Are non-producing ASX lithium companies now way over-priced?

One of the top five best-performing ASX shares of 2022 is a lithium explorer yet to produce a single gram of the commodity.

But this isn’t unusual. The share market is forward-looking and investors tend to make decisions based on the future prospects of younger companies in hot sectors like lithium mining.

What’s the hottest lithium stock on the market today?

For now, investors are just loving Core Lithium Ltd (ASX: CXO). Its share price is up around 130% in the year to date. Investors are clearly excited about its future.

Like all ASX lithium shares, Core Lithium is benefiting from a record lithium carbonate price. It may not be producing any as yet, but it’s reportedly only months off first production at its Finniss Lithium Project in the Northern Territory.

For now, Wilsons equity strategist Rob Crookston is bullish on lithium shares but sceptical about non-producers.

Crookston writes on Livewire:

We prefer lithium miners, like Allkem Ltd (ASX: AKE), who are currently producing lithium. We are more sceptical about the small-cap non-producers. We believe there is more exuberance in the non-producers, and valuations may have overshot fair value.

While Crookston does not refer to any specific non-producers, you can understand his logic, right?

The price of lithium carbonate hit a new record high this month at US$77,767.49 per tonne. It just keeps on setting new benchmarks as demand for electric vehicles around the world continues to surge.

So, of course, it makes sense that companies who are already getting lithium out of the ground and taking it to market right now are best placed to capitalise on the record commodity price.

Wilsons team likes Allkem best

Allkem is the Wilsons team’s preferred ASX lithium share. Crookston explains:

AKE is one of the world’s top 5 lithium producers, with operations in brine, spodumene, and hydroxide. Business operations are spread across Argentina, Australia, Canada and Japan.

The company has deep brine and hard rock lithium resources and a depth of experience in these fields. AKE brine production is low cost relative to the Western Australia spodumene (hard rock) mines.

We believe consolidation is likely in the pipeline for AKE, one of the biggest players in South America’s ‘Lithium Triangle’. The company could acquire smaller explorers to increase its capacity.

Allkem shares closed on Friday at $14.07, down 2.76% for the day and up 26% in 2022.

What other ASX lithium share does Wilsons back?

Pilbara Minerals Ltd (ASX: PLS) is another lithium favourite of the Wilsons team.

Crookston says:

[Pilbara is a] pureplay lithium miner. Owns 100% of the Pilgangoora hard-rock lithium mine in Western Australia, as well as 18% of a downstream joint venture with POSCO with an option to increase to 30%.

Spodumene production is expected to increase to ~1mt by FY28, up from 360kt in FY22.

While PLS screens attractively on near-term valuation multiples, the company appears to offer less valuation appeal over the medium-term.

Pilbara Minerals shares ended Friday’s session at $4.87 apiece, down 4.7% for the day and up 38% in 2022.

The post Are non-producing ASX lithium companies now way over-priced? appeared first on The Motley Fool Australia.

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More reading

• 5 big ASX announcements making news this week
• If ASX lithium shares are soaring, why is the ACDC ETF down 9% in 2022?
• Here are the 3 most heavily traded ASX 200 shares on Thursday
• Why ‘long-term lithium prices are far too low’: Wilsons
• Why ANZ, Australian Clinical Labs, Core Lithium, and Kogan are sinking today

Motley Fool contributor Bronwyn Allen has positions in Allkem Limited. 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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