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

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 [EV] 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.