Lithium – A Most Hated Sector (August 16, 2016)

by FI Fighter on August 15, 2016

in Clean Energy, Lithium, Lithium Updates

Model 3

Just a few short months ago, lithium stocks were the toast of the town. Coinciding nicely with the Tesla Model 3 unveiling, many of these junior companies saw their share prices going absolutely hyperbolic… and life was good! For many investors who got in early, life was real good…

For the late-comers (like myself), I entered the game well after the bulk of the early gains had been extracted. Well, “late” in the sense that I started investing in companies such as: Pilbara Minerals (PLS.AX), Altura Mining (AJM.AX), Galaxy Resource (GXY.AX), and Nemaska Lithium (NMX.TO) after their market caps were well north of the $200 million range…

I’m not going to lie, when you see charts like the following, and price action is moving strongly in the upward direction, it’s human nature to want to pile on in before “it’s too late”.

Trends

And for patient investors, isn’t the above demand chart just about the greatest looking thing you could ever hope to see from a growth trajectory point of view? Double digit Compounded Annual Growth Rate (CAGR) for the foreseeable future (next decade or so). Seriously, what more could you ask for?!?

Although I strongly disagree with the “lowball” estimates shown below (I think EV “tipping point” and mass adoption will arrive much sooner rather than later, and 35% of sales by 2040? Way too conservative!), I’ll still admit to liking the exponential shape of the curve!

ev-sales

And then you also have the following chart showing the drastic increase in lithium carbonate pricing in 2016.

20160116_WBC063_0

And let’s not forget about graphite!

Graphite Demand

Well, put two and two together, and it doesn’t take a rocket scientist to figure out where big money is going to be made next…

Clean Energy.

As I’ve already mentioned before in previous posts, identifying and getting into the next paradigm shift is one of the best ways to make tremendous wealth playing in the markets.

  • The internet boom.
  • The smartphone revolution.
  • Clean energy.

To me, it’s a foregone conclusion that clean energy will be the next technological game changer… The wheels have already been set in motion, and it’s no longer a question of “if” but more a question of “when”?

Elon Musk and Tesla have already demonstrated with the Model S that a 100% fully electric vehicle can be “sexy”. Model 3 will try and expand on those accomplishments by also making EVs affordable and accessible to the masses. If the volume of pre-orders for Model 3 is to be used as an indicator, all signs point to the fact that the mainstream is indeed anxious for the EV revolution to “officially” start!

Preorders

Further, big-tech, companies such as Apple and Google (those with the deepest pockets) have already jumped into the fire with the likes of Tesla, and have very real plans to introduce fully autonomous driving in the not-too-distant future.

Apple Spending

2-4

You are looking at Google’s very own, built-from-scratch-in-Detroit self-driving car. The battery-powered electric vehicle has as a stop-go button, but no steering wheel or pedals.

Google

From Google.

We’ve self-driven more than 1.5 million miles and are currently out on the streets of Mountain View, CA, Austin, TX, Kirkland, WA and Metro Phoenix, AZ.

Our testing fleet includes both modified Lexus SUVs and new prototype vehicles that are designed from the ground up to be fully self-driving. There are safety drivers aboard all vehicles for now. We look forward to learning how the community perceives and interacts with us, and uncovering situations that are unique to a fully self-driving vehicle.

Say hello if you see us around!

Google Auto

It’s no secret and everyone knows that smartphones have plateaued and there’s no real significant growth left in that space… What sector do you think the major Silicon Valley tech giants are targeting to make their next wave of fortunes?

Again, clean energy.

But as always, without the benefit of hindsight, nothing ever looks obvious until after the fact…

 

And getting the “when” part is an impossible task for anyone…

 

As readers know, whether we are talking about Deep Value Investing, or Hyper-Growth Investing (as is the case for clean energy), my own preference is to get well situated in the best stocks sooner rather than later… As I demonstrated with gold and silver in 2015, I’d rather be a year too early than a day too late… Especially as it pertains to mining stocks, because when these things rip, they tend to really RIP HARD!

And of course, we all know to “buy low and sell high“. Right? Isn’t that Investing 101?

Right now, these lithium (and graphite) stocks are getting hammered left, right, and center… It’s funny how markets work, ain’t it?

They are just so darn fickle!

One minute, a sector like lithium is in scorching demand from investors, and the next thing you know, nobody cares one iota about it… Like right now!

But has anything really changed since the Model 3 hype reached a short-term fever pitch back in March/April/May?

Nope.

