8 Major Reasons why I chose Lithium Stocks (Juniors <$1B)
* Exceptional EV Demand because we're not talking about Organic Growth
ICE vehicles are gradually being phased out and to be replaced by EV over the coming years, which means demand growth is assured over the next 5-10 years and the same applies for batteries and minerals like lithium that make up core battery components
* Pricing Power
Spot lithium price is now at US$70k and is still going higher, but for most lithium projects to enjoy IRR >40%, a base case conservative price of US$20k is enough; I'd say that lithium is the only commodity I am confident that would be priced at levels sufficiently high to render excellent returns for new upcoming projects over the short and medium term (let's not talk about long term as we don't know what will happen in the long term (>5 years). This factor ensures that there should be little concern over any prospect of fall in commodity price that would render junior lithium projects unviable over the medium term.
* Government Support and a Strategic Resource
As lithium supports the cleaner energy agenda, it is a globally supported resource. In fact, there is now keen competition between US and China to secure global lithium resource. When Govt supports a resource/asset, you have an easier path to securing relevant approvals/licensing and unlike non-government supported resource like fossil fuels (oil, coal) and cryptos, political cost is not an issue. The US can't wait to get more lithium dug out of its own soil to support the many giga-factories sprouting out to produce EV in the US (see earlier post). I'd rather invest in a resource/asset that global Govts support than those they don't.
* Multi-Bagger Potential for Junior Lithium Stocks
For all the reason(s) mentioned above, any lithium stock that can discover and develop a lithium resource face a promising prospect to enjoy multi-bagger status over a 1-3 year development cycle if invested at an early stage. Hence my preference for juniors (the biggest gains to be made is from discovery to development cycle), although it is equally important to choose the right lithium hopeful to back. Multi-bags are only possible via holding not trading, like buying LTR at 10c and now closing in on $2 (20x).
* Project Financing / Institutional Demand
Institutional demand for lithium project CR is very high, as was in the case for the recent ASN $50m capital raise. Retail investors have the advantage to buy these lithium juniors when they are cheap and keep them long enough for when instos can start buying into them more prominently when the stock gets into ASX300 index (as they can only invest when they do). So keep them long enough to be re-rated and when their analysts start covering them, you can expect more demand for the stock. Project financing for lithium projects is also not an issue as they can be from offtake parties, Governments or commercial banks and rights issues because there is less risks associated with a much sought after resource to fuel the EV revolution. With the growth of ESG investing, lithium should also remain in the spotlight.
* Acquisition Potential
You'd expect that even if lithium stocks loses its lustre for any reason, they would likely be subject to a takeover/acquisition if the market isn't appreciative enough of them (lithium stocks). It has also been rumoured that Tesla could consider investing directly in lithium resource companies to secure a cheaper access to lithium resource.
* Sustained Exuberance
It can be said that market exuberance over lithium stocks has been in place since mid 2020, 2 years , and I was indeed wrong to believe initially that it could not be sustained. Gold stocks enjoyed an exuberant period of just under a year and ditto with oil stocks because their elevated price were not sustained and it can be argued that there are many moving parts that determine the fate of the price of gold and oil e.g higher interest rates , demand destruction, war. The commanding power of the lithium price and the transformational change to EV are reasons why lithium stocks can command sustained interest and continued rising prices. And that is not changing anytime soon.
* No Forward Earnings Guidance to fault on
As I mentioned earlier in another post, I'd expect many earnings generating stocks to face headwinds ahead to report growth and on that basis, the market won't be too kind on them. With junior discovery/development stocks, there is no earnings to fault on, as long as management is able to execute their plans and milestones and raise the necessary project financing and secure offtakes, we should expect the company stock to do well over the medium term regardless of what market indices do. And the best commodity to depend on for resource stocks is IMO lithium because of its enviable position it is in with the EV transformational growth. It is possibly the only commodity that will have no problems securing project financing and long term offtakes and enjoy excellent project economics over the next 5 years or more.
And my stable of Lithium prospects:
CORE
ASN (Mcap: $400+ mil)
SECONDARY
LLL (Mcap $928 mil)
GL1 (Mcap: $560 mil)
LEL (Mcap: $100 mil)
KAI (Mcap: $79 mil)
LNR (Mcap: $52mil)
AOU (Mcap: $29 mil)
RGL (Mcap: $29 mil)
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