Hammered. Absolutely hammered.
That’s the only way to describe the lithium sector right now. Some of the explorer and developer companies are down 90%.
The flagship stock in the sector – Pilbara Minerals – is down nearly 60% off its 2022 high.
The Mount Cattlin mine in Western Australia is going into care and maintenance.
Mineral Resources [ASX:MIN] is getting smashed on its lithium business and crunched on the iron ore side. CEO Chris Ellison is said to have lost $1 billion in net worth.
Anyone with lithium reserves in the ground is now incentivised to leave it there and wait for the next price upswing.
What does this mean?
If I have learnt one thing over the years, now is the time to INCREASE your interest in the lithium sector.
Commodities are cyclical. They always have been, and always will be.
I don’t own any lithium shares. I haven’t recommended any for a long time. This massive wipeout is no skin off my nose.
All I need to do is watch and let others suffer the current consequences.
What I do know is they’re now trading at very cheap levels.
Here’s the thing…
If you’re looking at the long term, they present a fantastic opportunity.
The demand for lithium is not going away.
The Economist reported recently that the number of solar panels globally will double every three years. Based on that trend, solar could be the biggest source of energy in a decade’s time.
That kind of growth is exponential.
Electric vehicle sales may swing about alongside the business cycle.
But do you really think the push toward renewable energy stops now?
I don’t think so.
All we are seeing is normal commodity
market behaviour
You get a boon in prices. This kicks off the mining industry to explore and produce. Mining shares rally as investors expect massive profits. Then we get a downshift, as increased supply catches up with demand.
Take iron ore. China’s massive demand for iron ore came after 2009 as the world reeled from the subprime crisis, taking the price from US$60 a tonne to a high of US$190. Then back in 2015 and 2016, iron ore slumped to around US$50.
At the time, China’s rapid growth revealed a debt crisis, which threatened to bring the economy down. Iron’s steep decline shocked many investors as iron ore stocks slumped. Some even thought Fortescue might go broke because of its debt at the time.
But slowly iron ore worked its way back up. Then various factors came together in 2021 to push iron ore over US$200 a tonne.
It’s still around US$80 a tonne now. Not booming…but better than 2016.
My point is this, if you’d had the nerve to buy iron ore shares in 2016… you were sitting on a bonanza of capital growth and dividends by 2021.
The same applies to gold. Gold shares were in a slump for much of 2021-23. They’re booming again this year.
Now…
I can’t guarantee the same thing will happen with lithium. Maybe it was just a flash in the pan.
However…
Go back to the point from The Economist above.
Solar is the future of the energy market. Solar requires battery storage. Our current technology implies lithium is the best candidate.
As mines close now, or undergo a slowdown, there’s a pause in project development. Funds that used to flow into this sector go off to chase the next hot thing.
The outcome is predictable. At some point the current surplus of lithium spodumene will deplete.
This will spur lithium prices as demand exceeds supply.
That’s when we’ll see the next upswing.
Timing? I don’t know.
However…
What I know is that NOW is the time to review the projects available on the ASX and elsewhere
Find out which shares are worth owning when the next move up comes.
As they say, ‘luck follows the prepared mind’.
Of course, focusing on lithium now means not chasing sectors with more current momentum.
This is why most people won’t do it. There’s a risk of getting it wrong and suffering losses for your mistake.
Nobody said this was easy.
But as lithium stocks get cheaper, it offers more upside potential.
Incidentally, I recommended a while ago a tech company called Nuix [ASX:NXL] to my readers. Its shares returned 370% in just over a year.
Here’s the thing. It collapsed 90% first…before bouncing back.
That’s just how it works with the market sometimes. A sector or a stock dumps hard. But in some cases, they present the best buying opportunities.
Could lithium be one of them?
The odds lean in their favour. You don’t have to buy today, tomorrow or next week.
But you should watch from here closely.
Best,
 |
Callum Newman,
Editor, Small-Cap Systems and Australian Small-Cap Investigator
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