If anything, all the catalysts for growth that seemed so apparent “way back then” are not only still alive and intact today, but the future might look even brighter than ever before.

So, if you’re a buyer, and/or a long-term investor, why would you let something as fickle as price action shake you out? My own belief has always been — Focus on the macro, not the micro!

For example, if your favorite lithium stock is getting pummeled into a bloody pulp but the rest of the sector is off to the races making new record highs, then yes, you have absolutely every right to be nervous and scared! That type of scenario would definitely require some deeper probing!

But on the flipside, if the entire sector is in liquidation and the “baby has been thrown out with the bathwater”, why trip out about anything at all? Misery loves company, as we well know!

For me, yes, my lithium and graphite portfolio is beet red today, but I really don’t care… I have better things to worry about than day-to-day price action…

Unfortunately for me, I’m short of funds since I no longer hold a W-2 job, otherwise I would probably be looking to top off and add to my positions…

By far, my favorite time to buy assets is when nobody else is interested… Actually, when others are shaking in their boots, that’s when I tend to load up most aggressively.

With gold and silver, here’s what buying when nobody gives a shit looks like.

Here are where things stand right now with lithium/graphite.

August 16, 2016.

Screen Shot 2016-08-16 at 11.27.11 AM

My ASX listed lithium/graphite portfolio is currently down about -A$20,000.

OUCH!

Does that suck? Is that frustrating? Do I wish I was a better “market timer” and got in at much more favorable prices?

Well, yeah, of course… But if “market timing” was so easy, we’d have all been retired many years ago…

What’s done is done…

Again, I just try and focus on the macro more than anything else…

For instance, with Altura Mining (AJM.AX) and Pilbara Minerals (PLS.AX), their Definitive Feasibility Study (DFS) should be released sometime later this month, and down the line, we should be receiving more news regarding Binding Offtake Agreements (BOA).

So, yes, the share prices of both stocks have been decimated as of late, but for the most part, it’s just business as usual…

For readers who aren’t as experienced in the mining space, I should also add that the mine-building phase is the boringest phase a company can go through… Shares of each company could possibly get re-rated after the DFS, but after that and mine financing, it’s just zzzzzzzzzzzz until the mine is built and production starts… Then the next wave of re-ratings occur as the time to money inches closer and closer to reality…

Ideally, we like to find stories and get in earlier to enjoy the multiplicity factor (many re-ratings) along the way to production, but like I said, “better late than never”…

And development stage stories will be inherently lower risk than early-stage exploration stocks…

Speaking of early-stage exploration stocks, I’ve got a pretty large position in Birimian Limited (BGS.AX).

Interestingly enough, BGS.AX was a stock that was on fire earlier this year, with the stock peaking at A$0.42/share back on May 16, 2016.

Currently, because lithium is so hated, the company trades at only A$0.27/share.

Screen Shot 2016-08-16 at 1.25.53 PM

But wait, it gets better…

 

Back in May, Birimian Limited had just acquired the Bougouni Lithium Project and commenced drilling. That’s right, before the company even drilled one hole, shares were trading at A$0.42/share, fueled by nothing more than hype…

What has happened since that time? We’ve had one positive news release after another

The Bougouni Lithium Project only continues to further de-risk itself as the drilling confirms that the company indeed does possess the goods (abundant high-grade spodumene)…

What did the share price do in the process on the heels of all the good drill data?

From Birimian Limited.

Screen Shot 2016-08-16 at 10.10.46 PM

Go lower, and lower, and lower…

In fact, most recently, the company came out with yet another positive release, showing promising signs (although very early) that the West Zone might be as large in scale (if not larger) than the Main Zone… For many investors who got into the BGS.AX story early on, the West Zone was always kind of viewed as a “freebie”… That is, any kind of discovery made there would just be icing on the cake… And now we’re potentially talking about “twin towers”?

From Birimian Limited.

Screen Shot 2016-08-16 at 1.33.50 PM

What was the market reaction this time around?

Well, the stock didn’t crater through the floor as was the case during the previous round of drill results, but as was not much different from before, the market simply shrugged off the news and the stock has been trading sideways to down ever since…

If you are a day-trader, of course this type of “sideways” volatility is going to bug you a lot… But if you’re a long-term investor who is bullish on the future of lithium? Why would you even care so much about the short-term price action?

As we all know, markets are extremely inefficient in the short-term…

The markets are frequently, frequently wrong!!

 

If an exploration story only continues to get better and better and the market decides to dismiss the good news as nothing more than trivial (but you know better!), what should that tell an investor?

Maybe, perhaps, a wonderful buying opportunity is presenting itself?

