FCF yields vs. peers averaging negative FCF on project spend and our lithium price outlook, while AKE retains the best medium-term growth outlook.
However, the broker acknowledges that if prices were to rebound or M&A activity heats up, it would likely be the "higher cost/more leveraged names [that] will likely outperform."
