This isn’t a bubble…yet, but there are reasons to be cautious and a strategy reassessment is in order.
In the wake of Tesla Motors (TSLA:NASDAQ) introduction of the Model 3 “mass market” EV, lithium development and exploration company share prices have absolutely exploded higher. This is despite the fact that TSLA hasn’t actually sold (or even built) a single Model 3 yet, won’t have it on the road for years, and continues to hemorrhage money. The $1,000 refundable reservation fee is simply a free option for a potential car buyer and gives TSLA an opportunity to defray dilution.
In the wake of this news, lithium developers are “making hay while the sun shines” through some truly impressive capital raising efforts.
My estimates year-to-date show that the lithium mining industry has raised a collective $198,000,000 USD with multiple offerings oversubscribed. For an industry that only generated $1 billion USD in revenues last year, this is impressive. Especially when you consider the overall funk in the commodity sector and that no major lithium producer is included in this total.
It also appears that lithium majors outside of China are positioning for accelerated demand with the JV announcement between SQM (SQM:NYSE) and Lithium Americas (LAC:TSX) as an example. This deal has generated a great deal of discussion and I think it’s on balance good for both SQM and LAC.
For a development company to grow and have the opportunity to join the ranks of producers, ownership dilution is a stark reality. As the saying goes in mining, you can take your dilution in the ground or in the stock. My take is that the technical knowledge LAC gains coupled with a strengthened balance sheet positions them well against the tailwind of strong demand for lithium compounds. The debate around the deal value of $25 million misses the point in that LAC management has chosen the path of least resistance to a production decision and is worthy of a re-rating. Clearly the market agrees.
Given that most of the lithium developers are outperforming the majors and the broader equity indices year to date (the S&P 500 is up .18% YTD), I think the central question to consider now is:
How does your strategy evolve as an investor?
I have seen a total of four bubbles in the energy metals since 2007 (uranium in 2007, lithium in 2009, rare earth elements in 2011, graphite in 2012). Each time, the story was strikingly similar in that demand was underpinned by endless growth in China and resource nationalism while supply responses would not be able to meet the pace of accelerated demand.
Each time, commodity prices went parabolic and each time the story ended in tears for investors.
That is likely one of the most painful (and true) investing lessons I have learned in recent years.
So when you see returns such as these:
…it seems that the only prudent course of action and strategy is to sell into the unyielding strength in the lithium market. This is despite the tight market, both currently and going forward. Another valuable lesson I’ve learned in the small cap sector is that where there’s money on the table, you take it. After all, you never go broke taking profits!
Please excuse the snarky tone, but given the pace of change in technology, speculation in the lithium market, and the overall uncertain macroeconomic backdrop, locking in gains in lithium is a given at this stage of the cycle.
A major tailwind in cost deflation in lithium ion batteries and various forms of energy (wind and solar, in particular) is likely to continue and therefore the demand for lithium seems valid by any rational expectation. However, the ability of equities to get ahead of demand is well documented.
Assuming global demand in 2015 of 170,000 tonnes of LCE, here is what the market looks like at an 8, 10 and 12% CAGR to 2025:
Source: HMP, LLC
Assuming an 8% CAGR to 2025, lithium demand could grow by 115% from 2015. Even at this conservative growth rate, it ought to make you nervous. At my assumed 8% growth rate, this will require an additional ~20,000 tpa LCE every year to 2025. That’s roughly one new lithium mine per year. Can the existing producers and incumbents meet this forecast?
The supply response has so far been uncertain with Orocobre (ORE:ASX), Galaxy Lithium (GXY:ASX), and Neometals (NEM:ASX) all contributing to lithium supply in the near term, but after that, capacity additions become much more uncertain as the “next wave” of producers will grapple with the technical and financial challenges of building a mine and producing a product an end user will pay for. Majors such as Albemarle (ALB:NYSE) have also made pronouncementsaround capacity expansion, but this isn’t imminent. Clearly something has to give.
The good news is that due to the cost deflation I referenced earlier, this will remain supportive of lithium demand but more importantly it is likely to create a whole class of opportunities around mobility. Some examples include vehicle connectivity, nanotechnology advances in the battery space, and sensor technology – three areas I am spending more time on these days.
Lithium isn’t a bubble (yet). The demand sources are widespread and growing and production isn’t controlled by a single country (as it is in the case of rare earths). I expect lithium compounds prices to remain elevated for the next 18 months as supply will struggle to maintain the pace of demand growth. Beyond that, who knows?
Let me state again, however, that a focus on lithium pricing and the TSLA story is misplaced. What really matters to the miners is the ability to compete in an oligopoly and that is done through lowest cost production.
