Canaccord Genuity: Lithium has passed peak, but Canadian plays could still rule ASX in ‘23

Canaccord Genuity says lithium prices, which hit stunning levels this year, will pull back in 2023 - but it still sees big upside in ASX juniors working in Canada.

Canadian lithium plays have tremendous upside, Canaccord Genuity says. Picture: Grant Faint/The Image Bank via Getty Images

After a 2022 of record setting prices, the numbers for lithium are retreating in key markets such as China, where the boom in electric vehicle sales turned the battery metal into the world’s hottest commodity over the past 24 months.

The industry’s leading price setter, Benchmark Minerals Intelligence, on Wednesday reported a second consecutive weekly drop for both lithium carbonate and hydroxide in the Middle Kingdom.

The battery grade lithium carbonate price was down $US80,275/t, off 1.3 per cent weekly but up 123 per cent year-to-date, with hydroxide, often converted from carbonate, down 0.4 per cent to $US80,650/t over the week and +169.2 per cent YTD.

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It has followed concerns from analysts that sales of EVs could slow in China as subsidies end and that a supply response from miners could address what has become a major shortage of the key battery material.

But Canaccord Genuity’s head of mining research Reg Spencer, a veteran watcher of the lithium space, says the financial services firm is a long-term bull on battery materials including lithium, nickel, cobalt and rare earths.

That is even considering it sees lithium chemical prices pulling back to $US50,000/t next year.

“There is supply coming into the market, but countering that we have seen demand in both 2021 and 2022 arguably outstrip our forecasts based on EV sales so far this year,” he said.

“So you might argue that we may be a little bit conservative on the demand side.

“But on pricing, pricing had exceeded everybody’s expectations, and it’s probably run up to, let’s call it a short term peak and it was unlikely that prices were going to stay at that level.”

Put it into some perspective though

That sort of forecast may make a lithium investor nervous. We have seen a major sell off in battery metals stocks such as Pilbara Minerals (ASX:PLS) and Allkem (ASX:AKE) over the past month.

But it is important to put the surge in prices, which has seen the 6 per cent Li2O spodumene concentrate produced by WA’s hard rock miners sell on the spot market for more than US$8000/t at times - 16 times prices quoted over two years ago - into perspective.

“Now if you’d have asked me two years ago, where I thought prices would be in 2023, I would not be saying $US50,000 a tonne,” Spencer said.

“So that’s still a very, very high level by historical standards and that should equate to some very, very strong earnings and cash flow for those lithium companies in production.

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“And for companies looking to get into production, that should still provide very favourable project economics for those looking to finance new projects.”

The question isn’t if prices pull back, Spencer says, but where they pull back to. Spencer says lithium producers were already trading at a discount to spot prices, which meant the market was never really pricing it in to their market caps.

“Which would imply that the market never thought that lithium prices were going to stay at current levels,” Spencer said.

“The question is where do lithium prices pull back to, and where do these equities pull back to, in which case any major correction or pullback in those equities we would see as a major buying opportunity.”

O’ Canada

But it isn’t the established miners where Spencer sees the biggest opportunities in 2023.

WA’s hard rock producers now make up 50 per cent of the world’s lithium raw materials. But other markets have significant growth prospects.

Spencer says a great story is emerging in North America, where ASX juniors have increasingly planted the Aussie flag.

“I think the likes of the Pilbaras and the Allkems and the IGOs, your larger established producers, they’re always going to do well in a strong lithium pricing environment,” Spencer said.

“But as a sub-thematic of that main sector we’re quite enthusiastic about what’s happening in North America, and specifically Canada.

“Canada sits on the doorstep of the world’s second largest auto market. It’s a mining friendly jurisdiction.

“They’ve got a lot of sustainability credits with their hydropower, it’s underexplored relative to Australia.

“So you’ve got a lot of ingredients there for the development of a strong lithium producing industry in Canada.”

Sayona Mining (ASX:SYA) and Piedmont Lithium (ASX:PLL) plan to enter production early next year at their 75-25 North American Lithium JV in Quebec, while Allkem holds the large James Bay pegmatite.

