Disruptive Discoveries Journal

SQM

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 Berry3 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:

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

Lithium Strategy: Re-positioning in a Bull Market

Chris Berry8 Comments

By Chris Berry (@cberry1)

 For a PDF version of this note, please click here.

 

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.

Are We Headed for a Lithium Bubble?

Chris BerryComment

By Chris Berry (@cberry1)

 For a PDF copy of this note, please click here.

 

Recent events in the lithium and electric vehicle (EV) spaces have conspired to light a fire (pun intended) in this corner of the metals market. To wit:

Apple’s (AAPL:NASDAQ) recent public announcement of its intent to have their own EV ready by 2019 is a strong indication that a redefinition of transport is here to stay. While not a surprise, this announcement is good news as AAPL, a company with a history of transformative product development and extraordinarily deep pockets, is intent on making its mark in the EV business. While details are sketchy at this point (autonomous? Fully electric?), having a company of AAPL’s stature enter this space will accelerate adoption and interest – not to mention shine a light on raw material access and supply chains.

Regarding raw materials, the general trend of increasing prices for lithium compounds is intact with FMC Corp’s (FMC:NYSE) announced intention to raise prices for their lithium products by 15% starting October 1st. In the current market environment, there are no commodities with the same pricing power as lithium (See below for YTD metals performance). This pricing momentum's contribution to FMC’s bottom line and cash flow is likely marginal, but the price increase is an important signal. 

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.

What's Not Being Said Amidst the Lithium Ion Battery Hype (Hint: It's a Double Edged Sword)

Chris Berry1 Comment

By Chris Berry (@cberry1)

 

For a PDF copy of this note, please click here

 

Amid the Tesla-infused hype surrounding batteries a number of truths have become evident.

 First, battery costs are falling – fast. The overall cost of a lithium ion battery has fallen by over 90% since its commercial introduction in 1990 and the CAGR in the price decrease in recent years per kilowatt hour (kWh) is roughly 14%. Should this rate of decline continue, electric vehicles should be able to compete on total cost of ownership (TCO) with traditional internal combustion engine vehicles within five years.