It has been a tough 12 months for IGO Ltd (ASX: IGO) shares.
Since this time last year, the ASX lithium stock has lost 62% of its value.
This means that if you had invested $5,000 into its shares a year ago, you would only have $1,900 left today.
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Where next for this ASX lithium stock?
Unfortunately, one leading broker believes there are more declines to come for the battery materials miner.
According to a note out of Bell Potter this morning, its analysts have downgraded IGO's shares to a sell rating (from hold) and cut the price target on them by 32% to $5.15 (from $7.60).
Based on the current IGO share price of $5.70, this implies potential downside of approximately 10% for this ASX lithium stock.
What did the broker say?
Although Bell Potter was pleased to see that dividends continue to be paid from the Tianqi Lithium Energy Australia (TLEA) joint venture, it has still taken an axe to its earnings estimates to reflect weaker than expected lithium prices. It commented:
Dividends from TLEA have been lumpy in FY24, with 1Q $578m, 2Q $0m, 3Q $25m, and now 4Q $159m. We view the dividend as a positive signal on TLEA's ability to generate returns to shareholders in the current lithium price environment, while executing committed expansion programmes at Greenbushes. Our EPS changes include: FY24 -1%, FY25 -65%, FY26 -17%, resulting from changes to our forecast lithium production and price forecasts, mainly driven by reducing our average SC6 forecast over the next 12-months to US$1,200/t (from US$1,400/t) and our average lithium hydroxide forecast over the next 12-months to US$15,500/t from (US$24,000/t).
In response to the above, the broker has conducted a valuation sensitivity analysis to long-term lithium prices. Its model found that the market is pricing in stronger long-term lithium prices than it is comfortable with. It concludes:
We conducted a valuation sensitivity analysis to long-term lithium prices, using our model. The analysis highlights that the current share price implies long-term lithium prices of US$1,450/t SC6 and US$20,000/t lithium hydroxide, which are significantly higher than spot prices (US$1,000/t SC6 and US$12,000/t), notwithstanding the existing high degree of negative market sentiment around the lithium sector. In our view there remains considerable further short-term downside risk to the share price if sentiment deteriorates further. We reduce our Target Price by blending (50:50) our BPe valuation (using our commodity price forecasts) with a spot price valuation, reduce our Target Price to $5.15ps, and downgrade our recommendation to Sell.
