By Chris Berry (@cberry1)
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How Humility, Skepticism, and Opportunism are Leading to a New Playbook in Commodity Investing
COVID-19 has forced a huge dose of humility on the investing public after so much continuous wealth creation. Many are skeptical that all is lost. The there is, however, a huge opportunity in the new economic future and particularly the commodity sector.
The best-case scenario of a V-shaped economic recovery could be looking more U or L-shaped with no identifiable end in sight to COVID-related impacts to the global economy. While a recession of some length and tenacity is all but certain, the duration is subject to an increasingly vociferous debate.
With upwards of 11 trillion dollars pledged by global central banks to stimulate demand and global interest rates near or below the zero lower bound, this may not be enough firepower needed to bring a global economy at a standstill back on its feet (if equity returns are any indication). Additionally, demographic and debt-fueled headwinds are stark impediments to generating the inflation global central banks are intent on desperate for.
This disinflationary shock spells trouble for producers of all goods along supply chains as margins will be tighter owing to diminished pricing power.
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.
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:
By Chris Berry (@cberry1)
The Trump-induced reflation trade has been a popular one on Wall Street with the major equity indices such as the SPX at all-time highs and up slightly YTD (+5.57), and the US 10 Year Government debt market and the USD both range bound.
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
By Chris Berry (@cberry1)
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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.
By Chris Berry (@cberry1)
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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.
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.