We have proven with graphite that the closer a company gets to production, the lower the market cap tends to fall. Whether or not lithium will follow the same path remains to be seen, but taking profits as this dynamic market continues to evolve is the most prudent course of action.
President of House Mountain Partners LLC and Co-Editor of Disruptive Discoveries Journal
Chris Berry is a well-known writer, speaker, and analyst. He focuses much of his time on Energy Metals those metals or minerals used in the generation or storage of energy. He is a student of the theory of Convergence emanating from the Emerging World and believes it will have profound effects across the globe in the coming years. Active on the speaking circuit throughout the world and frequently quoted in the press, Chris spent 15 years working across various roles in sales and brokerage on Wall Street before shifting focus and taking control of his financial destiny.He is also a Senior Editor at Investor Intel. He holds an MBA in Finance with an international focus from Fordham University, and a BA in International Studies from The Virginia Military Institute. Please visit www.discoveryinvesting.com and www.house-mountain.com for more information and registration for free newsletter as well as his disclaimer.
Our Thinking and What We Do
We are believers in the theory of Convergence. As the quality of life between East and West slowly merges due to advances in technology, continued urbanization, and changing demographics, opportunities across numerous industries will arise which we can take advantage of. We aim to point out the strategic opportunities in the commodity space which arise from these themes.
Throughout history, no society has sustained a higher quality of life without access to cheap commodities or materials. As global population increases, putting stresses on resource availability, efficiency and technology must come to the fore to continue to provide for a higher quality of life. The looming convergence of lifestyles between the emerging world and the developed world is a fact we must all understand and accept in order to chart a sustainable path forward for humanity.
DISCLAIMER AND INFORMATION ON FORWARD LOOKING STATEMENTS
The material herein is for informational purposes only and is not intended to, and does not constitute, the rendering of investment advice or the solicitation of an offer to buy securities. The foregoing discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (The Act). In particular when used in the preceding discussion the words “plan,” confident that, believe, scheduled, expect, or intend to, and similar conditional expressions are intended to identify forward-looking statements subject to the safe harbor created by the ACT. Such statements are subject to certain risks and uncertainties and actual results could differ materially from those expressed in any of the forward looking statements. Such risks and uncertainties include, but are not limited to future events and financial performance of the company which are inherently uncertain and actual events and / or results may differ materially. In addition we may review investments that are not registered in the U.S. We cannot attest to nor certify the correctness of any information in this note. Please consult your financial advisor and perform your own due diligence before considering any companies mentioned in this informational bulletin. The information in this report is provided solely for users’ general knowledge and is provided “as is”. We make no warranties, expressed or implied, and disclaim and negate all other warranties, including without limitation, implied warranties or conditions of merchantability, fitness for a particular purpose or non-infringement of intellectual property or other violation of rights. Further, we do not warrant or make any representations concerning the use, validity, accuracy, completeness, likely results or reliability of any claims, statements or information in this Research Report or otherwise relating to such materials or on any websites linked to this report. The content in this report is not intended to be a comprehensive review of all matters and developments, and we assume no responsibility as to its completeness or accuracy. Furthermore, the information in no way should be construed or interpreted as – or as part of – an offering or solicitation of securities. No securities commission or other regulatory authority has in any way passed upon this information and no representation or warranty is made by us to that effect. Chris Berry owns no shares in any of the companies mentioned in this report. He has been paid a fee by LAC for consulting services. All statements in this Research Report, other than statements of historical fact should be considered forward-looking statements. Some of the statements contained herein, may be forward-looking information. Words such as “may”, “will”, “should”, “could”, “anticipate”, “believe”, “expect”, “intend”, “plan”, “potential”, “continue” and similar expressions have been used to identify the forward-looking information. These statements reflect our current beliefs and are based on information currently available. Forward-looking information involves significant risks and uncertainties, certain of which are beyond our control. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking information including, but not limited to, changes in general economic and market conditions, industry conditions, volatility of commodity prices, risks associated with the uncertainty of exploration results and estimates, currency fluctuations, exclusivity and ownership rights of exploration permits, dependence on regulatory approvals, the uncertainty of obtaining additional financing, environmental risks and hazards, exploration, development and operating risks and other risk factors. Although the forward-looking information contained herein is based upon what we believe to be reasonable assumptions, we cannot assure that actual results will be consistent with this forward-looking information. Investors should not place undue reliance on forward-looking information. These forward-looking statements are made as of the date hereof and we assume no obligation to update or revise them to reflect new events or circumstances, except as required by securities laws. These statements relate to future events or future performance. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. For a more detailed disclaimer, please click here.