By Chris Berry (@cberry1)
Click here for a PDF version of this note
In late 2018, we published a note examining whether volatility was a positive or negative for lithium investment. At the time, lithium pricing and lithium equity prices were at much higher (and ultimately unsustainable) levels. Lithium spot pricing has been more than cut in half and has wreaked havoc on the production plans of Alita, Nemaska, Albemarle and Mineral Resources, Livent, SQM, Galaxy, Altura, and Pilbara – not to mention their share prices despite the early run up in January 2020. The irony here is that the relative success of new hard rock entrants into the lithium sector has created an oversupply glut which has run well ahead of robust demand for the time being pressuring the whole sector. This has happened even as downstream players such as OEMs talk about battery shortages.
In short, nobody has been immune and a lesson here is that while lithium is indeed strategic and necessary for a lower carbon future, it is a commodity/specialty chemical not immune from the capital cycle. The same could be said for other metals, shown below.
By Chris Berry (@cberry1)
For a PDF copy of this note, please click here.
$80 Million Deal Between Western Lithium and Lithium Americas Redefines the Junior End of the Lithium Market
On an otherwise quiet holiday week in North America for mining, the news of the effective merger between Western Lithium (WLC:TSX, WLCDF:OTCBB) and Lithium Americas (LAC:TSX, LHMAF:OTCBB) is an exciting and positive catalyst in the lithium space. I have maintained for some time that, despite the rosy demand growth projections for lithium, the market needs fewer players. The lithium market (at approximately 160,000 tpy of lithium carbonate equivalent) just isn’t big enough for numerous players to generate adequate cash flows (and hence returns). Further, the resulting players will need to demonstrate costs or competitive advantages that allow them to exist alongside the oligopoly in the space.
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.
By Chris Berry (@cberry1)
For a PDF version of this note, please click here.
This note will be shorter than usual as my travel schedule seems to have gotten the best of me. I recently returned from Costa Rica and am off to Europe tomorrow with Zimtu Capital to join them in Frankfurt (Nov 6th), Munich (Nov 8th), Zurich (Nov 10th), and Geneva (Nov 12th) as a keynote speaker on their annual bus tour. If you’d like to attend any of the presentations (numerous TSXV and CSX companies will be presenting as well) please let me know and I can get your name on the invite list.
The recent swoon in the metals markets likely has all of us questioning our faith and resolve. Personally, I see no reason why gold and silver, in particular, can’t go much lower and stay there indefinitely. Ultimately, supply and demand always equilibrate, but it can be painful waiting for this to happen. The perception of increasing economic strength in the US with a recent 3.5% GDP growth print plus continued US Dollar strength are outweighing the continued reports of gold and silver consumption in the Emerging World.
By Chris Berry (@cberry1)
Introduction
I have been optimistic on lithium demand since we first started covering the space through Salares Lithium and its merger with Talison Lithium in 2010. My investment thesis revolves around the fact that though lithium is plentiful and the market structure resembles an oligopoly, there is “room at the top” for select lithium development plays that possess a distinct disruptive advantage which lowers their overall cost of production and allows them to sustain operations and thrive.
Demand for lightweight electronic devices and mobility that is reliable and cost effective ensures robust lithium demand in an electrified future. There simply is no readily available substitute to the lithium ion battery and the double digit growth rates in battery use in recent years confirms this.
One company that I believe holds promise to join the ranks of production companies is Lithium Americas (LAC:TSX, LHMAF:OTCBB). I have discussed the company in video interviews previously. This is the first time I have discussed it in depth in print.
There are several reasons for LAC’s unique value proposition. The company’s new management, strengthened balance sheet, superior asset, and important cooperation agreement with POSCO (PKX:NYSE, 005490:KRX), rank it among the top near-term lithium production stories.
The agreement LAC has in place with POSCO has the potential to transform the production dynamics of the industry and render the age old debate about which lithium production method is better – brine or hard rock - irrelevant.
LAC appears to be at an inflection point and is the focus of the following report.
