Disruptive Discoveries Journal

Rockwood

Q2 Lithium Results: Full Steam Ahead, but Watch Where You Step

Chris BerryComment

By Chris Berry (@cberry1)

 

For a PDF of this note, please click here

 

 

In keeping with tradition, each quarter I take a look at earnings announcements of select companies involved in Energy Metals value chains. Today I look at lithium. The thinking here is that dissecting financial results of companies involved in lithium production or use can give clearer guidance on the narrative of looming electrification (and growing materials demand to underpin this sea change). While it is true that all financials can be twisted or manipulated to spin a story, the ability to analyze financial statements can give reasonable insights into trends of this relatively small but growing business. The devil is always in the details.

Lithium in 2015: Positioning For The Inflection Point

Chris BerryComment

By Chris Berry (@cberry1)

 

For a PDF of this note, please click here

 

Of the Energy Metals that I am actively following, lithium stands apart from almost all others as one which I view most positively. The last lithium “boom” from an investor perspective was in 2007 when lithium exploration and development plays rocketed upwards, bolstered by the thinking that an electric vehicle “revolution” was imminent. Obviously, that was premature. EVs of all types (hybrids, plug-ins, etc) are finally starting to gain traction, but any sort of environment where vehicle electrification becomes more than a small percentage of the overall global vehicle fleet is still a ways off.

Paradoxically, I think this is a good thing if you’re an investor in lithium. 

My investment case for lithium should be familiar to anyone who has read these notes in recent months, but as a brief refresher, here it is:

Lithium production is an oligopoly. Despite the strong growth rates in lithium demand (estimated at 8% per year), oligopolies do not welcome competition and therefore if you’re a company aspiring to join the ranks of producers, you need some sort of a competitive advantage or strategic relationship which allows you the possibility of achieving the lowest cost of production. The growth rate in demand is key. I can’t think of another metal I am following with such a strong forward looking growth rate – a real rarity when most commodity demand forecasts barely match global GDP forecasts.

 

The Quiet Resilience of Energy Metals

Chris BerryComment

By Chris Berry

 

Despite their small size (in terms of yearly production) relative to base metals or fertilizers, many of the Energy Metals which I follow continue to make their strategic significance felt. We have talked a great deal in recent months about global excesses in labor and capital putting a “lid” on commodity demand. A confluence of geopolitical and economic issues has come to the fore which has only, I think, strengthened this thesis but has also paradoxically helped Energy Metals reassert their significance in global supply chains.

 

When it Happens…It’ll Happen Fast

The phrase above was said to me once by a money manager commenting on one of the main questions we have been asking ourselves in recent months. Namely, “When will this cycle turn?” With respect to Energy Metals, we could very well be at that tipping point.

 

What to Watch for With Energy Metals During this Earnings Cycle

Shelley Chen
  • With evaluation of junior resource companies challenging using discounted cash flow models, an alternative approach to understanding the various market sectors is a must.
  • I have written a great deal in the past about the benefits to be gained from listening to earnings calls from commodity and materials producers.
  • You must "read between the lines" of what is said and written, but statements made by CEOs and CFOs of large cap companies can offer insights into the strengths and weaknesses of various markets. This can only help with your analysis.
  • Today, I offer some of the insights I'll be listening for during calls this week and next. I also offer a list of companies whose calls I will be dialing into.