The stock I am writing about today is Kidman Resources (KDR), a stock that has the potential to be the largest lithium producer in Australia.
The reason KDR has a market cap of just $176m is that there is, in my opinion, a spurious legal claim of ownership of its major resource, Earl Grey, by another small mining company. Without that legal claim, which only came recently, I would strongly suspect KDR’s market capitalisation would be double the current market cap.
My view is that legal claim will be resolved and upside value will be released in KDR. In reality, the
discounted current value of KDR is based off this legal claim, which I think will be resolved.
So why am I so bullish on KDR??
Firstly I am bullish on lithium and I note that FOB 6% lithium prices have advanced to US$905t versus current market estimates of $700t. I believe in structural demand growth for lithium, based on growth in battery demand for electronic cars etc. The tables below are from Galaxy Resources and are a good macro summary of Electronic Vehicle (EV) growth and potential associated demand growth for lithium.
Secondly, the Earl Grey deposit is a world class hard rock lithium deposit with the potential to be at the bottom of the lithium cost curve, due to the scale of the deposit and its flay lying nature.
The simple point is that Earl Grey is a world-class lithium discovery. My personal view is the stock is very cheap versus its grade, scale and potential.
Obviously, this is high risk and speculative, but my experience in mining investment suggests that the underlying resource decides the success of the investment. Remember, I was the first East Coast broker to ever recommend Fortescue (FMG) about a decade ago.
If KDR successfully settles any legal action, a view I feel is likely, then it would be fair to assume KDR would be re-rated to peer group sector valuations. In that scenario, I would be expecting to see a KDR share price above $1.00, which makes KDR at 58c a solid risk/reward opportunity.
To put this in context, I currently have 2% of my fund in KDR as our no.1 play on potential large scale
lithium exposure, yet with the investment sized in the portfolio to represent that it’s highly speculative and the volatile nature of mining exploration stocks.
Anyhow, that’s my idea for the Festive Season and 2017 – KDR.
I hope you all have a safe and happy New Year.
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