"The battery metal bull market is over!" Recently, the renowned American investment bank "soothsayer" Goldman Sachs Group predicted that lithium prices will drop by 70% in 2023.

Before the echo of the statement had faded, the market staged a scene of "ice and fire": on one side, lithium miners in the US and Australian stock markets were collectively "scared"; on the other side, the battery raw material market continued to run at high levels, with Tesla and BYD still frantically grabbing mines...

So, who understands the market better, the industry leaders or the big capital players? Can we find a "good value" "fake fall" stock among the falling Australian lithium mining stocks?

A sudden bearish attack, lithium mining stocks in the US and Australia were collectively "scared"

Recently, the latest report from Goldman Sachs Group predicted that the prices of lithium, cobalt, and nickel, the three key battery raw material metals, will fall in the next two years, especially lithium prices, which are expected to drop by about 70% in 2023.

"This year, the average price of lithium will fall from the spot price of over $60,000/ton to below $54,000/ton; in 2023, the average price will further fall to just over $16,000/ton." However, Goldman Sachs also stated that as prices bottom out and supplies normalize, lithium prices may soar again in 2024.

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The reason for Goldman Sachs' bearish stance is that a large influx of investor funds into supply investments related to long-term demand for electric vehicles essentially treats spot-driven commodities as forward-looking stocks. This fundamental pricing error leads to oversupply before the demand trend emerges.

At the same time, a decision by Argentina, a major exporter of lithium carbonate, has also sparked market discussion. Argentina's customs announced plans to set the reference price for lithium carbonate exports at $53,000/ton, a nearly 30% reduction from the high price of $74,707/ton in March.

Affected by the above news, lithium miners in the US and Australian stock markets fell collectively.On June 1st, in the U.S. stock market, the world's largest lithium producer, Albemarle Corporation (ALB.US), saw its stock price close down by 7.8%, Lithium Americas (LAC.US) fell by 8.11%, and Piedmont Lithium (PLL.US) closed down by 13.39%. Concurrently, lithium product manufacturer Livent (LTHM.US) plummeted by 14.28%.

On the same day, Australia's largest lithium miner, Pilbara Minerals Limited (ASX: PLS), experienced a sharp decline of over 20%, Allkem (ASX: AKE) fell by 15%, and IGO Ltd (ASX: IGO) saw a drop of more than 10%. Among them, PLS was the most severely "injured," with its stock price falling from AUD 3.02 per share on May 31st to AUD 2.05 at the close on June 15th, accumulating a significant drop of 32.12% over half a month.

Interestingly, in response to Goldman Sachs' "bearish" stance, professional institutions such as Benchmark Mineral Intelligence have refuted it. Benchmark believes that, based on historical records, the mining industry has a poor track record in achieving its production targets, and the complex technologies involved in the manufacturing process of battery components are increasing the risks associated with lithium supply. Goldman Sachs has greatly underestimated the difficulty of increasing new supplies.

Macquarie Bank, an Australian investment bank, also believes that although supply will grow in the future, it will not result in a rapid supply-demand reversal as described by Goldman Sachs. Lithium ore prices will gradually retreat from high levels, rather than plummeting.

Furthermore, CICC (China International Capital Corporation Limited) stated that considering the potential easing of the pandemic in the third quarter and the entry of lithium demand into the traditional peak season, coupled with limited supply increases, lithium prices are expected to reach a turning point for rebound, which will drive the valuation repair of the lithium sector.

Tesla and BYD are frantically competing for lithium mines; who between industry and capital understands the market better?

On one side, Goldman Sachs' bearish stance has "intimidated" lithium miners in the U.S. and Australian stock markets; on the other side, the two major electric vehicle leaders, Tesla (TSLA.US) and BYD (002594.SZ), are frantically competing for lithium mines. The market has staged a scene of "ice and fire."

