On November 6, lithium manufacturers Albemarle (ALB), Livent (LTHM), and SQM (SQM) saw their stock prices fall as a result of a broker downgrade. Despite this, I see no reason to change their fair value estimations for these companies, as all three are considerably undervalued. Albemarle and Livent stocks are rated 5 stars, trading at roughly 40% of their respective fair value estimations, while SQM stock is rated 4 stars, trading at slightly less than 50% of its fair value estimate.
The reduction is based on an estimate that lithium prices will fall to $15,000 per metric tonne in 2026, taking into account the marginal cost of production. However, I disagree, estimating the marginal cost of production at $20,000 on an all-in-sustaining-cost basis. Even if lithium prices fall to $15,000 for a short time, I believe this will result in high-cost supply being shut down, producing an undersupplied market and ultimately raising prices.
Despite recent spot price decreases, I am still optimistic about lithium in the long run. In 2024, I anticipate a price stabilization of around $20,000 per metric tonne, followed by a climb due to increased demand, the conclusion of inventory destocking, and additional supply delays. This estimate sets the ground for a return to undersupply and higher pricing, with a 2024 average lithium carbonate spot price of $30,000 per metric tonne.
While conceding potential volatility, I see significant opportunities for investors, especially given current market valuations and pricing lithium as a commodity. Volatility, in my opinion, creates chances, especially because lithium producer shares trade considerably below their marginal cost pricing scenario, giving a good investment opportunity.
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