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Five Questions on Supply Chains Against the COVID-19 Backdrop

Chris BerryComment

By Chris Berry (@cberry1)

With events moving faster than ever, many questions are raised which most are ill equipped to answer in the sense that many have never lived through a simultaneous social, economic, and financial crisis. This confluence of events seems likely to intensify barring a miracle from both Central Banks and mother nature.

I have worked through the dot com bust in 2001, the global financial crisis (GFC) in 2008, and the commodity bust in 2012. All were unique, but at the end of the day were financial and economic in their composition. At risk of simplifying greatly, both fiscal and monetary policies helped to get the global economy back on its feet after each bubble had popped. The effects on all of us of COVID-19 are hard to fathom as the virus threatens economic activity through both a supply and demand shock of indeterminant proportions. The light at the end of the tunnel is that this will blow over eventually, but what we thought the future was going to look like may change markedly. As such, you owe it to yourself to ask tough questions and challenge your beliefs as the external environment we operate in continues to evolve.

Every day seems to bring more and more questions on the path forward. Equity market valuations, gold prices, and bond yields which go parabolic one day and collapse the next do investors no favors in terms of holding fast to a long-term vision…..and that long-term vision is important.  

In that vein, I thought I’d take the next few weeks and lay out some of the questions I’m wrestling with and in the interest of information-sharing, layout my own ideas on navigating a path forward around supply chain issues. This is arguably a therapeutic exercise for me, but hopefully can challenge your own views and thoughts on both the macro and micro with Energy Metals supply chains. I readily admit I don’t have the answers, but hopefully 25 years of successes failures and everything in between can stimulate debate as we navigate through this truly historic and uncharted time in history.

The questions or issues to be debated in the coming weeks are:

·      How does COVID-19 affect the thematic of de-globalization and supply chain regionalization? Is the result inherently inflationary or deflationary?

·      How does COVID-19 affect the cost structure of the lithium ion supply chain and what is the true cost of the “marginal molecule” (h/t to Deep Basin Capital)?

·      Does the collapse in oil pricing and a race to the bottom in global interest rates slow down or accelerate the transition towards electrification?

·      What will raw material producers need to do in order to ensure the viability of their businesses going forward (from juniors to producers)? What is the optimal capital structure and what do companies do to manage costs with ESG pressures only set to increase?

There are no doubt more issues to be debated and thought through and I’ll be sure to address them as necessary.

Stay tuned for the first piece early next week.

The Strategic Metals Supply Chain in an Era of De-globalization

Chris Berry1 Comment

By Chris Berry

Ed Note: **This piece is a shorter version of a book I am writing on the economic, financial, and geopolitical aspects of the energy transition and will publish in 2020.


 

What a difference a year makes. The Summer of 2018 can arguably be remembered as a time when investor sentiment for lithium and cobalt took a turn for the worse. Since then a paradox in the sector has only become more glaring: while prices for lithium and cobalt in various forms have continued to fall, long term demand projections haven’t budged and are still very much intact. This disconnect has caused many investors to leave the sector for the “safety” of index funds or cash.

While it’s true that spodumene originating from Western Australia has flooded the market as I believed it would, pushing lithium prices down, conversion capacity in China remains somewhat of a question mark. How much is existing? What is the spare capacity? How much is under construction? When will a new equilibrium be reached?

As someone who has been to China recently, these questions have answers that change more frequently than you’d like to believe. Once built, scaled, and fine-tuned, investor logic dictates that this will push prices for lithium carbonate and lithium hydroxide down further. While some sell side banks might agree here, the truth is, as always, somewhere in between.

Much the same can be said for cobalt which has a truly ugly chart (below). The recent decision by Glencore to put Mutanda, a truly world class copper/cobalt asset, on care and maintenance for the foreseeable future due to poor economics says volumes about resource nationalism and royalties hurting profitability (to put it mildly), but still says nothing about long-term demand for cobalt, which appears firmly intact.

Volatility in Lithium: A Gift or a Curse?

Chris Berry7 Comments

By Chris Berry (@cberry1)

 

With the sentiment around lithium almost universally bullish, the recent hammering of lithium equity share prices can be traced back to one or two reasons: either as a sign that valuations had exceeded reality or a specific catalyst has injected a dose of reality into the markets. It is possible for both to be true and while I think this is the case, anyone with a long-term bullish view of the lithium sector can view the recent carnage as a gift.

Q2 Energy Metals Earnings Review - Crunch Time for the Lithium Majors

Chris BerryComment

By Chris Berry (@cberry1)

 

With earnings season winding down and news of vehicle electrification hitting the wires daily, it makes sense to take stock of Q2 results from some of the major players in the Energy Metals space and position as necessary. After all, this is a cycle. There is a great deal of “macro” news I could discuss here, but decided to keep this note short and focused on the producer side of the Energy Metals business.

