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Midcap case study: Lithium producer Allkem is well positioned for a rebound in lithium prices

ASX-listed lithium producer Allkem – which is held in Pendal Midcap Fund – has struck a merger deal with US rival Livent. Pendal analyst JACK GABB outlines its growth potential

AMONG Australian mid-cap stocks, few companies get more media attention than lithium producers.

And as the recently announced $16 billion merger of ASX-listed Allkem and New York-listed Livent shows, they’re getting plenty of corporate attention as well.

Australia is a significant supplier of lithium because we possess vast quantities of lithium raw materials, leading to substantial industry growth in recent years.

In large part that’s because the fastest growing use of lithium is in batteries, and demand for lithium batteries is growing as economies shift away from fossil fuels.

“Our view is that there is a rebound coming in lithium prices,” says Pendal investment analyst Jack Gabb.

“Destocking in China has run its course… There will be a more normalised demand environment by the middle of 2023 which will drive prices to rebound,” Gabb predicts.

Allkem — which is held in Pendal Midcap Fund – is one the purest ASX-listed lithium plays, he says.

The Argentina-based group was known as Orocobre until November 2021 — and now will likely be rebranded again assuming the merger with Livent goes ahead.

Advantages of diversification

One of Allkem’s advantages is its diversification of products, says Gabb.

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“It’s majority lithium carbonate but also has exposure to spodumene and lithium hydroxide. That’s all three lithium products while other producers are picking one or two.”

Spodumene is a mineral that’s the primary source of lithium.

Lithium carbonate is a white powder used in a variety of applications, including batteries, ceramics, and glass. It’s made by extracting lithium from spodumene ore or brine.

Lithium hydroxide is a white powder used in batteries and other applications. It’s typically made by reacting lithium carbonate with water.

“Allkem has one of the highest growth potentials of all the lithium companies,” argues Gabb.

The group forecasts that long term, its assets have the potential to produce up to 250,000 tonnes of lithium carbonate equivalent per annum.

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“These are very large, very long-life assets, that are going to be expanded multiple times.

“That brings with it a huge amount of delivery risk and a huge amount of capital that needs to be spent. But the potential prize is huge production.”

Keep an eye on Argentina

Allkem owns lithium assets in Argentina, Australia and Canada.

The key risk for Allkem, and any future merged entity, is its Argentinian exposure, says Gabb.

Allkem’s flagship brine-based lithium project Olaroz (pictured above) is based in northern Argentina.

Inflation is rife in Argentina’s economy and the local currency, the peso, has been devalued.

“It sells in US dollars but at some time it has to take money out of the country and how it manages that is key,” Gabb says.

“There is a lot of strategic value in the lithium story.

“Companies like Allkem provide huge potential, but at the same time, it has a lot to do in terms of projects over the next decade, and particularly the next one or two years. It has to deliver on these.”

About Pendal MidCap Fund

Pendal MidCap Fund features 40-60 Australian midcap shares.

The fund is managed by Brenton Saunders, a portfolio manager with Pendal’s Australian equities team. He draws on more than 25 years of expertise in resources, derivatives, investment banking and private equity. He is a member of the CFA Institute.

The fund leverages insights and experience gained from Pendal’s access to senior executives and directors at ASX-listed companies.

Pendal operates one of Australia’s biggest Aussie equities teams under the experienced leadership of Crispin Murray.

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management. 

Find out more about Pendal MidCap Fund here

Contact a Pendal key account manager here

This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current at May 17, 2023. PFSL is the responsible entity and issuer of units in the Pendal Midcap Fund (Fund) ARSN: 130 466 581. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com

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