Prominent Australian miners Liontown Resources, Pilbara Minerals and Arcadium Lithium are among many who have recently announced a lithium overhaul, with operations temporary suspended or reduced to account amidst falling demand.

Despite this, Morningstar remains bullish on the long term prospects of the future facing commodity.

Buy when there is blood in the streets

Like many investors, I have been patiently watching as prices continue to tumble for future facing commodities after historic rallies during the pandemic era. Though I am not a self-professed contrarian and ultimately believe that time in the market is better than timing the market, the phrase ‘buy when there is blood in the streets’ has been resonating with me recently.

In a recent video about the mining industry, Morningstar analyst Jon Mills suggested “the best time to invest in any commodity is when that commodity is in a down cycle”. It appears investors have lost hope as lithium producer’s share prices have taken significant hits this year after the commodity hit multiyear lows from oversupply. If you have been waiting in anticipation, now is the time to pay attention.

Strengthened price forecasts

We reduce our 2025 lithium price forecast 30% to USD 15,000 per metric ton, but our longer-term outlook remain unchanged. The recovery is taking longer than anticipated and the market remains oversupplied despite curtailments and project delays across the industry.

Our September Lithium Market Update projects medium term prices to recover to the marginal cost of production which we view as $20,000 per tonne, up from $10,500 today.

lithium price forecast

Lithium carbonate prices currently remain at multiyear lows, around $10,000 per metric ton on an index basis. In response to low prices, many producers, including Albemarle and its peers, are cutting supply. However, end-market demand continues to grow. As demand growth overtakes supply, we predict the market will return to balance in 2025 from a current supply deficit. This should lead to higher prices, which are the strongest catalyst for lithium stocks.

Global electric vehicle sales were up 6% in three key auto markets (China, US and the EU) during the first seven months of 2024 compared to 2023. We expect this growth to continue throughout the rest of the year. Additionally, demand is growing rapidly for batteries used in utility-scale energy storage systems.

We project lithium demand will surpass 1 million metric tons in 2024 and grow to 1.5 and 2.6 million in 2026 and 2030, respectively.

lithium demand forecast

Our best ASX picks

This week I screened for lithium stocks with a Morningstar Rating of 4 or 5 stars and found the below undervalued picks that could ride you into the next lithium bull run.

Mineral Resources MIN ★★★★★

  • Fair Value Estimate: $64.00
  • Share Price: $35.46 (as at 18/11/24)
  • Price to Fair Value: 0.55 (Undervalued)
  • Moat Rating: None
  • Uncertainty Rating: High

I recently reported on Mineral Resources (“MinRes”) last month after a stimulus announcement from China drove commodity prices higher. We have since increased our fair value estimate by 3% to $64.

This week the company announced 300 job cuts for the Bald Hill mine that has now been placed on care and maintenance until market conditions are favourable for lithium production. In response, shares in the company fell almost 7% this week, reflecting an overall 31% decline in the past month and a 50% slump year to date.

The player holds a portfolio of mining operations across lithium and iron ore. The business consists of three core pillars: Mining Services, Commodities, and Innovation and Infrastructure. The miner maintained all fiscal 2025 volume and cost guidance with the release of first-quarter fiscal 2025 results.

Financial health is currently weak with high debt levels however we expect this to rapidly decline by fiscal 2028. They board has expressed the intention to bolster the company’s balance sheet while lithium prices are low with a net debt/EBITDA of 4.2 at end-June 2024.
At the end of October, the company announced the sale of its gas assets for $800 million and a further $300 million pending certain conditions. The transaction consideration nets more than previously ascribed therefore leads to our fair value increase.

Morningstar believes that the shares remain materially undervalued, but uncertainty remains high. Further, high debt levels and volatile commodity prices could conjure a perfect storm. However, the current share price does not effectively account for the improvement in forecasted lithium prices.

We project a compounded annual growth rate of 13% for 10-year group EBITDA and a fiscal 2034 midcycle EBITDA margin of 41%. Current midcycle EBITDA hovers around 20%, weakened by low prices.

The company’s share price nosedive can largely be attributed to falling iron ore and lithium prices. Further uncertainty spurred by allegations against founder, Chris Ellison haven’t helped either.

My colleague further explores this collapse with our resident MinRes analyst, Mark Taylor, who details what has happened over the past few years and where he thinks the company is headed.

IGO Limited IGO ★★★★

  • Fair Value Estimate: $7.00
  • Share Price: $5.14 (as at 18/11/24)
  • Price to Fair Value: 0.73 (Undervalued)
  • Moat Rating: Narrow
  • Uncertainty Rating: High

A regular feature in our Monthly Australia & New Zealand Best Stock Ideas, IGO has suffered a similar fate to its peers with the share price down 42% year to date. 

We reduce our fair value estimate for IGO by 7% down to $7 per share on lower near-lithium price assumption. Unlike MinRes, IGO’s lithium resources account for nearly 90% of our valuation with the remaining in the company’s sole operating nickel mine, Nova.

IGO's primary asset is its minority stake in Greenbushes, one of the world's highest-quality and lowest-cost hard rock lithium mines. Despite a challenging few years for the lithium industry, Greenbushes mine posted a solid operating result in the first quarter of fiscal 2025.

To capitalise on forecasted growth in global lithium demand, IGO recently announced the upsizing of a loan facility funding a significant capital investment program at Greenbushes to expand capacity by two-thirds by the end of the decade. Our IGO analyst Esther Holloway expects the return on invested capital for this mine to comfortably exceed weighted average cost of capital for the next 15 years, and furthermore, average over 50% over the 10 year forecast period. The Greenbushes operation accounts for roughly 80% of our $7 fair value estimate.

IGO also has a joint venture with narrow-moat Tianqi Lithium with a 49% interest in the Kwinana lithium hydroxide refinery. This mine is at a cost-disadvantage relative to production peers in China, where capital intensity and operating expenses are significantly lower. The miner has faced considerable challenges since 2022 and is still running well below capacity. However, the refinery isn’t material enough to detract from IGO’s narrow moat status overall.

The balance sheet is in excellent health with no debt and a cash position of $468 million at end June 2024. Additionally, there is $720 million of undrawn debt available through a facility maturing July 2026.

Concluding thoughts

Despite a tough year for the battered miners, both MinRes and IGO remain materially undervalued. This could be attributed to the market taking a different view on the outlook for lithium prices, the key valuation driver for both companies. Morningstar believes that lithium prices are near a cyclical bottom and offer an attractive point of entry for investors.

Given end-market demand growth for EVs and higher-cost supply exists, prices are expected to recover in the medium term with forecasted demand nearly tripling by 2030 from 2023 levels.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.

Uncertainty Rating: Morningstar’s Uncertainty Rating is designed to capture the range of potential outcomes for a company. An investor can think of this as the underlying risk of the business. For higher risk businesses with wider ranges of potential outcomes an investor should consider a larger margin of safety or difference between the estimate of what a share is worth and how much an investor pays. This rating is used to assign the margin of safety required before investing, which in turn explicitly drives our stock star rating system. The Uncertainty Rating is aimed at identifying the confidence we should have in assigning a fair value estimate for a stock. Read more about business risk and margin of safety here.