Again, I don’t have much free funds these days, but even I took notice of the market’s non-reaction as an opportunity to add more BGS.AX shares. I purchased 26,000 more shares of BGS.AX at a cost of A$0.285/share. I now own 200,000 shares in total.

Of course, it came as no surprise to me, as soon as I made my purchase, the share price of BGS.AX decided to sink some more yet again!

Hey, these things happen… I’ve got better things to do than to try and make sense of what’s happening right now… Some seller wants to offload their shares… This stuff happens all the time… Better get used to it because it won’t be the last time this ever happens to one of your stocks…

Anyway, I’m not saying that purchasing up lithium and graphite stocks is low-risk (it absolutely is RISKY STUFF and NOT for the faint of heart!), but you’ve always got to ask yourself, “If you’re a buyer, do you want to pay more for your merchandise or less?

And if you’re already well situated with these stocks, you have to ask yourself, “What’s my time horizon for this trade?

In my own situation, I’m viewing 2018-2020 as the prime window to exploit this lithium/graphite trade… So, that’s a few years away… Around that time frame, the Model 3 hype should be building up rapidly, and the rising demand coming out from China (and as of April 2015, Benchmark Minerals estimates that at least 12 lithium ion battery megafactories are in the pipeline between now and 2020) will finally start to really be felt by the markets, which should stress supply (hopefully), keeping the price of lithium carbonate, lithium hydroxide, and spodumene concentrate somewhat elevated… No, I don’t quite need $20,000/t Lithium Carbonate Equivalent (LCE) for my thesis to ultimately work out and prove to be a successful trade, but anything north of $10,000/t should do the trick… Those are my own expectations, but your mileage will vary of course…

So, long story short, as long as the macro picture surrounding clean energy, electric vehicles, lithium, graphite, etc. aren’t deteriorating for the worst, what is there for me to worry about?

Sure, being down -A$20,000 in my lithium/graphite stocks kind of sucks, but where have I seen this song and dance before?

Oh, that’s right, with gold and silver mining stocks, where I was down -$60,000

January 19, 2016.

Depths of Despair 1_19_16

 

Been there, done that…

 

Volatility in mining stocks doesn’t surprise me in the least bit… It’s their nature, it’s what they do best.

 

Here’s an example of a lithium/graphite watchlist.

August 16, 2016.

Screen Shot 2016-08-16 at 1.46.22 PM

Yes, I realize that seeing the stocks you own getting smashed into bits and pieces can be disheartening, frustrating, and very emotional…

Don’t get mad, get even…

What’s the biggest complaint that gold/silver investors have today? “Damn, why didn’t I buy more at the market bottom in January… Why can’t the stocks just pullback and give me a good buying opportunity again!?!

But when we do get wonderful buying opportunities, what is our natural reaction as human beings?

Oh shit, prices are cratering through the floor… I better start selling now! Ahhhhhhh!

Would you rather buy shares of Magnis Resources (MNS.AX) at A$0.62/share, or at A$1.10/share? Because I assure you, there were way more interested buyers back when it was trading at A$1.10/share just a short while ago…

Same for all those other stocks listed above…

But if the individual stories are still intact and continuing to make good progress (positive drill results, resource/reserve upgrades, completion of technical reports such as Scoping Study, PFS/DFS, etc.), what’s there to stress out about? If you strongly believe in the clean energy revolution and think that demand for resources such as lithium, graphite, cobalt, etc. are going to surge and exceed supply in the future, then you already know what you need to do… However, if that’s not your macro thesis, then don’t buy…

 

Simple stuff…

 

Price action, I couldn’t care less about it in the short-term… Someone wake me up when 2018 rolls around…

 

Fight On!

{ 22 comments… read them below or add one }

1 DougNo Gravatar August 16, 2016 at 8:33 am

This is why I read your blog buddy. Great insight.

Reply

2 FI FighterNo Gravatar August 16, 2016 at 7:54 pm

Doug,

Thanks for the support!

Take care!

Reply

3 Ton TrieuNo Gravatar August 16, 2016 at 8:53 am

Hi FiFighter

Such a great article again !! What brokers or method that you use to purchase those shares (PLS.AX, AJM.AX, GXY.AX, NMX.TO) ?

Reply

4 FI FighterNo Gravatar August 16, 2016 at 7:56 pm

Ton,

I use Schwab Global to buy foreign stocks on ASX, TSX, TSX-V:

http://www.schwab.com/public/schwab/investing/accounts_products/accounts/global_trading

Interactive Brokers is another good one, but I’ve had better experiences with Schwab… Schwab has excellent customer service… Ryan, Russell, Elaine, I think I know them all… lol.

