Today’s Daily Reckoning Australia will check how things are going with the lithium boom.
Is there still money to be made?
Let’s find out…
Our first port of call will be the flagship stock on the ASX for this space: Pilbara Minerals [ASX:PLS].
PLS released its earnings on 24 February. Goodness me! It declared a $1.2 billion profit for the first half. The company also declared its first dividend.
You’d think that kind of result would get a mark up from the market.
Not so! PLS is down 6% or so from the day before it released its accounts.
What gives? Is this ‘as good as it gets’?
Hmm. I’m not so sure.
One confounding factor, at least as price action goes, is that one of its major shareholders just decided to sell out.
The company, CATL, sold a staggering $856 million worth of stock for a gigantic profit from its earlier investments.
The stock went ex-dividend last week too.
But what of the future?
The stock only trades on a P/E of about six if it can hit its forecast profit of more than $2 billion for this financial year and the next.
That, as ever, is the big ‘if’.
You and I know that depends on where the lithium spodumene price goes.
This has skyrocketed since 2020. But nothing lasts forever.
The Financial Times reported last month that pricing for lithium carbonate was weakening in China as concerns about demand rolled around.
We see this type of spook in commodity markets, like iron ore, all the time.
Lithium prices in China, as I understand it, have always been prone to big swings.
It’s also hard to see the long term as anything but bullish, either.
It’s not as if the switch to electric vehicles and renewable technology is going away any time soon.
Tesla recently held its investor day. Musk wants to make Tesla the world’s largest (by volume) carmaker, eclipsing Toyota.
Tesla, according to the report, has spent US$28 billion to get this far.
It will need to spend nearly US$150 billion more to sell 20 million vehicles a year.
Tesla’s chief financial officer is quoted as saying:
‘We may choose to vertically integrate into more things. We may find efficiencies elsewhere.’
That sounds a lot to me like the company could be interested in buying mining projects directly.
Could this be the cause of the unexplained jump in Liontown Resources [ASX:LTR] recently?
It’s possible, I suppose, though I have no idea how likely.
Tesla is still active in engaging with Aussie stocks too, by the way.
It was only the other week that speculative junior Magnis Energy Technology [ASX:MNS] announced a conditional offtake agreement with the electric car company.
(Admittedly, the market seems sceptical of the deal. The stock is down since. Hardly a ringing endorsement of the announcement).
I thought I’d check with any recent comments from ‘Mr Lithium’, US Advisor Joe Lowry.
He said recently, in part:
‘By the fourth quarter I believe it will be obvious that investors who worried about lithium demand in 2023 and focused on negative predictions for China without understanding the historic seasonality of the China market or had misguided concerns over Beijing’s management of subsidy policy or focused on the potential impact of a global recession and let those concerns overshadow the long term growth trend simply came to the wrong conclusion.’
Probably could have used a full stop in there somewhere…but thanks, Joe!
Senor Lowry also refers us to an acquaintance, Matt Fernley, who analysed the potential demand for raw materials as EVs take market share.
Senor Fernley tells us that:
‘Assuming that all of the 240,000GWh of cells were lithium-ion (which they won’t be, but just to illustrate the magnitude), that would mean a total requirement of c.160Mt of lithium carbonate equivalent (LCE). Given that current production is of the order of 0.7-0.8Mtpa of LCE, you can understand the magnitude of the bottleneck.
‘Let’s be realistic — there are other techs out there, particularly in the ESS space where there are flow batteries, sodium-ion, etc, but the magnitude of the likely demand increase for lithium-ion in general and lithium, graphite, phosphate, nickel and manganese in particular still looks off the scale.’
Are you picking over ideas here? I think you should be. Personally, I picked up some stock in PLS last week. We’ll see how that goes.
But the high-octane stuff is at the junior end of the resource market (as PLS once was!).
I have pegged the junior most likely to have a crack at repeating PLS’s success. I called it my ‘Tesla Jackpot’ play.
You can check out the idea, and more, by clicking here.
Editor, The Daily Reckoning Australia