Standard Lithium: No More Than Neutral With Bleaker Li Prospects (NYSE:SLI)

A “Hold” Rating on Standard Lithium Ltd.

This analysis recommends a “Hold” rating on Standard Lithium Ltd. (NYSE:SLI) (TSXV:SLI:CA), a Vancouver-based company seeking to develop lithium brine properties in southern Arkansas, signaling that current very low shares compared to lithium hype in 2021-2022 are seen to continue to trade at best according to a neutral stance due to the following.

The Outlook for EV Battery Lithium: LT Demand Reduced

Lithium is a key metal for building batteries for electric cars. In the long term, demand is promising as this eco-friendly mobility technology is expected to account for around “half of global new car sales by 2035”, according to recent research from Goldman Sachs Group, Inc. (GS).

In terms of how much lithium needs to be brought to market to meet global demand, the world’s largest lithium producer Albemarle Corporation (ALB) estimates that about 3.3 million tons of lithium carbon equivalent will be supplied worldwide within seven years. This estimate follows Albemarle’s cutting demand forecast, compared to a previous estimate of 3.7 million metric tons of lithium-carbon equivalent, largely due to slower-than-expected electric vehicle sales in the U.S. and Europe.

The Outlook for EV Battery Lithium: No Incentive in the Near Term

Instead, the prospects for lithium demand in the short term do not appear to be as good as in the long term. Benchmark Mineral Intelligence expects that there will be a fairly large surplus of lithium on the market and that it will now take several years for demand to catch up with supply. The main reason for this excess of lithium in the market compared to demand’s ability to absorb it is that EV sales are lower than expected because, contrary to popular belief, the economy is not heading for a soft landing.

This scenario now comes with insufficient incentives to purchase EVs, while prices remain too high, borrowing is expensive, and charging infrastructure is inadequate, all of which are holding back demand for EVs – or, as Rho Motion puts it, global EV sales of 1.1 million units sold in January 2024 fell by 26% compared to the previous month.

Headwinds to electric vehicle demand are likely to continue due to the economic slowdown that the cycle of Western economies is heading towards due to aggressively restrictive monetary policies to combat high inflation. This sentiment is being felt in the lithium commodity market, where the price is now down more than 80% since its peak in 2022 and the near-term outlook does not look promising.

To get an idea, the following chart from Trading Economics shows where the price of lithium is now (about CNY 95,500/ton) and where it was two years ago (about CNY 600,000/ton) for a drop of more than 80%.

The near-term outlook does not look promising, with a recession looming and the Fed poised to delay the start of rate cuts amid persistent inflation and a robust labor market. The major producers see no conditions now to focus on the financing of growth projects for the future production of lithium.

The Additional Issue of the Impending Recession

The inverted Yield Curve of the current spread between a 10-year yield of 4.323% and a 1-year yield of 5.004% is currently warning of difficult times for the economy, as in a normal situation shorter maturity should yield lower yields than longer maturities. The indicator has correctly predicted the last seven recessions since 1965.

These economists expect an economic recession as the aftermath of the Fed’s hawkish stance on interest rates to combat elevated inflation:

Michael Pearce, Chief US Economist at Oxford Economics, Chryssa Halley, Chief Financial Officer of the US Federal National Mortgage Association (Fannie Mae), and David Rosenberg, Economist at Rosenberg Research. Also, former US Treasury Secretary Larry Summers and Luke Tilley, Chief Economist at Wilmington Trust. Plus, Economists at Oxford Economics forecast a recession in the coming months sometime in 2024, and the negative cycle could occur sometime in the first half of 2024, according to economists at Deutsche Bank Aktiengesellschaft (DB).

The Risk Associated with Shares of Standard Lithium Ltd

Major producers such as Piedmont Lithium Inc. (PLL) (OTCPK:PLLTL) and Albemarle Corporation are now lowering their production targets and reducing staff to contain costs and protect profit margins.

Standard Lithium, which relies on interest from major players such as Piedmont and Albemarle for the financial sustainability of its projects, is likely to see its shares reflect a weaker lithium outlook for now, delaying the deal with the recovery on the North American stock exchanges.

Robert Mintak, CEO and director of Standard Lithium recalls the market for specific geolocation of his company’s project portfolio – its flagship, the 150,000-acre Lanxess project in the Smackover region of southern Arkansas – which should represent an opportunity for large operators:

“The Smackover region, in particular, is attracting interest from major players in the global energy sector.”

But as major operators are currently unable to recognize the economic viability of lithium growth projects due to the weak lithium price environment and looming economic slowdown, the investment in Standard Lithium stock carries the risk of remaining unproductive for a long time as it may take even 3 or 4 years for prices to rise to a supportive level as demand must catch up with supply.

