Arcadium Lithium (ASX: LTM) shares have been bouncing around this week.
The ASX 200 lithium stock was charging higher on Wednesday in response to its quarterly update.
However, since then it has given back most of these gains and sits within touching distance of a record low.
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Should you buy the ASX 200 lithium stock?
One leading broker believes recent weakness leaves the lithium giant's shares "trading at a material discount."
According to a note out of Bell Potter, its analysts have responded to the quarterly update by retaining their buy rating with a reduced price target of $7.25 (from $9.50).
Based on its current share price of $4.17, this implies potential upside of 74% for investors over the next 12 months.
To put that into context, a $2,000 investment would turn into approximately $3,480 if Bell Potter is on the money with its recommendation.
What did the broker say?
The main talking point from the update was the ASX 200 lithium stock's decision to hit the pause button on its production expansion plans.
This will see its capacity reach 115,000 tonnes per annum in FY 2026 instead of 170,000 tonnes per annum, which will save US$500 million in capital expenditure. It commented:
LTM has responded to weak market conditions by pausing/deferring expansions, we calculate reducing LTM's notional CY26E capacity to 115ktpa LCE (previously 170ktpa LCE). The Galaxy (previously James Bay) spodumene concentrate project will be paused and LTM is seeking a strategic minority capital partner. Brine expansions in Argentina will also be deferred. The net impact on capex is a US$500m reduction over 2025-26. Despite this initiative, LCE volumes (excluding Mt Cattlin) are still expected to grow by 25% in CY24 and by 25% again in CY25.
In response to the plans, the broker has reduced its earnings estimates and valuation accordingly. It adds:
Earnings changes in this report relate to the downgraded CY24 outlook, paused/ deferred projects, and a lower lithium price outlook. The upgrade to CY24 relates to a revision of our depreciation assumptions. EPS changes are: CY24 +21%; CY25 -24%; and CY26 -20%. Our target price is now $7.25/CDI (previously $9.50/CDI).
Why is it a buy?
As I mentioned at the top, the broker believes that this ASX 200 stock is trading at a material discount. And with Bell Potter expecting the lithium market to improve over the medium term, it feels this makes it a great option right now. Its analysts conclude:
LTM has rapidly reversed its aggressive production growth plans to conserve capital and signal some level of supply restraint to investors and a weak lithium market. The company remains a large and diversified exposure to lithium in terms of mode of upstream production, asset locations, downstream processing and customer markets. We expect lithium markets to improve over the medium term. LTM is trading at a material discount to its depreciated asset base.
