Market Update – Part one Sorry I’ve been silent in recent days;...

Market Update – Part one

Sorry I’ve been silent in recent days; I’ve been in Asia meeting with key industry players in the Lithium battery sector. I went there with a couple of my associates to better understand the true demand picture, as in my view, as most here would know, is that the market is significantly underestimating the demand growth over the next 2-5 years.

Suffice to say we were blown away by what we found. The companies we spoke with all shared plans to increase materially their battery production capacity. I was expecting to hear numbers slightly above what has been published by Australian broking houses, but in reality the production growth plans we heard are in the magnitude of a tripling of current capacity (300% increase) over the next 18 months, and then doubling that again (200% increase) over the following 24 months. The market here appears to have its demand forecasts so very very wrong.

We met with top management of the companies we saw, the message was the same, “we need more lithium”. After our visits we have a much better understanding of the market dynamic, essentially battery producers are being drip fed their Lithium supplies on month to month contracts by their suppliers. In my opinion this is a smart strategy by the suppliers, but puts the consumers in an unsustainable position; they need surety of supply and they are likely to act to make sure this happens in my view.

There are few, if any, long term supply contracts around, the only contracts on offer are monthly pricing for maximum 6 month terms. It’s my opinion that it won’t be long until we see key battery producers in China buying Aussie mining assets so that they ensure their supply source and survival. In my view there is no other way for them to survive.

Right now the Chinese battery production growth forecasts we’re seeing remind me of the Chinese steel sector in 2004 – 2008. Massive capacity growth that pushed iron ore prices to levels never seen before, and made a few billionaires out of the raw material suppliers along the way. Lithium demand appears to be headed in the same direction with a few key differences in that Lithium is not as easy to find, mine and process as iron ore is. We are unlikely to see any material supply response in the near term, which should lead to Lithium prices remaining higher for longer in my view. We are in an exceptional position as holders of PLS.

I’ve posted before on the PLS share price and how in my opinion, there is the possibility of a shorting strategy being used to build a stake in the company, we had great news yesterday from the company on the doubling of reserves, yet the share price closed well off its highs, the shorts are still growing in PLS (according to the shortman.com.au website they are now at over 2% of issued shares). My view is that we are in for a very sharp reversal of this position in the coming weeks.

When the DFS is released in the next 8 days (assuming the company is still on its August timeline for release) I believe we will see a material uplift in the NPV of the project. As a shareholder of PLS I will not be selling on this news as it’s my opinion a take-over is likely to happen in the very near future for the reasons stated above.

More to come over the next few days as we digest our notes and catch up on missed sleep.

We believe that after our visit we are very aware of who would be the best partner for PLS in their future development.

Best Wishes,
Super Ninja