Disruptive Discoveries Journal

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Volatility in Lithium: A Gift or a Curse?

Chris Berry6 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.

Are Electric Vehicles About to Jump The Shark?

Chris BerryComment

By Chris Berry (@cberry1)

For a PDF version of this note, please click here

 

As if vehicle electrification needed any more hype, Apple Inc’s. (AAPL:NASDAQ) rumored move towards producing its own EV by 2020 may have been the first sign that the whole idea of EVs has “jumped the shark.” For those of you unaware of this term, it refers to the 1970’s sitcom Happy Days when Fonzie was waterskiing and literally jumped over a shark. Happy Days was never the same and the show never quite recovered from this stunt to win viewers.

The rumors leaked last week about AAPL secretly working on developing its own EV have fanned intense speculation about how this would be accomplished. With $170 billion in cash on its balance sheet, obviously hiring the talent and research and development are non-issues. 

 

Tesla Sparks More Questions Than Answers

Chris Berry1 Comment

By Chris Berry (@cberry1)

For a PDF of this note, please click here.

 

Tesla Motors (TSLA:NASDAQ) released Q4 and 2014 full year earnings last night and the results were disappointing. The company missed expectations on just about every conceivable metric one would use to judge success including earnings, deliveries, and revenues. Although disappointing, TSLA should still likely be viewed through a longer-term lens than its competitors as the company is still arguably in its early growth phase and isn’t yet a mature operating entity.

While the numbers we all tend to focus on were down, what was perhaps more concerning were the statements made by Mr. Musk and his team on the call. They include: 

·         Mr. Musks’ statement that in ten years TSLA could have a market cap that equaled that of Apple Inc. (AAPL:NASDAQ). AAPL’s current market cap of US $740 billion would give TSLA a share price of approximately $5,920 per share based on TSLA’s current share count. When was the last time you hear of a company selling what is effectively a commodity (cars) with that sort of valuation and share price?

"Forecasts" For Metals and The Global Economy In 2015

Chris BerryComment

By Chris Berry (@cberry1)

To view this entire piece in a PDF, Click here

 

“It’s tough to make predictions, especially about the future.”

-       Yogi Berra

 

In the time that I have been writing on the metals markets and global economy, one mainstay has always been reading the tsunami of year end research reports laying out predictions for the year ahead. Almost universally, these well-written and tirelessly researched musings all share one consistent trait: they are almost always off the mark.

Last year at this time, I was reading about the looming interest rate increases in the United States (not even close), Japan finally conquering deflation and returning to growth (fourth recession since 2008), oil prices never falling below $100 per barrel (no comment necessary), the junior mining markets turning higher (I think we’re several years from this) and electric vehicles taking a much larger piece of automotive market share (not yet, but eventually).

I don’t mean to denigrate those who make predictions as it’s a necessary part of portfolio construction. The fact that so many predictions are so spectacularly wrong I think speaks to how interconnected markets are which makes it difficult to anticipate any sort of domino effect. 

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.

 

Tesla Motors (TSLA:NASDAQ) - On The Verge of Changing Everything, But Questions Remain

Chris BerryComment

By Chris Berry

 

Charging Ahead

Last week, TSLA released its Q2 2014 earnings. As a proponent of disruptive business models and the raw materials necessary to enable the upheaval, I always listen with rapt attention. The earnings of $0.11 per share on net income of $16 million (non-GAAP), and a loss of $0.50 per share on net income of $62 million (GAAP) were enough to satisfy the market and after a brief dip in after hours trading, the share price rebounded strongly.

As is the case with many of the early-stage companies I follow, I’m more interested in production metrics, though revenue here is accelerating, indicating that TSLA is having no problem selling its cars. I’m willing to tolerate negative earnings and cash flow as long as the company is investing in future growth and increasing sales.

This is clearly the case with TSLA which reported record production (8,763 Model S) and deliveries (7,579 Model S) in Q2 and is on track for more than 35,000 deliveries in 2014 with the stated goal of 100,000 deliveries by the end of 2015. Additionally, with a Cap Ex guidance of $850 million, TSLA has a Cap Ex/Sales ratio of over 20% - unparalleled in the automotive business according to the FT. The next closest is Jaguar at 12%. TSLA is clearly a company in its early growth phase.

Rather than dissect the numbers here, I think it’s important to look at the main takeaways from the call and consider any questions that arise for the company as they continue on an exciting journey to revolutionize the automotive and energy storage businesses.  

The Lithium Market - Desperate for Disruption

Chris Berry

By Chris Berry

 

Separate and Unequal

In a note I wrote last week, I discussed the danger in assessing all critical metals together rather than individually. I am just back from serving as the Chair of the 6th Lithium Supply and Markets Conference hosted by Industrial Minerals. Of the many takeaways, this idea of analyzing the prospects for these metals separately is no more evident than in the case of lithium.

In the wake of Tesla’s (TSLA:NASDAQ) Gigafactory announcement, many lithium junior companies, who were left for dead, were given a new lease on life.  I have written in the past about the challenges I think must be overcome to make the Gigafactory a reality, and am still unconvinced that a junior mining company not close to production can participate and benefit its shareholders, but we shall see. I try and make a habit of not betting against terminally successful visionaries like Elon Musk.

It is clear that the automotive sector is the real growth driver for lithium, as David Merriman of Roskill pointed out in his remarks:

Q1 2014 Economic and Energy Metals Review

Chris Berry

In accordance with the roll out of our new journal offering next week, and our goal of increasing your “value added,” we will begin publishing a quarterly review of the Discovery space.  Specifically, today we will analyze the overall macroeconomic picture and how it has affected select Energy Metals.  We'll highlight the key themes which have driven many of the companies involved in exploration, development, and production to double digit returns YTD.

 

As the West Sputters Along…..

In mid 2013, it appeared as if the US and Euro Zone economies were picking up steam based on accelerating PMI readings and falling unemployment.

What Tesla's Gigafactory Means for the Juniors

Chris Berry
  • Tesla Motors (TSLA:NYSE) recent announcement to build its own vertically integrated lithium ion battery factory (dubbed the Gigafactory) sent the share prices of many junior mining companies into the stratosphere

  • There are a number of questions to consider behind TSLA’s strategy, but with respect to the junior mining sector, one wonders if this is a lifeline or a false dawn

  • Though lithium and graphite plays have benefited the most from the TSLA announcement, there are a host of metals which will be required to manufacture the specific battery chemistry

  •  It was interesting to note that cobalt or nickel plays didn’t react in the same way lithium plays did after the announcement

  •  It is dangerous for a junior mining company (or an investor) to assume that a major manufacturer like TSLA will rely on a junior not yet in production to feed the eventual Gigafactory supply chain

  • The success or failure of the Gigafactory rests less with a secure supply of raw materials and more with the long term price of a gallon of gas