·         Lithium segment results from Albemarle (ALB:NYSE) and FMC (FMC:NYSE) were unsurprisingly strong (Ed note: SQM doesn’t report until later this month, but based on previous guidance, results similar to ALB and FMC can be expected).

o   ALB reported lithium segment sales of $244M in Q2 up 55% driven by higher pricing (up 31%) and volume (up 25%). Adjusted EBITDA margins of 47% continued a streak of at least eight straight quarters of +40% operating margins in the lithium segment. The company forecast higher costs going forward due to expansion and exploration expenses and also LOWER average lithium pricing for customers saying that Q3 and Q4 lithium results are likely to match Q1 – perhaps managing investor expectations downwards. The stock sold off hard, falling as much as 6% and is down another 2% as I write this. Given that ALB has returned over 40% in the past year and pundits on CNBC are recommending buying the stock at close to all-time highs, perhaps a pullback was long overdue.

Takeaways from the Recent Industrial Minerals Lithium Conference in Montreal

Chris BerryComment

What follows is an abbreviated version of  the most salient points from the recent lithium conference in Montreal with some context added. The full and more complete version was sent out to clients earlier this week. 

·         Attendance has risen by 100% each of the last three years with this year being the most diverse across the lithium supply chain. While upstream players were the most widely represented group, some new names from the automotive and tech sectors were in attendance – a difference from years past. The institutional investment community was more prevalent this year, but still a minority at the conference. This is likely due to the fact that the conference is less focused on investors.

·         My thesis of valuing “execution over exploration” seems to have taken hold as the most advanced development stories including Lithium Americas, Orocobre, Nemaska, and Neometals garnered the most attention at their respective presentations. Everyone is watching to see how the Nemaska and Lithium Americas capital raises unfold as an announcement on each is anticipated shortly. There was much more forward thinking at this year’s conference relative to years past.

Lithium Q1 2017 Review and Risks - The Train Keeps a Rollin'

Chris Berry4 Comments

By Chris Berry (@cberry1)

 

As I’ve discussed before, all commodities are cyclical and the Energy Metals are no exception. Anecdotal evidence suggests that battery grade lithium pricing remains healthy in the $14,000/t USD range even as lithium share price returns have moderated from their triple digit returns in 2016. Despite this, lithium shares continue to post impressive gains. Year to date in 2017, an equally weighted basket of lithium names I track has returned 45.1%. This is compared to a return of 5.98% for the SPX, 2.42% for the TSX, and 4.07% for the ASX.  

Here are the year-to-date returns for select lithium names sorted by USD market cap:

Strategic Overview of the Cobalt Market

Chris BerryComment

It's been a busy few months and I'm pleased to announce that I've completed a thorough review of the cobalt market which is available for purchase. 

The report covers all aspects of the cobalt supply chain from mining, to refining, to end uses with supply and demand forecasts as well. 

I'm offering the Executive Summary and a portion of the Introduction for free. You can download a PDF version here. The cost of the full report is $500 USD which can be paid through PayPal (or we can make arrangements for a wire if necessary). As an added bonus, I'll give the first 20 people to purchase the report an opportunity for a 20 minute phone call to ask any question they want regarding the outlook for the cobalt market. 

To be clear, this is not a "stockpicking" report and so you won't find any "flavor of the month" stock picks here. What you will find is in depth data and insights into the cobalt supply chain and how the companies along it are shifting their business to capture the anticipated high growth of downstream industries. 

For more info on purchasing the report, please email me at info@house-mountain.com.

Thanks,

Chris

Lithium in Las Vegas: A Closer Look at the Lithium Bull

Chris Berry3 Comments

By Chris Berry (@cberry1)

 For a PDF of this note, please click here. 

 

I'm just back and recovering from a week in Las Vegas where the 8th Annual Lithium Supply and Markets Conference hosted by Metal Bulletin took place. Sentiment in the industry is overwhelmingly positive as the ubiquity of technology and the cost deflation associated with that technology (EVs, consumer electronics) means that lithium ion battery chemistry will remain central to this growth. The event was attended by  major lithium producers including Albemarle (ALB:NYSE), SQM (SQM:NYSE), and FMC (FMC:NYSE), cathode manufacturers, investment professionals, and junior mining companies, so coming away with a clear view of the market was facilitated.

It looks like my demand estimates of ~270,000 tonnes LCE by 2020 will be met. Supply, on the other hand, is always a wild card in the mining sector and my proprietary estimates