Battery-powered IPO should be handled with great care


Ganfeng Lithium’s IPO comes as material’s price may peak

Ganfeng Lithium is riding the electric vehicle wave. The Chinese miner, processor and recycler plans to raise at least $1 billion in Hong Kong. But competition in the battery supply chain is increasing and prices may be peaking. Investors will want to know the Shenzhen-listed group isn’t just cashing out at the top.

Tapping the green boom

Thanks to the green boom, the price of lithium carbonate, used for battery materials, is two-and-a-half times what it was in early 2015. Demand has helped, as have concerns that raw material supply will not keep pace.

Shares of Ganfeng, China’s largest producer of lithium compounds, have risen roughly 10-fold over the same period. It now has a market value of $8 billion.

That narrative is starting to cool. Unlike cobalt, another key input for electric vehicle batteries which is harder to bring into production fast, lithium supply will steadily increase. Resources are plentiful and projects are multiplying.

Morgan Stanley reckons lithium prices will peak in 2018. That might underestimate demand and overestimate producers’ ability to deliver new projects on time, but price peaks scaled in mid-2017 are hardly sustainable.

Processing capacity is increasing too, and that is more significant for Ganfeng, which is essentially a manufacturer of lithium compounds which has moved into mining the raw materials and making batteries. New operations including Chinese rival Tianqi Lithium’s giant plant in Australia, and Ganfeng’s own expansion plans will add tens of thousands of tonnes.

Ganfeng currently looks good with a 30% return on assets over the nine months to the end of September. Its portfolio of mine investments is attractive too, ranging across the two main types of operation one cheaper in the long run and the other faster to bring online. But these attractions are fully accounted for.

On the mainland, the company trades at almost 20 times forward EBITDA. That’s more than the world’s largest lithium miner, SQM, which trades at under 14 times. Shenzhen shares of BYD, the Warren Buffett-backed batteries-to-cars group, trade at 13 times. As more Chinese producers bet on vertical integration, it is not clear if Ganfeng will be able to protect its position.

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own)

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Printable version | Jan 26, 2020 11:39:52 PM |

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