Good morning all
I've been in ORE in a modest way for three months and it has been good to me to date.
However - I am just starting to ruminate over a pair trade that would be LONG ORE / SHORT TESLA.
Initial thoughts that have me contemplating this idea include:
1) ORE looks materially undervalued at the current share prices assuming only that a) lithium prices remain stable at current levels over the medium term and b) the Argentian project comes onstream as planned and c) no sovereign risk issues emerge.
2) There is a good chance that lithium demand will grow at the upper end of current forecast rates which will lead to one or both of a) significant lithium price increases for a period of time, and b) the opportunity for ORE to bring additional production capacity onstream faster than planned with attractive return on investment. This only adds to the ORE share price appreciation opportunity.
3) Tesla - with its market capitalisation of around $25 billion - can only grow into its current market cap if it has 7 - 10 years of flawless execution. This means increasing vehicle sales from 23,000 this year to 300,000 in 2021 and 500,000 in 2027. If they can do this. . . . . then Morgan Stanley reckon the stock is worth $250 today. Tesla currently trades at $190 and is worth more than double the price at which Porsche changed hands a couple of year back. My contention is that Tesla can only achieve this level of success - which would require selling a heck of a lot of $30,000 EVs rather than just selling $100k vehicles to the 1% in California in an environment where EVs and Hybrids are capturing significant share of the total vehicle market.
In light of the above - I see three key scenarios for the pair trade:
1) EVs do not gain significant market share over the next decade.
In this environment, Tesla shares have 50-75% downside from current levels, while ORE possibly has 50% upside from here.
2) EVs gain significant market share with a number of manufacturers competing for sales, underpinning really significant additional lithium demand. Tesla hits current analyst targets
In this scenario - I am very interested in the views of others around here on where ORE can trade. Is there 200% share price upside??? Tesla from here has maybe 50% upside in this scenario - so I would lose on a short position entered at current prices.
3) EVs gain significant market share, underpinning really significant additional lithium demand. Tesla however finds competition to be increasingly tough and falls short of current analyst targets in terms of units sold and /or margins achieved.
In this case - ORE returns are as for (2) above, while Tesla has 50%+ downside from current price levels.
4) Tesla flourishes and prospers - but does so in an environment where there is minimal competition with other EV manufacturers. ie. other manufacturers either don't try to compete, or fail to be effective competitors.
. . . here we have maybe 50% upside in ORE, and also the risk that Tesla goes on to have continuing share price appreciation. This is potentially a poor result, but how likely is it???
Anyway. . . . this post is intended as a conversation starter. While I think the idea may have merit, I am not rushing to initiatie the Tesla short. Certainly not going to do so while market sentiment for the stock remains as strong as it is at present. However - if the thesis proves up, I will be waiting for sentiment to turn and will then go short in volume.
Let's hear from the wisdom of the crowd. . . .
Gotta zip
Geraldine
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