The headwinds for Lithium have seen Standard Lithium’s share price fall more than ten times since its late 2021 peak but investing in the stock now just because of a big stock price drop is not considered the right approach, even though, the EV business is seen on a continued growth trajectory but less intense than couple of years ago.

Under the SLI symbol on the NYSE, the shares of Standard Lithium Ltd. traded at $1.19 per unit for a market cap of $212.90 million, and a 52-week range of $1.11 to $4.85 as of this writing. The shares are below the 20-,50,-100-, and 200-day simple moving averages, while 14-RSI signals oversold levels.

Under the SLI:CA symbol on the TSXV, the shares of Standard Lithium Ltd. traded at CA$1.61 per unit for a market cap of CA$287.54 million, and a 52-week range of CA$1.51 to CA$6.38. The shares are below the 20-,50,-100-, and 200-day simple moving averages, while 14-RSI signals oversold levels.

Furthermore, the stock market of Standard Lithium shares is discounting the likely easing of CO2 reduction requirements for car manufacturers, which poses a risk to the EV transition through 2030, and as if that wasn’t enough, buying the stock today also means forgoing opportunities elsewhere in the financial markets.

The latter includes, for example, fixed-income securities, favored by the Fed’s restrictive interest rate policy or the volatility of precious metals, which, as safe-haven investments against the headwinds of the impending recession, have the potential to be caught in a strong upward trend.

About Standard Lithium Ltd.’s Mineral Target

Specifically, the company’s flagship projects are the Phase 1A Project and the Southwest Arkansas Project, both located in South Arkansas, near the border with Louisiana, where the area, a business-friendly environment, close to all necessary infrastructure, has traditionally been known as a world’s largest producer of bromine, which brine is rich in commercial lithium concentrations. To extract lithium from Smackover brine and produce lithium compounds for EV batteries Standard Lithium has developed a fully integrated, start-to-end Direct Lithium Extraction at the LANXESS South facility process with a lithium recovery rate of 96.1% and an average pollutant removal rate of 99% after the test period.

Phase 1A has an after-tax NPV of $550 million and IRR of 24% as indicated in the Feasibility Study. Assuming the headwinds mentioned do not impact the Final Investment Decision, commercial production will begin in 2026 — 5,400 tonnes annually at operating costs of $6,810/t over 25 years of operations — with lithium mine construction commencing in 2024. The estimate says that approximately $365 million including 15% of contingencies is needed to build the lithium production.

According to the market, the southwest Arkansas project, 15 miles west of the town of Magnolia within the Smackover Formation, is the game changer with an after-tax NPV of $3.1 billion and an IRR of 32.8% as of the preliminary Feasibility study indicates. The project includes exclusive brine production rights to 27,000 net acres of brine leases. The project aims to produce 30,000 tonnes of lithium per year at a total cost of US$4,073/ton per year. The first production is expected in 2027 and construction will begin in 2025. But first – assuming there are no unforeseen headwinds in the current challenging environment – a feasibility study must be carried out. Including contingencies of 20% of the total amount, about $1.3 billion is required to build the mine and produce lithium for electric vehicle batteries.

In total about $1.7 billion is required to realize the two productions. Currently, the company’s balance sheet, which has no significant debt, instead shows cash on hand of C$15.8 million (or US$11.7 million) and working capital of C$5.7 million (US$11.7 million). Capital is needed, but since financing costs are currently too high, the company is resorting to issuing new shares on the exchanges by offering 100,100 common shares on the TSX Venture Exchange and approximately 1.33 common shares on the NYSE American LLC. However, the latter is just a solution to maintain current activity before some production takes place at some point in the future. Standard Lithium Ltd. managed to raise about CA$ 0.3 million (or $0.22 million) and US$3.3 million. So, the investment plan will have to wait for a) central banks to cut interest rates, with the first-rate cut for June losing steam amid persistent inflation and robust labor conditions, b) or the contributions of major lithium producers who are currently facing the problem of commodity prices that do not provide stimulus to growth projects.

In addition, the company has 45,000 acres of Bristol Lake in the Mojave Desert, San Bernardino County, California, that have not yet been assessed for potential reserves.

Conclusion

This analysis recommends a “Hold” rating on Standard Lithium Ltd., a Vancouver-based company seeking to develop lithium brine properties in southern Arkansas.

Shares have lost more than 10 times since peaking in late 2021, due to a glut of lithium, while demand struggles to catch up as sales of electric vehicle batteries decline. It will likely take no less than a few years for the lithium price to return to supportive levels, and major producers will not invest in growth because of that.

Why would the retail investor choose this stock over fixed-income securities, precious metals, or defensive businesses? This scenario, combined with high borrowing costs, creates an unfavorable environment for Standard Lithium stocks, which from their oversold levels are seen trading neutral for a while due to uncertainty about the first rate cut by the Fed.