Reports indicate that BYD has found six lithium mines in Africa, and as of May 31st, the company has reached acquisition intentions for all of them. According to internal calculations by BYD, in these six lithium mines, the ore with a lithium oxide grade of 2.5% amounts to more than 25 million tons, which can be converted into 1 million tons of lithium carbonate.

In response to this, BYD has chosen not to comment. However, looking at the financial data from the 2021 report, BYD has been deeply affected by the rise in raw material prices, with an overall gross margin of 13.03%, the lowest since its listing, and a year-on-year decline of 6.36 percentage points. Additionally, to stabilize the subsequent supply of lithium salts, BYD is also cooperating with Salt Lake Co., Ltd. (000792.SZ) on lithium extraction from salt lakes, so its purchase of mines is not surprising.

In fact, since the development of new energy has entered the fast lane, the competition for lithium mines has never stopped, from raw materials to battery manufacturers, and even including整车 manufacturers.Back in April of this year, Tesla also indicated that it might directly enter the lithium mining and refining business on a large scale. The reason is that lithium, as a core component in battery manufacturing, has significantly increased costs.

"Lithium supply will increase, but will the current situation really be reversed in the near term? Those who are not engaged in lithium mining production do not understand the difficulties of rapidly increasing production," Dale Henderson, the incoming CEO of Pilbara Minerals (PLS), also questioned Goldman Sachs in an interview with the Australian Financial Review (AFR).

Daniel Jimenez, a director of Galan Lithium (ASX: GLN), also told the AFR, "Stock investors are anxious due to broker information and some headline news, but the demand for lithium is indeed underestimated, and the supply of lithium is overestimated."

So, who understands the market better, industry leaders or capital giants?

Although the perspectives of industry and capital are different, the strong demand for lithium from industry leaders reflects their expectation that lithium prices will remain high in the short term.

It is worth mentioning that the battery raw material market continues to maintain a high level of prosperity.

In terms of spot prices: According to data from Trading Economics, the current spot price of lithium carbonate is 468,500 yuan/ton (about $70,000/ton), slightly lower than the high of 500,000 yuan/ton (about $74,700/ton) in March, which fully indicates that the current significant fluctuations in lithium mining stock prices are more influenced by market sentiment.

In terms of actual market transactions: On May 24, PLS completed the 5th electronic auction of lithium concentrate on the electronic trading platform Battery Material Exchange (BMX), with 5,000 tons of lithium concentrate ultimately sold at $5,955/ton, far higher than the market expectation of $5,000/ton in April, setting a new historical high.

At the same time, Albemarle in the United States raised its performance expectations for the second time in May, with sales in 2022 expected to reach $5.8 billion to $6.2 billion. The company stated that due to the implementation of index references, adjustable price contracts, and increased market pricing, the average actual selling price is expected to increase by about 140% year-on-year.

Looking at the global new energy vehicle market: In May, from the central government to local governments, China's policies to promote new energy vehicle consumption were密集出台, and the world's largest market is accelerating its recovery. Data from the China Association of Automobile Manufacturers shows that new energy vehicle sales in China in May increased by 1.1 times year-on-year, and in the first five months of this year, both production and sales have exceeded 2 million vehicles. Chen Shihua, the deputy secretary-general of the China Association of Automobile Manufacturers, expressed confidence that China's new energy vehicle production and sales will exceed 5 million vehicles this year.The upward trend in the terminal market has also been transmitted to the capital market. On June 10th and 11th, BYD set new historical highs for two consecutive days, with a total market value that once broke through the 1 trillion yuan (148.1 billion USD) mark, becoming the first self-branded automotive company in the A-share market to enter the trillion-yuan market value club.

At the same time, in May, the combined sales of pure electric vehicles in eight European countries, including Germany, France, Norway, the United Kingdom, Sweden, Italy, Spain, and Portugal, were approximately 144,000 units, a slight year-on-year increase of 0.9%, and a month-on-month growth of 19.2%. Xingye Securities believes that the European market is expected to continue to maintain a high level of prosperity, with an estimated annual sales volume that could reach 2.6 million units.

