This is from Charlie's column in today's Switzer report:
I want to continue the process of updating you on my key Australian high conviction ideas. These ideas aren’t “trading” ideas — they are medium-term investing ideas that should be sized appropriately in your portfolio to allow you to tolerate periods of shorter-term volatility. A purge or an opportunity? Firstly, it must be made clear that there has been a complete purge in all China-facing assets globally and all emerging market stocks globally. The rush to the US dollar, which is now very over-bought, has pulled the rug from beneath commodity currencies, commodities, commodity equities, Chinese equities and Chinese tech stocks listed in New York. In this indiscriminate purge there is clearly opportunity. Structural Asian Growth stocks have become value stocks within a period of three months. I think in this classic capitulation in all things China facing, there is a tremendous contrarian money-making opportunity for anyone with more than a one-week view. The outright capitulation is presenting a smorgasbord of opportunity in anything inverse correlated to the US dollar. I absolutely expect a recovery in quarter four of China-facing assets, and I am continuing to take advantage of this capitulation to buy the highest quality China-facing companies and some speculative ones that have been hit even harder than the 25% fall in the Shanghai Composite Index. Fortune favours the brave Buying in the peak of gloom requires conviction. But for those of you who bought BHP at the peak of gloom at $15.00 a few years ago, you know the rewards can be enormous. Mr Market is now paying you to take the risk on China-facing assets. The margin of safety is now high, due to substantial share price falls. It’s time to be braver as the world throws the baby out with the bathwater. Kidman Resources is a classic example of a high risk, potentially high reward investment. As I have written numerous times before, as a speculative investment it should be no more than 2% of a balanced equity portfolio. Despite the 53% pullback in Kidman shares from the May high of $2.47, I remain a believer in Kidman and feel there’s more than 100% upside in KDR shares from these grossly oversold levels. Firstly, let me try to explain what has happened and why KDR has fallen 53%. The over-riding reason is short-term caution on lithium prices driven by a view of near-term oversupply. Source : Kidman Quarterly Report Oversupply fears The graph above shows various lithium carbonate Thursday 16 August 2018 02 and hydroxide prices. The growing fears of a lithium oversupply seem to have triggered this slide in prices, and subsequently stock prices of companies with lithium exposure. It is important to highlight that Kidman Resources is planning to make lithium hydroxide, not lithium carbonate. Lithium hydroxide prices are shown by the dark blue and yellow lines on the graph (above), and have not pulled back nearly as much as the carbonate prices. Moreover, lithium hydroxide is increasingly the preferred product for electric vehicle manufacturers – where a large portion of future demand comes from. In theory, this should mean Kidman Resources has less exposure to this kind of lithium price move. The opposite has been true however. The fall in Kidman has been considerably worse than other listed lithium players. The graph below shows relative performance of Kidman compared to peers over the last six months: Source: Bloomberg Catalysts for growth Company specific news has been limited to the most recent quarterly report, released on July 25 – which we viewed as positive. Kidman have stated that there is strong interest from globally significant offtake parties for lithium hydroxide. Discussions with potential debt financiers are also underway. In terms of near-term catalysts, Kidman has the following: 1. Mine and Concentrator definitive feasibility study, due at the end of this quarter. When this is released, global lithium producer SQM will inject $US60 million into the joint venture and pay $US25 million to Kidman. 1. Further offtake agreements to be signed. The company has issued guidance for two offtake agreements in the near term. 1. The refinery study is due before the end of the calendar year. We believe this is significant and would highlight the Mt Holland project as a 1st quartile lithium hydroxide producer. The verdict Beyond this, our view on Kidman remains the same. The opportunity to participate in the refinery is what sets Kidman apart from other Australian lithium producers. We are of the view that this is where a significant portion of the value lies. Our calculations show that 50% of the refinery net present value (NPV) is worth significantly more than 50% of the actual lithium deposit. The integrated refinery model will provide substantially higher margins, compared to only a spodumene concentrate operation. In addition to this, Kidman Resources still has the backing of SQM through the JV – a globally dominant producer of lithium. SQM has an international reputation of delivering projects on time and on budget. With a team of 50 process engineers, and with many of these already focusing on the Kidman/Mt Holland project, we expect this to give KDR a material advantage. Through time, I think we can more than double our money in Kidman Resources from this low price
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