Coppo: Lithium could do what iron ore did 10 years ago

Richard Coppleson

Some see this as a bubble & that may be correct – but not for a few more years. Lithium-ion batteries are “fundamentally changing the world” but a balancing of supply and demand will eventually expose some players.

Tianqi Lithium chairman Jiang Weiping, said recently – some lower quality producers will be "wiped out" over the next few years as new supply enters the market – but until we get there the ride looks exciting...

Iron ore all over again?

I’m seeing Lithium now a lot like iron ore was back in the early / mid 2000’s was trading around US$10 for along time. Then it ran to US$40 & everyone said at the time it was a bubble & couldn’t last…

Well it did & iron ore reached a peak of around US$150 before it collapsed all the way back to US$50 & now back at US$70. There is a lot of supply but it’ll take a number of years to come on & before that happens.

There is a very good chance that we could see Lithium do what Iron ore did a decade ago...

So I have been watching Lithium stocks with interest & they look like they will go on with it. Given the accelerated rally in the last month in a few – these types of stocks tend to have just as violent selloffs– but I’m guessing there will be a wall of buyers waiting for a pullback who will support theses stocks…

Three stocks in focus

The two stocks I have heard from those who follow them closely are Pilbara Minerals & Galaxy - while most see Mineral Resources as the ‘safest' one to own (as they also have iron ore) - this one recently hit a record high.

The shorts in Galaxy are up at 11% while Pilbara they are just 3.6% (down from 6.5%) back in June. While fellow Lithium stock Orocobre has seen its short position at 15.4%. There is thought that is has been US Quant funds shorting. Some think that the reason the shorts are high is that Hedge Funds are long the US Lithium stocks & shorted the Aussie ones against them.

When looking at these stocks I like to see which instos are on Galaxy – and they have 3 very high quality instos who I know have done serious analysis on this.

They have Blackrock with 6.46% Ausbil (just became substantial) at 5.75% & Paradice Investment Mgt with 3.3%.

Underperforming global peers

Our lithium stocks have massively underperformed the offshore peers that are up around 50% to 100%. But that could easily change……

Our lithium stocks have massively underperformed the offshore peers that are up around 50% to 100%. But that could easily change……

Tribeca’s Ben Cleary (who is known as being right on top of this) makes a very good point to the AFR a month ago when he said…

"More than half our portfolio is in North America – as we are global investors – but all of our lithium exposure is via Australian listed stocks because they represent far better value on most metrics but particularly on an enterprise value to production tonnes basis."

Tribeca's analysis pegs MinRes's 2018 EV to production tonnes at $US50 a tonne with Galaxy at $US38 a tonne and Orocobre at $US49 a tonne.

By comparison the global producers are on a much higher "premium" – SQM at $US338 a tonne, Ganfeng at $US565 a tonne and FMC at the top of the bunch at $US779 a tonne. Cleary says:

"We see this dislocation between Australian and international peer valuations as short term and believe it's a great opportunity from the long side."

Recently…

We have started to see a bit happening in the lithium space, with:

  • Pilbara Minerals signing an offtake agreement & receiving an equity injection from China's Great Wall Motor Company.
  • And also Galaxy who confirmed they'd be in informal discussions with Japan's Panasonic.
  • UBS the other day lifted (10%+) its 2018/2019e prices for lithium carbonate and graphite, as strong battery factory build in China is seen driving demand for both at a time when supply will struggle to keep pace. Although longer term, high margins for the industry (50%+) will encourage new supply.

Bell Potter's top pick is Galaxy. Our last note was released on 1 Sept (stock was $1.80 at time). Peter Arden valued the stock at $3.28ps.


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Geoffrey Adams

This is the type of information that is exciting. It is big picture lateral thinking.

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