In terms of the US market, according to data released by Marklines, the sales volume of new energy passenger cars in the US in May was about 85,000 units, a year-on-year increase of 46.7%, and a month-on-month decrease of 1.6%.

CITIC Securities believes that by 2025 and 2030, the sales volume of new energy vehicles in the US is expected to reach 3 million and 8 million units, respectively, with a compound annual growth rate of 50% from 2021 to 2025.

The European Union announced that it will ban the sale of all fuel vehicles, including hybrid vehicles, within its territory starting from 2035, and the high oil prices caused by the conflict in Eastern Europe will also prompt consumers to shift from traditional cars to the new energy vehicle market.

BYD, aiming to purchase six mines in Africa, has sounded the alarm for Australian lithium mines.

More importantly, against the backdrop of global carbon neutrality, the penetration rate of new energy vehicles is rapidly increasing with strong support from governments around the world. In May, the penetration rate of new energy vehicles in the US reached a historical high of 7.6%, an increase of 0.7 percentage points from the previous month. CITIC Securities estimates that by 2025 and 2030, the penetration rate of new energy vehicles in the US will approach 20% and 50%, respectively.

According to Deloitte analysis, the global market penetration rate of new energy vehicles will continue to grow over the next decade. By 2030, the sales volume of new energy vehicles will account for 32% of new car sales. This will continue to drive the market's demand for lithium batteries, thereby boosting the performance of the entire industry, especially the upstream lithium mining industry.

With the increase in sales volume of new energy vehicles, according to Bloomberg New Energy Finance (BNEF) forecasts, in 2025, the global demand for lithium carbonate (LCE) will increase from 500,000 tons last year to 1.4 million tons; the total demand for various metals required to make lithium batteries by the end of 2030 will reach 13.8 million tons, a 6-7 times increase compared to 2020.

In stark contrast to the unprecedented market demand for lithium mines, there is a serious imbalance in the production and reserves of global lithium mines.According to the latest data from the USGS, in 2021, the global production of lithium ore was only 100,000 tons (excluding the United States), while the reserves were as high as 22 million tons of lithium metal LCE (approximately 117 million tons of lithium carbonate LCE). Among them, Australia's lithium ore production last year was 55,000 tons (55%), ranking first in the world, and its lithium ore reserves were 5.7 million tons (26%), ranking second in the world.

The commercial data platform Statista predicts that by 2025, the global demand for lithium ore will triple; by 2030, the demand will exceed 2 million tons.

Regarding the issue of future oversupply, Goldman Sachs clearly pointed out in its report that the expected ultra-high supply mainly comes from China's independent research and development of lithium mica extraction, accounting for about one-third of the expected global supply increase.

The advantage of lithium mica extraction is the high reuse rate of various by-products, but at the same time, there are disadvantages such as complex processes, high impurities in production, high processing difficulty, and high costs, which lead to a production capacity far lower than that of salt lake lithium extraction and spodumene lithium extraction. Therefore, even if the supply of lithium ore increases, facing the strong market demand, the price of lithium may not plummet in the short term.

In addition, the investment direction of some Chinese lithium ore companies has begun to shift from Australia to Africa, but the grade of mica ore in Africa is lower, and the early exploration and investment level of African lithium ore is much lower than that of Australia, making the development progress of lithium ore slower. Therefore, the production capacity and online speed of Chinese lithium ore may not meet expectations.

Goldman Sachs also pointed out that based on a comprehensive view of various indicators, among the three battery metals of lithium, cobalt, and nickel, lithium produces the most carbon emissions, has the highest production energy intensity, and has the greatest impact on future water resource supply, so lithium is the least environmentally friendly.

