The Zhitong Finance App learned that Galaxy Securities released a research report saying that the worst expectations for the lithium sector in the A-share market have passed. When domestic lithium carbonate futures fell to 80,000 yuan/ton, A-share lithium share prices had already risen to respond. This may indicate that the market believes that lithium prices have reached a long-term bottom, that the uncertainty and risk of lithium ore stock performance have been eliminated, and the bottom of the lithium sector has been discovered. However, with the cessation of lithium production in Australia and the acceleration of industry clearance, the A-share lithium sector has reached a long-term, relatively good left-side allocation stage, and is expected to rebound. It is recommended to focus on Tianqi Lithium (002466.SZ), Tibet Mining (000762.SZ), China Mining (002738.SZ), etc., which have a high self-sufficiency rate of lithium ore and have high-quality lithium mines and low cost lithium mines.

Incidents:

On January 5, Australian lithium miner Core Lithium announced that in response to the continued decline in lithium prices, the company decided to suspend mining operations at its Finniss lithium project. According to the Shanghai Steel Federation, on January 10, hundreds of people held a protest in northern Chile and blocked the access to the Atacama Salt Lake salt beach.

▍ The main views of Galaxy Securities are as follows:

Australian lithium mine production stopped, and production capacity at the mining end of the lithium industry chain began to be cleared:

The Finniss lithium mine under Core Lithium was put into operation at the end of 2022. The lithium concentrate production capacity was 173,000 tons/year, and the 2023Q1-Q3Finniss lithium mine production was 0.36, 1.47, and 207,000 tons, respectively. The original 2024 lithium concentrate production guideline was 80,000 to 90,000 tons. Core Lithium's financial report shows that the cash operating cost of Finniss lithium mine 2023Q3 is 1,889 Australian dollars/ton, or about 1,263 US dollars/ton, which is higher than the current spot price of Australian lithium concentrate (CIF China) of 1,000 US dollars/ton according to SMM statistics. Due to the price falling below the cost of cash, the Finniss lithium mine was put into operation late and did not enjoy high profits and reserve sufficient cash during the peak lithium price period (Core Lithium's cash reserves of US$135 million as of 2023Q3), which forced Core Lithium to stop production of the Finniss lithium mine to reduce cash operating costs and reduce net expenses and losses.

According to Core Lithium's announcement by the end of 2023, the company still has about 280,000 tons of ore in stock for processing until mid-2024, and there is no need for further mining. According to SMM, the discontinuation of production of Finniss lithium mine will affect the production of 80,000 tons of LCE lithium concentrate. The discontinuation of production of Finniss lithium mine kicked off the clean-up of the Australian lithium industry in the downward cycle of the lithium industry chain. According to SMM statistics, the current price of spodumene concentrate (6%, CIF China) is threatening the production costs of Mt Marion, Wodgina, NAL, and African mines. Australian lithium mines are the main supplier of global lithium resources, accounting for 42% of global lithium resource production.

In the last round of the lithium industry downturn, the bankruptcy and shutdown of Australian lithium mines Bald Hill, Wodgina, and Altura was a prerequisite for the industry to reverse. The discontinuation of production at the Finniss lithium mine due to the sharp drop in lithium prices also indicates that the adjustment of the lithium industry has entered a deep clean-up stage.

Chile's Atacama salt lake disrupts global lithium resource supply:

Local indigenous groups in northern Chile protested that their interests were marginalized and ignored in negotiations between SQM and Codelco, which blocked public roads leading to mining operations in southern Atacama Salt Lake to prevent workers, supplies, and lithium from entering or leaving. Atacama Salt Lake is the world's largest salt lake lithium mine. Its lithium salt production in 2023 is expected to be around 260,000 tons of LCE, accounting for 25% of the world's total production; in 2024, the lithium mine production capacity of SQM and Abbott in Atacama Salt Lake may increase to 295,000 tons of LCE.

Although Carmen, SQM's lithium salt processing plant, is located in Antofagasta, and with sufficient brine stocks, local Aboriginal people will not affect Sqm's lithium salt production in the short term. Abbott, the lithium salt producer at Atacama Salt Lake also said that operations are going as usual, while lithium prices continue to drop sharply, the twists and turns in Atacama Salt Lake's operation disrupt global lithium supply, and may strengthen the industry's expectations for accelerated clearance.

Investment advice

Although the discontinuation of lithium mine Finniss lithium mine production has limited improvement in the global lithium resource oversupply in 2024, the suspension of lithium production in Australia indicates that the current round of lithium price decline has now begun to break through the cost line of spodumene mining companies after first removing the profits of non-mineral smelters. If lithium prices fall further, it is expected that more solid lithium mining companies will stop production or delay the progress of new production capacity, thus providing support for bottom lithium prices on the supply side, thus supporting the bottom lithium price.

The period of worst expectations for the lithium ore sector in the A-share market is over. When domestic lithium carbonate futures fell to 80,000 yuan/ton, A-share lithium share prices had already risen to respond. This may indicate that the market believes that lithium prices have reached a long-term bottom, that the uncertainty and risk of lithium ore stock performance have been eliminated, and the bottom of the lithium sector has been discovered. However, with the cessation of lithium production in Australia and the acceleration of industry clearance, the A-share lithium sector has reached a long-term, relatively good left-side allocation stage, and is expected to rebound.

Risk warning

1) The risk that production and sales of new energy vehicles will fall short of expectations; 2) the risk of new global lithium production capacity being added faster than expected; 3) The risk of a sharp drop in lithium prices.