What Mattered Today: Lithium stocks cop it on the chin

James Gerrish

The ASX 200 came back and tested the 6000 level today with the market once again seeing the best of it in early trade. Lithium stocks were in focus today and the AM report proved to be very timely, CLICK HERE with our view that volatility in the sector would create opportunity at lower levels – simply the lower levels probably came quicker than we thought. From a portfolio perspective, we used the BIG sell off in the sector to buy into Orocobre (ORE) below ~$6.45 this afternoon. It was certainly a volatile stock / sector today with some big downside moves prevailing. In the case of ORE, it opened weaker, got bid up in the first 15 mins back up above $7 before tracking lower for much of the day – closing at $6.48 – an ~11.5% daily range which is pretty extreme. More on the sector below.

Overall, the Consumer Staples were strong, while on the flipside, the Telco’s had another poor day capping off a fairly soft weak. An overall range today of +/- 26 points, a high of 6028, a low of 6002 and a close of 6005, down -8pts or -0.15%

ASX 200 Intra-Day Chart

ASX 200 Daily Chart

CATCHING OUR EYE 1.Lithium Stocks – A lot going on in the sector today with ORE coming online after finalising a capital raising that involved a placement to Toyota of $A234m worth of stock at $7.50 per share, while institutions tipped in $A35m at the same level while the renounced entitlements were sold at $7.25 through a book build process, which was 11c above the TERP. The stock closed at $6.48, we bought at $6.34 however with the acknowledgment that this is an incredibly volatile stock and it traded around the $6.45 limit price at the time of the alert.

The pricing pressure came on the back of news that major global Lithium miner – SQM – ended a long-running dispute with Chilean development agency (Corfo) over royalties in the Salar de Atacama. Basically the upshot of this news is that SQM will be able to expand its Lithium production by an extra 349,553 tonnes until 2030, allowing the company to take advantage of increasing lithium demand for electric car batteries – which is the theme we spoke about this morning. Clearly, this new production will have a negative influence on the Lithium price and we saw this play out today with the decent move out of the sector – however it’s worth noting that the production discussed above was always in the wings but the magnitude is now the variable - and it does seem like it will be higher cost given the details of the agreement.

What’s also worth noting though, is that the deal will have less of an impact on the funded Australian producers like Orocobre – but instead it will mean that those unfunded developments that are further from production will find it more difficult to get funding in the short term. Clearly, the move is a negative influence for the price of Lithium now as we suggested above, and that’s why we saw such an aggressive move out of the sector today + it’s the reason why we’ve only taken a 3% holding in the portfolio. Expect this to be a very volatile position.

Orocobre Daily Chart

Have a Great Weekend and keep an eye out for the report on Sunday.

That’s all for today….

FREE TRIAL - 14-days free stock market advice - all our reports including every ASX buy & sell recommendation - CLICK HERE TO REGISTER

Have a great night

James & The Market Matters Team

Market Matters Disclaimer


James Gerrish

James is a Portfolio Manager within Shaw and Partners heading up a team that manages direct equity and option portfolios. He is also the Primary Contributor to Market Matters, a daily investment report that offers real market insight.

Expertise

ASX:ORE

Comments

Please sign in to comment on this wire.