Argonaut Funds Management’s David Franklyn joins Stock head to share investing secrets from the high-conviction resource sector investing fund, including his junior stock pick of the month.
Lithium prices have tumbled to a fresh four year low of late.
After numerous dead cat bounces in the US$800/t range last year, 6% Li2O spodumene – the kind of lithium produced by WA's hard rock miners – is trading at US$620/t according to Fastmarkets.
Those are levels that only Greenbushes in WA's South West, the highest grade hard rock lithium mine in the world, is really making money on.
Prices last bottomed out at US$375/t in March 2020, before the EV boom that temporarily sent them as high as US$8000/t on the spot market in late 2022.
It's impossible to predict if and when that could happen again.
But fund manager David Franklyn has an important message. With lithium stocks all off the boil, it's the right time to trade out marginal players for true quality.
It's like heading to a McDonalds only to find out the place next door is selling a porterhouse for only a couple bucks extra.
"I think the advantage you have where you're looking at a sector where it's near the bottom of the cycle rather than near the top of the cycle, is you don't need to compromise on quality," he said.
"What we tend to do is go, do we think we can double our money in the next three years?
You don't really know when that turn in the market is going to happen, whether it happens in the first three months that you own it or whether it happens in two years and nine months.
"We're here for a medium-term investment and we're happy to wait and see when that return actually pays off."
The turn
It's impossible to really say where the top or bottom of any market is.
Despite the hype around the battery metal, lithium remains small and immature, with price-setting opaque and futures markets in their infancy.
It can make it hard to truly assess the role supply and demand plays in setting prices, especially with two of the market's biggest end users – dominant Chinese battery producer CATL and EV maker BYD stepping upstream into the raw materials space to secure their own supply chains.
They operate higher cost lepidolite mines, a lower grade, lower quality form of hard rock lithium, that counts as a major swing factor for lithium supply – a market otherwise dominated by Australian and African spodumene and South American brines.
"The industry is dominated by CATL and BYD. They produce about over 55% of global batteries. And therefore they're the biggest buyer of lithium," Franklyn said.
"You could argue they're bringing on high cost lepidolite a time the market's slightly oversupplied to force the price down, because ultimately they're a big buyer of lithium and by doing that they're reducing their purchase price.
"It reflects the fact that lithium is still a small market, it's dominated by a small number of major players and therefore it is open to some form of manipulation."
Yet feedback from lithium suppliers suggests demand remains strong.
"You've got a doubling of (demand in) the industry in the next five years and you have prices that are going down," Franklyn said. "I think we're getting near the bottom of the market and the question is do you start to chip away at some of these good quality lithium stocks."
There are four serious players in the lithium mining space – Pilbara Minerals (ASX: PLS), IGO (ASX:IGO), which owns ~25% of Greenbushes, Mineral Resources (ASX:MIN) and Liontown Resources (ASX:LTR).’
MinRes and Liontown are "very good businesses" but still have debt concerns to address.
"At this point in the cycle, do you want to take on the additional risk? And our view is, I don't think you need to," Franklyn said.
With IGO saddled by two troublesome lithium refining plants and a nickel business that's winding down, that makes the cashed up Pilbara the standout option for Argonaut.
"The benefit of Pilbara is it's got net cash of about $700m and it's very well positioned," Franklyn said. "I'd probably put Pilbara slightly ahead of IGO."
PLS shares rose a heady 5.6% on Wednesday to $1.425 after a 23% increase in lithium resources at its flagship Pilgangoora mine in WA's North West to 446Mt at 1.28% Li2O.
It remains some way of its $5.31 boom time highs
PLS Price at posting:
$1.35 Sentiment: None Disclosure: Not Held
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