It is worth noting that recently, due to the EU's possible introduction of legislation to classify lithium as a hazardous substance, Albemarle, which accounts for about one-third of the global lithium product market, said it may close its factory in Germany, which will further raise lithium prices.

Australia has high-quality and abundant spodumene, and the most mature and largest share in the market is currently spodumene lithium extraction. It can be said that Australia's rich lithium ore resources combined with China's mature and efficient manufacturing capabilities can achieve a strong alliance.

However, although Australia has abundant lithium ore resources, it only controls a share of the upstream of the lithium battery industry chain, and there is almost a blank in the downstream value-creating links. It is obvious from the proportion of China and Australia in the lithium battery industry chain that Australia only accounts for nearly half in the raw material link, and the proportion of the remaining material processing, battery components, and battery assembly parts is far lower than that of China and other countries.

More importantly, BYD's attempt to acquire six mines in Africa has once again sounded the alarm for Australian lithium ore merchants, prompting them to accelerate from the pure upstream of raw material mining to the layout of downstream processing capacity such as lithium resources, thereby improving the industry chain synergy and starting a new "lithium" journey.In conclusion, the bearish stance taken by Goldman Sachs has triggered a wave of panic in the stock market, leading investors to blindly sell lithium mining stocks. However, this may only be a short-term adjustment. Considering the continuous growth in demand for new energy vehicles and the global trend towards carbon neutrality, lithium prices may experience some fluctuations in the near term, but it is unlikely to see the sharp decline anticipated by Goldman Sachs. The long-term outlook for the entire lithium battery sector remains positive, and it is expected to maintain an upward trend in the coming years.

At this point, investors are undoubtedly most concerned about which Australian lithium mining stock, amidst the turmoil, offers "good value for money" and is experiencing a "false drop" in valuation.

We believe that as one of the largest lithium mining companies listed in Australia, Pilbara Minerals Limited (PLS) fully owns the world's largest independent hard-rock lithium project, Pilgangoora, located in Western Australia. This allows for orderly development of lithium resources and capacity upgrades, which is expected to attract more attention from the capital market in the future.

According to the latest data, the top five shareholders of PLS are HSBC, JPMorgan Chase, Citigroup, Contemporary Amperex Technology Co. Limited (CATL), and Ganfeng Lithium, with these capital and industry giants holding a combined stake of 55.04%.

It is worth mentioning that PLS has no worries about lithium ore sales in the next five years. The main companies that have signed offtake agreements with PLS include industry leaders such as China's Ganfeng Lithium, General Lithium, Great Wall Motor, Tianqi Lithium, and South Korea's steel giant POSCO.

More importantly, PLS is currently seeking a diversified development strategy. The company has clearly stated that its long-term development strategy for the next few years is to become a comprehensive supplier of lithium ore raw materials and chemicals, based on the increasing demand for clean energy technologies such as electric vehicles and energy storage. This aligns with the aforementioned approach of Australian lithium miners to accelerate industry integration and upgrading.

According to the quarterly report, PLS has reached an agreement with POSCO to jointly build a lithium hydroxide processing plant project and has cooperated with Calix Limited in the construction of a lithium phosphate processing plant, moving into the midstream and downstream of the industry. This strategy has clarified the direction for PLS's future development and has greatly enhanced market investment confidence.

At the same time, the company holds cash of AUD 285 million, a sequential growth of 16.33%. Compared with the cash balance of the past two years (FY2020: AUD 86.3 million; FY2021: AUD 99.7 million), liquidity has greatly improved.Looking at the stock performance over the past year, PLS has achieved an investment return rate of over 80%, significantly outperforming both the ASX 200 and the mining sector index.

In summary, Australian Finance believes that strong fundamentals and ample cash support will be beneficial for PLS's future development. Meanwhile, the current stock price, influenced by market sentiment, is at a six-month low, and the valuation can indeed be described as "good value for money." Investors can continue to monitor and look for an appropriate price to enter the market.