3 key reasons to sell Core Lithium shares

This lithium miner's decline may not be over according to one broker.

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Core Lithium Ltd (ASX: CXO) shares have had a very disappointing 12 months.

During this time, the lithium miner's shares have lost approximately 87% of their value.

Unfortunately, despite this material decline, one leading broker believes there's potential for the lithium stock to fall further.

Who is bearish on Core Lithium shares?

Goldman Sachs remains very bearish on Core Lithium.

According to a recent note, its analysts have a sell rating and 11 cents price target on the company's shares.

Based on the latest Core Lithium share price of 13.5 cents, this implies a potential downside of approximately 18.5% for investors over the next 12 months.

What did the broker say?

Goldman has laid out several reasons why it believes that investors should be avoiding Core Lithium's shares even after their sharp decline.

The first reason that Goldman has given to justify its sell rating is the company's valuation. It notes that it still looks expensive at current levels. The broker said:

CXO appears relatively expensive trading at a premium on ~1.1x NAV and an implied LT spodumene price of ~US$1,200/t (peer average ~1.05x & ~US$1,250/t (lithium pure-plays ~US$1,140/t)), with the lowest average operating FCF/t LCE on a more moderated/deferred production restart/ramp up.

Another reason for its bearish view is its belief that there are a lot of risks with respect to the restart of mining operations. It adds:

In the current pricing environment, a mine restart looks highly unlikely ahead of the next wet season, in our view and, given the Grants open pit has ~12 months of life, likely tied to a development decision on BP33 (with its own funding risks) to support a new processing contract, increasing the risk of a longer gap in production. Following a restart, production risk in a steady state operation remains as the Finniss project moves through ramp ups on project complexity moving between different open pits and underground configurations.

A third and final reason is its belief that Core Lithium's resource growth may take longer than expected now. It concludes:

Though further exploration is underway, and while potential resource expansion could be promising (including revisiting the gold, uranium and base metal exploration projects), with resource extension likely at depth/from new areas, we see limited near-term upside, where further meaningful exploration is now also likely longer dated on falling lithium prices, particularly with a near-term restart of the operation now unlikely in the near-term.

All in all, Goldman thinks investors should be staying clear of the company for now. It prefers IGO Ltd (ASX: IGO) for lithium exposure and has a buy rating and $8.10 price target on its shares.

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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