BMO analyst Joel Jackson, known for being prudent on Lithium, turning more positive on the sector for the following reasons:
1- Lithium prices are only starting to rise. See charts below.
2- We now see prices for lithium carbonate going from $6,75k/t today to $7,5k/t in 2021 and then average $10,0k/t by 2023
3- WE now see EV penetration to grow from 3.9% in 2020 to 5% in 2020 and 12% by 2025.
4- Recent data have shown an acceleration with Chinese EV sales up 120% in November yoy and Europe tripling
5- Joel also sees lithium supply basically not rising in 2021 before a supply boost in 2022/23. See charts below.
6- Joel is now using 18X EV/EBITDA multiple targets up from 12X justified by: 1- 20% demand CAGR for lithium, 2- Scarcity of liquid investments in the space, 3- ALB’s lithium unit has traded at 18X for the past five years
7- SQM and ALB trade at 30% discount to their SOTP. Details below and attached. Joel is upgrading SQM to Outperform.
Fertilizers & Chemicals
Raise Lithium Target Prices After Electrifying Year; Upgrade SQM to Outperform
Joel Jackson, P.Eng., CFA•Fertilizers & Chemicals
(416) 359-4250
Bottom Line:
Although we maintain bullish 2021 and mid-term lithium and EV forecasts (and change no estimates), we upgrade SQM to Outperform (target price rises to $57). Lithium stocks have strongly outperformed in 2020 and despite recent multiple appreciation, we still see upside. This as EV penetration rates continue to increase, still overwhelming investor/corporate interest in the EV thematic, and lithium prices only now rising. The upgrade of SQM adds to our Outperform rating on ALB, for which our target price rises to $165. Incremental is raising our target lithium EBITDA multiple for SQM/ALB to ~18x (from ~12x) in 2024E SOTPs. ALB and SQM trade at similar ~30% discounts to 2024E SOTPs and while the portfolio/opportunity differs a little for each, these are two large lithium platforms relevant strategically with customers owing to scale, and which can benefit from both lithium volume and price growth over the mid-term.
Key Points
Still model ~5% EV penetration in 2021E ramping to ~12% in 2025E, up from ~3.9% in 2020E (and 2.5% in 2019). We expect EV sales to grow ~40%/yr across 2021/22E before cooling off to “only” 20-30%/yr growth. The dynamic is heating up in Q4E with Chinese October/November EV sales up ~120% y/y (Europe also trending up triple).
Still expect spot lithium price recovery in 2021E on way back to ~$10k/t by 2023E vs. $6.7-8k/t currently. We expect lithium inventories to continue to lower considering expected ~20% demand growth (EV plus recovering GDP-related demand) coupled with little new supply in 2021 before a large (delayed) supply wave starting in late 2021/early 2022. One caveat is re-ramping Australian spodumene and Chinese conversion capacity, running at lower op rates in 2020.
How to justify 18x lithium multiples. We expect 20%+ lithium demand CAGRs with scarce liquid investment alternatives in the space, and the implied multiple on ALB's lithium segment has averaged ~18x the last five years.
ALB target ~0.85-0.9x 2024E SOTP ~$187/sh assuming 18x/10x lithium/non-lithium EV/EBITDA multiples. ALB continues to offer strong lithium scale (doubling capacity in a year), cost position, geographic/feedstock diversification, product diversification, and its longer-term contract strategy has clearly worked considering well-above-spot lithium price realizations. Catalysts should also see recovery in 2021E.
SQM target also ~0.85-0.9x 2024E SOTP ~$65/sh (18x/10x lithium/non-lithium multiples). Largely transacting lithium at spot, SQM has underperformed ALB on realizations. However, low-cost SQM has high leverage to lithium price/demand recovery with 15-30%/yr volume growth trajectory at low capital intensity levels. Plus the balance sheet is strong, and ag has been better (NOP/potash etc.). Lithium earnings mix has lowered to ~18%, but this rises to ~45% in 2022E and ~65% in 2025E.
Raise target to $14 on Market Perform rated LTHM (trading like ALB/SQM at ~30% discounts to 2024E EV/EBITDA and ~700x Q3/20 annualized EBITDA), but may see reduced strategic relevance for customers. Therefore, LTHM may only benefit from price recovery but not volume growth as the balance sheet and seemingly displaced lost industry position has halted growth (we therefore use lower ~12x target multiples).
Although we raise targets prices on LAC and ORE to C$11 and A$5, respectively, equal to ~2x NAV for both names, our ratings remain Market Perform.
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