No, I don’t get paid any commissions/fees for any referrals…

Cheers!

Reply

5 JanNo Gravatar August 17, 2016 at 5:34 am

I use Schwab also. I would like to buy a little of several lithium stocks, dollar cost averaging style, over the next few month – but with the $8.95 commission to buy only $800 worth each time at 0.30 (for example) would bring the ‘cost basis’ all the way up to 0.39 probably! Then suddenly you are down 25% percent right from the start. I guess that’s the way it has to be (unless you use a different brokerage but I’m sticking w/ Schwab). Do you have this ‘problem’?

Reply

6 FI FighterNo Gravatar August 19, 2016 at 6:16 pm

Jan,

Yeah, the fees/commissions make things kind of tough… It’s a problem I’ve definitely had to deal with myself. Personally, I like purchasing and selling shares in about $3000+ lots to reduce the impact as much as possible. Even better would be $5000+, but you just have to do the best that you can.

It really does feel like starting off the race a few steps behind… So, in order to make it worthwhile, we have to make sure we are buying shares that are not only cheap but have lots of upside potential.

Easiest said than done, I know! 😉

All the best!

Reply

7 MalankoNo Gravatar August 16, 2016 at 1:33 pm

Hi FiFighter,

I’m following your blog for quite some time now although i never commented.
I saw your gold play back in December/January and now you have money poured into Lithium. Now I’m just curious, how do you asses the value of these companies other then the macros and drill reports, as these companies (like BGS.AX) have no actual revenues yet.

Reply

8 FI FighterNo Gravatar August 16, 2016 at 7:59 pm

Malanko,

That’s a great question but a tough one to answer… For the most part, when it comes to lithium/gold/silver, I look at other similar assets and try to get a good grasp on what the net present value (NPV) could be…

In the case of Birimian, their initial exploration target was 15-18Mt Li2O at very high grades, 1.5%+…

When you look around, that sounds a bit like Altura Mining (in terms of size but much higher grades!) which trades at a market cap of ~A$200 million… and the NPV on the DFS for Altura will likely show a much higher NPV using current spodumene prices of $500/t+.

BGS has a market cap of ~A$50 million… Plus BGS has gold that just needs a processing solution (e.g. Morila)… So, you can see a lot of upside for the market cap/EV…

And right now, there’s no other sector I’d rather be in than gold/silver and lithium. You get both with BGS!

All the best!

Reply

9 MalankoNo Gravatar August 22, 2016 at 9:29 am

Hi FiFighter,

Thanks for your views on this. Over the weekend I’ve read all your articles on lithium. After that i plowed to some documentaries on green energy and then I watched a documentary on the upswing of the electric car. I see that a lot of car manufacturers are betting big on EV’s and for good reasons! I’m convinced that aside from saving the environment it will make economic sense for consumers to buy these cars in the near future. And I feel that i’m coming up to the stage that i want to invest in lithium assets as well. But i’m looking for some information on how to read these drill reports, do you have any good sources?

Reply

10 Investment HuntingNo Gravatar August 16, 2016 at 5:44 pm

I’m happily holding on to my 3 Lithium holdings. In fact I’ve been thinking of doubling-down since all three have dipped significantly. Thanks for the awesome post.

Reply

11 FI FighterNo Gravatar August 16, 2016 at 8:00 pm

Nathan,

Same here, I’m holding strong despite the current headwinds. Doubling down doesn’t sound like a bad idea at all right now…

Best wishes!

Reply

12 JanNo Gravatar August 16, 2016 at 5:51 pm

Interesting.
Why is Galaxy Resources not on your portfolio list – do you not own it anymore?
Do you still own Nemaska Lithium?
Thanks

Reply

13 FI FighterNo Gravatar August 16, 2016 at 8:03 pm

Jan,

Sorry for the confusion, the screen capture above just shows my ASX stocks that are currently beaten down the most… I didn’t highlight my OTC/TSX/TSX-V stocks…

With Galaxy, I hold it under GALXF, the OTC listing… Same for Nemaska, I own NMKEF. And lastly I own a lot of Critical Elements through CRE.V and CRECF, which is my favorite lithium idea of them all.

Take care!

Reply

14 JanNo Gravatar August 17, 2016 at 5:24 am

Thanks.

