Should lithium investors buy the dip in the Allkem share price?

A woman looks nonplussed as she holds up a handful of Australian $50 notes.

A woman looks nonplussed as she holds up a handful of Australian $50 notes.The Allkem Ltd (ASX: AKE) share price had a day to forget on Thursday.

The lithium miner’s shares tumbled over 5% to end the day at $11.64.

This means the Allkem share price is now more than 20% over the last six months.

Why did the Allkem share price tumble?

Investors were hitting the sell button on Thursday after the miner released its third-quarter update.

Although the company delivered production that was largely in line with expectations, its commentary on pricing appears to have spooked the market.

For example, analysts at Morgans highlight that management is guiding to a sharp drop in lithium prices during the fourth quarter of FY 2023. They said:

AKE delivered 3Q production largely as expected but weakness in Chinese spot markets is affecting the short term outlook. Guidance for 4Q carbonate prices ($42k/t) was reduced 21% compared to 3Q and spodumene ($5k/t) was reduced 12%.

Should you buy the dip?

Interestingly, despite the recent weakness in lithium prices, they are still trading well beyond what Morgans is expecting for the long-term. In light of this, it continues to see significant value in the Allkem share price at current levels.

In fact, the broker has suggested that its shares could be worth almost double what they are now if spot prices were to remain at these levels over the long term. It explained:

Spot prices in China are significantly lower than Asia although there are some quality differences between the benchmarks. It’s unlikely that all of the Chinese production would be qualified for use by Asian battery manufacturers but there is clearly pressure on prices until the Chinese market tightens. Contract prices will likely continue to follow spot prices lower.

Despite this, our LT price assumptions are still well below current spot prices. Our nominal LT carbonate price of ~$20k/t is significantly below Chinese spot prices (~$25k/t) and our LT spodumene price of $2.5k/t is half of the current spot price. If we were to substitute for spot prices in our valuation, it would be over $22ps.

However, the broker doesn’t believe prices will stay this high forever, unfortunately. So, it currently has a more modest (but enticing) add rating and $14.70 price target on Allkem shares.

Based on where they are currently trading, this implies potential upside of 26% for investors over the next 12 months.

Incidentally, it is a similar story over at Bell Potter and Goldman Sachs. Both brokers have responded by retaining their buy ratings with price targets of $19.89 and $12.90, respectively.

All in all, brokers appears to believe buying the dip could be worth considering.

The post Should lithium investors buy the dip in the Allkem share price? appeared first on The Motley Fool Australia.

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More reading

Motley Fool contributor James Mickleboro has positions in Allkem. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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