Summary
Reasons for the Australian miners sell off.
Comparisons of valuation for my top 4 Australian lithium miners.
What I expect going forward.
The Australian lithium miners have been on a wild ride in 2016. Many rose over 500% in the first half of 2016, only to see a savage pull back in the order of 50% in July, August and September. Investors that invested in June/July/August have been hit the worst. See graphs below.
In this article, I will examine reasons for the sell-off, valuations, and what I expect going forward. In particular, I will relate this to my top four Australian lithium miners.
Reasons for the Australian lithium miners sell-off
The Australian lithium miners market became overbought and rose too quickly. Whenever you get a rapid or exponential rise, many of the early investors and sometimes company insiders, choose to off load after making enormous short term gains, despite the long term fundamentals. I don't see this as a deliberate pump and dump, but merely a victim of an incredible short term rally that probably rose too fast.
At the height of the rally Macquarie came out with a very negative report on August 9, basically stating they believed we would soon have an oversupplied lithium market. They severely cut targets to all of the big four Australian lithium miners. I believe their report assumptions to be far too negative. For example, I see lithium demand being much stronger. My own research and modeling assumes the average electric vehicle (EV) going forward will have a 60kWh battery (Macquarie and others use 15-30kWh), and I also forecast higher EV sales as a percentage of all global car sales. For example my 2020 forecast is 8-10%, and 2025 is 40-50%. Macquarie and others forecast figures much lower than this. Current EV growth rates over 50% pa support my assumptions, especially when you had in ebuses, etrucks, and ebikes.
The lithium carbonate 99.5% China spot price has fallen around 12.5% in the past 3 months. I think this is a minor factor as lithium contract prices are still holding up strongly. Also the Canadian lithium miners have risen and played catch up the past 3 months (as I had forecast), showing that the Australian lithium miners have been singled out in this down turn.
1 year comparison of the Australian top 4 lithium miners and the Australian All ordinaries index. Click to enlarge Source
The graph above shows Galaxy Resources (OTCPK:GALXF) was the top performer over the past year at one stage it was up a staggering 2,000%. Today Galaxy is still up 1,100% even after a fall from around AUD 0.60 to AUD 0.32. Investors should remember that Galaxy was almost bankrupt back when the stock was just 2.5 cents. Their AUD 200m debt has been largely removed, and Mt Cattlin re-opened.
Altura Mining (OTC:ALTAF) was the second best performer over the past year at one stage it was up about 1,500%. Today Altura is still up 636%.
Pilbara Minerals (ASXPLS) was up around 400%, and today is still up 188%.
Orocobre (OTCPK:OROCF) was up around 250%, and today is still up 154%. Comparison of the top 4 Australian lithium miners' valuations versus current stock price
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NB: The above figures are in AUD. In the upside ranges I only included based on 2017 targets. 2018 targets were included for PLS and AJM as they won't have earnings until then.
NB: I have left out Neometals (NYSE:NMT) as it has been selling down its stake in Mount Marrion.
You can see from the table above current prices are well below the 1 year targets, including the very negative Macquarie targets. Pilbara being the exception. In other words, taking the most cautious targets investors could expect a 1 year upside of 24% for Orocobre, 26% for Galaxy Resources, 0% for Pilbara Minerals, and 14% for Altura Mining. Based on what I view as less pessimistic assumptions, investors could expect a 1 year upside of 29% for Orocobre, 183% for Galaxy Resources, 47% for Pilbara Minerals, and 129% for Altura Mining.
Back on April 7, when I wrote "Lithium Miners Are Booming As Lithium Spot Prices Rise - Which Lithium Companies Should I Buy?" I said: "My top three lithium miners for now would be Albemarle, Galaxy and Orocobre. I would invest a smaller sum now, and look to add on any dips, bearing in mind some miners have recently spiked as the lithium spot price spiked." Well, dear investors, the large dip is here now. No-one can say if we are at the bottom of that dip but I can say valuations are very compelling right now for the Australian lithium miners, and the long term lithium demand story is still intact, in my view.
I conclude from the above that the Australian lithium miners are now oversold and it is "time to buy the Australian lithium miners". Those investors who entered a bit late should use this opportunity to lower their average purchase cost.
What I expect going forward
Going forward I expect several things to happen.
1) Lithium demand to strengthen, especially as EV sales continue to grow globally, currently at 53% pa. I believe this can even increase as the mainstream car makers are now rushing to build EVs and the energy storage market is just getting going. The lithium battery manufacturers certainly agree with my view as they are all increasing production and several new entrants are joining the rush. Sony being the most notable recent entrant. You can view my research on lithium demand versus supply here.
2) The Australian lithium miners discussed in this article will settle in price, then resume the second leg up of what can be a 20 year lithium boom. I wrote about this idea here. Investors need to remember we are still in the very early stages of what I believe will be a 20 year lithium bull run. As with all bull runs, we get setbacks along the way. Early buyers, insiders, and day traders will sell quickly on any downwards momentum. This shake out usually lasts only a few months, then if the underlying fundamentals and valuations are sound (which they are), the bull run continues higher and stocks make higher highs.
3) We may see some mergers and buyouts across the lithium mining sector, such as this month's Tianqi Lithium (SHE:002466) plan to bid for a 23% stake in Chilean rival Sociedad Quimica y Minera (NYSE:SQM). The Chinese know the lithium boom has only just begun. Both Tianqi and Gangfeng Lithium (SHE:002460) have been positioning themselves to be major players in the lithium supply business, and continue to do so as recently as this month.
Conclusion
Investors can read my specific articles on Orocobre, and Galaxy Resources, or my latest lithium miners monthly update here. I have not yet written on Pilbara Minerals as it does not yet have a US ticker, and I may soon write on Altura Mining.
I view all four Australian lithium miners as solid long term buys, particularly at the current prices. My favorite remains Galaxy Resources and I am quite shocked at its current stock price being so undervalued. Orocobre remains a safer play given it is a low cost Argentine brine producer, currently ramping up production. Pilbara Minerals and Altura Mining are very similar. Both have lithium deposits at Pilgangoora in the Pilbara region of Western Australia. Pilbara Minerals has the larger deposit, whilst Altura has a lower start up CapEx and is likely to reach production sooner (in 2017). To be buyers of spodumene lithium producers it helps if you believe demand will be strong, as currently spodumene lithium production costs are much higher than brine making them more vulnerable to any severe lithium pricing corrections.
In conclusion, investors should not be panicked or spooked by the current sell down. It is common after exponential rises that early short term investors cash out. My style of investing always buys into a position over time. This way if a stock falls I can buy some more and lower my cost base. If a stock rises I may not buy more, but I will be sitting on gains so I will not be concerned. The long term lithium demand and EV and energy storage boom continues to get stronger every month, which is why I remain a committed long term investor of this sector.
As usual any comments are welcome. Disclosure:I am/we are long OROCOBRE (ASX:ORE), GALAXY RESOURCES (ASX:GXY), PILBARA MINERALS (ASXPLS) , ALTURA MINING (ASX:AJM).
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: The information in this article is general in nature and should not be relied upon as personal financial advice.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
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