By Chris Berry (@cberry1)
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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:
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.
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 version of this note, please click here.
In the 19th century, geopolitical tensions were at the fore as Great Britain and Russia jockeyed for position in much of Central Asia with an eye on protecting British interests in India. At risk was control of land and sea routes for trade. Ultimately, other countries including China, Afghanistan, and some in Europe would be drawn in and would set the stage for geopolitical rivalries which still exist today.
This geopolitical chess match became known as The Great Game, a phrase coined by Arthur Conolly, a British intelligence officer in India at the time. Control of land and sea meant not only economic security, but also the ability to project economic and political power far beyond one’s borders. The common belief that the sun “never set on the British Empire” was at risk.
About the same time (late 19th Century) in Germany, a self-taught engineer named Ferdinand Porsche built what is widely believed to be the first electric vehicle. Mr. Porsche wouldn’t found his famous automobile company until 1948. He could have hardly realized it at the time, but this invention would be the eventual catalyst for the emergence of a “new” Great Game. However, today it isn’t countries that are the main players and it isn’t trade routes that are at stake. The new players are companies and what is at stake is energy usage for mobility and continued enhancement quality of life.
By Chris Berry (@cberry1)
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It’s been interesting to read the mainstream media’s impression of the recently announced lithium hydroxide supply deal between Tesla Motors (TSLA:NASDAQ) and Rare Earth Minerals PLC (REM:LON) and Bacanora Minerals (BCN:TSXV, BCN:LON), a joint venture with lithium concessions in Mexico. Arguably the biggest misconception is that TSLA has consummated a deal with companies operating an existing mine. This is not the case as the deposit at the center of the agreement is just that – a deposit.
Semantics aside, the agreement between the companies offers an interesting window into TSLA’s supply chain strategies, and in the end what the company has really done has purchased an out of the money call option on future lithium supply.
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.
By Chris Berry (@cberry1)
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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?
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
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.
