Investing in ASX lithium shares certainly has not come without its fair share of risks.
Most lithium producers and explorers rocketed higher in 2022 and into 2023 as the price of the battery critical metal they dig from the ground hit all-time highs.
But with demand growth slowing and supply growth ramping up, that trend reversed resulting in an 85% collapse in global lithium prices from those record prices.
While prices have somewhat stabilised in 2023, many of the ASX lithium shares with higher costs have found themselves operating at a loss. Some have gone so far as to suspend production, awaiting the return of better market prices.
As for the risk of investing in the lithium miners in the past year, here's how these top-name stocks have performed over 12 months:
- Pilbara Minerals Ltd (ASX: PLS) shares are down 40%
- Core Lithium Ltd (ASX: CXO) shares are down 87%
- IGO Ltd (ASX: IGO) shares are down 61%
- Liontown Resources Ltd (ASX: LTR) shares are down 66%
- Sayona Mining Ltd (ASX: SYA) shares are down 82%
- Lake Resources (ASX: LKE) shares are down 87%
- Latin Resources Ltd (ASX: LRS) are down 51%
- Patriot Battery Metals Inc (ASX: PMT) are down 67%
- Mineral Resources Ltd (ASX: MIN) are down 20%
I think those figures speak to the formidable risks on investing in ASX lithium shares.
At least for the year just past.
But what about the year ahead?
Are ASX lithium shares still very risky?
To be clear, every investment comes with its own unique risks.
As for the particular risk of investing in ASX lithium shares, we'll defer to Blackwattle Investment Partners.
Here's what the fund managers reported on Blackwattle's own investments and outlook for the Aussie lithium miners.
In June, the Blackwattle Small Cap Quality Fund lost ground on its Latin Resources and Patriot Battery Metals holdings. Blackwattle noted that the lithium commodity price continued to follow a volatile trading pattern over the month.
As for those risks, the fund manager added:
Perversely, when considering investments in the resources sector, the risk is the lowest when commodity prices are falling toward the lower end of the cost curve for mining companies with tier-one assets.
At current spodumene lithium prices, few hard rock miners are generating much free cash flow today. As such, we continue to maintain modestly sized holdings in the lithium sector. In our view projects with superior economics like Latin Resources and Patriot Metals are well placed to ride out near-term volatility in the lithium price.
Noting that it will take some time for the supply and demand dynamics in lithium markets to balance, Blackwattle said, "At current prices, new projects, such as Pilbara Minerals' P2000, don't stack up."
However, the fund managers are more optimistic about the outlook of Arcadium Lithium (ASX: LTM) after the ASX lithium share plunged 26% in June.
Arcadium, as you may know, started trading on the ASX in December, formed from the merger of the previously ASX-listed Allkem and US-listed Livent.
According to Blackwattle:
The merger has created a quality, vertically integrated global lithium chemicals producer with a significant synergy opportunity & production growth upside.
We see significant upside for LTM outside any moves from the lithium price, as the new business looks to maximise the merger potential through synergies, driving cost & capex reductions as well as improved pricing.
We view a potential rebound in lithium prices at some point as option value.
Foolish takeaway
So, is investing in ASX lithium shares right now risky?
You bet.
But could buying some of the beaten-down, low-cost producers also pay off handsomely over the longer run?
I certainly think it could.
Just don't invest more than you're prepared to lose.
