House Mountain Partners

cobalt

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.

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.

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

China Outflanks Freeport To Further Consolidate The Lithium Ion Battery Business

Chris BerryComment

By Chris Berry (@cberry1)

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

 

 

Earlier this week, the deal in which China Molybdenum Co. (603993:SHA) agreed to pay Freeport McMoRan (FCX:NYSE) $2.65 billion for FCX’s African copper assets reaffirms our view that asset shedding from the FCX project portfolio must continue (See the press release here).

FCX, with a $13B market capitalization, made a bad bet in diversifying into the oil business at the cyclical peak and now must reckon with roughly $20B in debt on their balance sheet. The debt maturity profile of the company is shown below:

Macro Strategy Note: The Case For Energy Metals (Revisited)

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By Chris Berry (@cberry1)

For a PDF copy of this note, please click here

 

In reading the Berkshire Hathaway annual letter this weekend, I was reminded of a response Charlie Munger gave to an investor on how he tests the validity of his investment thesis. Munger’s response was, “Invert. Always invert.” The meaning here is to consciously take the other side of your thesis and try and disprove your beliefs/biases.

I’ve spent the past month or so on the road at conferences and meeting with investors to take a temperature check and “invert” our investment philosophy. We’ve also witnessed a huge increase in our subscriber base in recent weeks and so an outline of our view of the world and how we’re positioning is in order and likely overdue.

While the content here may be repetitive for long-time readers, I welcome any (constructive) comments as they can only help refine and strengthen our outlook.

Despite the overwhelming complexity of the global economy, we see a huge struggle against two headwinds. Though we’ve been involved in commodity investment for over a decade, we view the commodity super cycle (2001 – 2011) as definitively over. The end of the super cycle has left the economy with additional supply of commodities now coming on stream just as demand continues to soften.

Is it Different This Time? - Separating Hype from Reality in the Lithium Ion Boom

Chris BerryComment

Here is the link for my recent remarks at PDAC regarding how to interpret the lithium market. The presentation is "picture heavy" as I generally hate powerpoint and minimize words in favor of images.

Nonetheless, reach out to me if you'd like a deeper discussion on these issues.

The presentation looks at the reasons why the lithium ion battery is increasingly important in our daily lives and offers a few thoughts on what to look for and avoid as you start to understand an increasingly interesting and pivotal space. 

Is this the Final Leg Down in the Commodity Cycle? How Much Lower for How Much Longer?

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By Chris Berry (@cberry1)

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

 

If anything is clear after the start of 2016, the global economic rebalancing that central banks around the world are trying to engineer is not proceeding according to plan. The circuit breaker fiasco in the Chinese equity markets is the latest example giving investors pause with respect to what is truly “going on” in China. The Shanghai composite equity index has lost almost 15% of its value YTD and few see good reason for this slide to halt aside from intense government support and RMB devaluation. Money continues to flow out of China as we speak.

2016: There's Something in the Air

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By Chris Berry (@cberry1)

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

As is the case this time of year, we start to close the books on 2015 and position for 2016. While we have effectively and indefinitely moved “to the sidelines” with respect to stock picking in the junior mining space, there were some notable successes, in particular with the merger between Western Lithium (WLC:TSXV) and Lithium Americas. This combination positions the new company in a unique strategic light as electrification, underpinned by the lithium ion battery, gathers steam in 2016. Galaxy Lithium’s (GXY:ASX) restructuring is another positive development. We’ll be watching the developments with these two companies closely.

In 2015, there was very little to be cheerful about in the metals markets and to be blunt, we expect this malaise to continue into 2016. China’s RMB devaluation last summer...