Why were Core Lithium shares just downgraded?

Goldman Sachs has become bearish on this lithium miner today.

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Core Lithium Ltd (ASX: CXO) shares are pushing higher on Tuesday.

At the time of writing, the lithium miner's shares are up almost 1.5% to 37 cents.

While this is positive, Goldman Sachs doesn't believe this run will continue for long.

What is Goldman Sachs saying about Core Lithium shares?

According to a note, the broker believes that falling lithium prices are going to be a problem for Core Lithium in more ways than you think.

While falling prices hurt sentiment and profits, the broker also believes they will mean the company needs to launch another capital raising in the near future. Especially given inflationary pressures on industry costs. It explains:

Given the more rapidly declining lithium pricing environment than we expected when we upgraded the stock to Neutral in Aug, we now see increased risk that funding from existing cash/operating cash flows may be insufficient to fund BP33 development (which may be required to continue spodumene production as Grants pit production ends; FID targeted Mar-24 quarter), particularly with recent underground cost escalations, where, since the DFS in Jul-21, we estimate underground mining costs are up ~40% (on our bottom-up quarterly analysis of >30 listed Australian gold assets).

In light of this, the broker has downgraded Core Lithium shares to a sell rating and cut its price target on them to 31 cents. Based on its current share price, this implies a sizeable downside of 16% for investors over the next 12 months. The broker concludes:

With a [-16%] TSR vs. our covered lithium peer average of +5%, we downgrade CXO to a relative Sell on valuation, where we note that since the start of Sep-23, CXO is down <10%, vs. spodumene down ~40%, and Australian lithium peers down ~25-40%. We sit below Visible Alpha consensus in FY24/25E on our weaker lithium pricing outlook and Finniss ramp up profile.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs Group. 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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