But these smaller names are capturing Spencer’s attention.

GREEN TECHNOLOGY METALS (ASX:GT1)

Spencer’s first pick in the Canadian lithium space is Green Technology Metals, which owns the Seymour project in Ontario.

“They’ve got an emerging project in Ontario, they’re currently actively drilling out a resource, which will ultimately be somewhere around 40-50 million tonnes,” Spencer said.

“And that should be more than sufficient to underpin a 200-300,000 tonne per annum spodumene operation.

“It’s got a very strong management team and they have a strategic partnership with a large high profile North American lithium company called Lithium Americas. So there is clearly some potential for M&A in there as well.”

CYGNUS GOLD (ASX:CY5)

Second on Spencer’s radar is Cygnus Gold, which boasts Bellevue (ASX:BGL) and Auteco’s (ASX:AUT) Ray Shorrocks and Michael Naylor on its board, BGL managing director Steve Parsons as a substantial shareholder and recently appointed former Mincor (ASX:MCR) boss, Kidman Resources director and Western Areas executive Dave Southam as its MD from early next year.

“It’s a bit smaller and earlier stage and don’t let the name put you off, but ... Cygnus Gold earlier this year picked up some ground on the Pontax belt,” Spencer said.

“Now that may not mean much to you, but the project is not that far south of Allkem’s major James Bay development project, and Cygnus Gold have just started drilling an outcrop there and already we see potential for a decent resource.

“The real upshot here comes with being able to extend the known limits of that mineralisation. And if you can outline a 20-30 million tonne deposit, then you’ve got yourself a development project.

“Based on the relative market cap to some of the peers and the people behind it -- it’s the same management team that was behind the success of Bellevue Gold and Auteco Minerals -- that’s another one that we think’s got a lot of potential through 2023.”

PATRIOT BATTERY METALS (ASX:PMT) and WINSOME RESOURCES (ASX:WR1) Tying for third in Spencer’s list are Patriot Battery Metals, famously chaired by former Pilbara Minerals MD and CEO Ken Brinsden, and Winsome Resources, both of which are in close proximity in Quebec’s James Bay region.

“I’m conscious that I’m throwing all these Canadian lithium names, I’m trying to think if I should throw somebody a little bit off the wall,” Spencer quipped.

“But look, if I had to tied for third, there’s a number of other early stage explorers that are doing good things.

“Patriot battery metals, which is recently listed in Australia combined with their listing in Canada, has what we think could be one of the world’s best lithium discoveries in northern Quebec.

“They should be coming out with a resource early next year, which could be upwards of 100 million tonnes, which would put it firmly into tier one territory.”

Winsome’s early drilling is showing promise too.

“They announced a few months ago what looks to be an emerging discovery, just to the west of Patriot in Northern Quebec, the drilling looks really, really good,” Spencer said.

“If they can repeat that early stage drilling, they could be looking at a major discovery as well.”

At an even earlier stage, Spencer is also keeping a lookout for Critical Resources (ASX:CRR), which owns the Mavis Lake project in Ontario.

The big value uplift

Spencer says exploration companies could offer the best option in this part of the lithium investment cycle.

“I like exploration, in this part of the cycle a lot of the better projects and I guess last cycle’s discoveries are all being developed now,” he said.

“So the big value uplift we see is with those projects where you take them through resource definition, you take them through studies and financing and into development.

“A good analogy to use would be something like Liontown (ASX:LTR) - great deposit, great discovery, it’s a $3 billion company that started out as an explorer.”

Another positive factor is proximity to the US battery supply chain.

“If you can combine that with a very favourable jurisdiction like Canada, and being well placed to service a burgeoning US battery supply chain - which is trying to, God bless them, disassociate or detach themselves from their reliance on China - that makes for a very healthy macro setup, irrespective of what Chinese lithium prices might be doing,” Spencer said.

“That’s probably the part of the market where I’m most interested in 2023.”

This content first appeared on stockhead.com.au

The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse, or otherwise assume responsibility for any financial product advice contained in this article.

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