Reply

15 AlexNo Gravatar August 16, 2016 at 11:11 pm

What do you think about uranium seems pretty beaten up as well

Reply

16 JanNo Gravatar August 17, 2016 at 5:23 am

I bought some URA a week ago fyi. I think fi fighter likes it – but much prefers lithium and I don’t think he holds any uranium stocks. I think it has a lot of upside but I suppose it could be a very long wait.

Reply

17 FI FighterNo Gravatar August 19, 2016 at 5:54 pm

Alex,

i’m a fan of uranium stocks and think the sector is perhaps the most undervalued of them all…

I was in uranium earlier this year, but when I discovered lithium I realized that I preferred to play the upcoming clean energy movement… Uranium, as undervalued as it is, is not a consumer driven commodity… The growth rate will be more stable and you aren’t going to witness a “revolution” like we will with electric vehicles.

Further, the uranium industry is heavily regulated and political… Lots of things go on behind the scenes, and it makes it tough to accurately gauge supply/demand.

I think a lot of money will be made in uranium, but nobody knows when that sector will turn… But when it does, it will probably soar b/c there really aren’t that many options out there for investors to buy… There exists only a very small basket of high quality uranium stocks.

UUUU was/is my personal favorite to play the turn. And NexGen has the best undeveloped uranium deposit that could be primed for a takeover/buyout in the future.

Best wishes!

Reply

18 MARC CIUCCINo Gravatar August 17, 2016 at 9:20 am

Hey man, what you think of Orocobre?

That deserves at least to be on your watch list, eh?

Reply

19 FI FighterNo Gravatar August 19, 2016 at 5:56 pm

Marc,

Orocobre is an interesting name… I like them below $1 billion market cap, anything higher than that and the risk vs. reward becomes less favorable. I haven’t been following, but last I heard they are still trying to get up to nameplate capacity… so there are still some uncertainties there.

Over time, Orocobre is a stock that should do well if they can hit their targets and proceed with a successful expansion of Olaroz.

Best wishes!

Reply

20 Rudy SMTNo Gravatar August 18, 2016 at 9:34 am

Hi Jay,

beautiful article.

May I give one point to reduce confusion on the article?

One chart before the last (gold investments), there isn’t any date or reference. For the first time reader might be confusing and make them thinking that is your portfolio as today.

Would be great to add a date to the portfolio image or create a link to your blog post in January 2016.

Keep up the good work and thanks for sharing.

Reply

21 FI FighterNo Gravatar August 19, 2016 at 5:57 pm

Rudy,

Thanks for the tip! Let me go and revise that right now to better clarify things.

Appreciate the feedback!

Cheers!

Reply

22 theFIREstarterNo Gravatar August 23, 2016 at 1:07 am

Hi FI Fighter

I’m read up shed loads about Tesla, EVs and renewables recently and am now convinced lithium is going to explode (not literally… hah) like yourself but it’s really hard to pull the trigger knowing that only 4-5 months ago some of these stocks were a third of the price or less!!! Really can’t help thinking we’ve missed the boat here but your analysis shows otherwise. Your latest post on stock price manipulation is another concern as the big spikes did seem to correlate with a lot of what it said on there (or it could have just been the announcement of the Model 3, and impending Gigafactory opening, which is now open)

Anyway I think I’m going to dip a tentative foot in the waters as a long term play. I’d rather lose a couple of G’s rather than miss out on a 10 bagger and feel good about getting involved in the renewables/EV revolution 🙂

The thing is, I’m having trouble finding places to buy them from the UK. One of my brokers seems to list them but there is literally NO information about the price, investment or anything when you click on it. The only option is to “Buy at best price”. What’s more, the symbols don’t match up with what you’ve given so I’m confused as to what one I should be buying, or whether it matters. For example for Altura mining it lists:

BD31MC6 ALTURA MINING LTD NPV DFD 21/07/16(EX-OPTION) (SEDOL:BD31MC6)
B1HK0F4 ALTURA MINING LTD NPV (SEDOL:B1HK0F4)
6318053 ALTURA MINING LTD NPV (SEDOL:6318053)

Presuming I don’t want the EX-OPTION one, but why is there two more? I’ve googled the two codes (B1HK0F4 & 6318053) and one of them doesn’t even come up with anything, and the other looks like just a list of funds that holds that stock. Not really sure how I am supposed to tell what is what and what the difference it. Obviously a call to the broker would help but wondered if you had any insights on it first?

Many thanks for all the posts you’ve been pumping out on this and any advice you can give me here.

Cheers!

TFS

Reply

Leave a Comment

 

{ 1 trackback }

Previous post:

Next post:

Copyright © 2012 FI Fighter