Disclaimer:
My year end post “Parting Shots” is a “stream of consciousness” reflection of my view of the past year in the lithium world. I give myself 45 minutes to go where my thoughts lead me while one my eclectic playlists (Springsteen, Dylan, Journey, Adele, Neil Young, U2 – well you get the idea) plays in the background. Each of the prior times I have done this it was well received but irritated some group within the lithium cosmos. Last year it was fans of the Ninja & lovers of $AGY (who wasn’t even mentioned). OK, 45 minutes starts now. 45:00 – typos included.
For investors in lithium, 2018 was seemingly a year to forget. My perspective is that 2018 was a GREAT year to buy improperly priced lithium equities. Simple mantra – buy low, sell high. If you believe, as I do, that the lithium growth story is in its infancy – all 2018 did was allow you to “load up”. It is up to you to find the high quality assets because there is a lot of garbage out there.
As always – I separate the “lithium market” from the “market for lithium stocks”. What were my biggest “take aways” on the lithium market as 2018 draws to a close? Read on……
The oversupply / price crash myth is hard to debunk but here are the facts: the old “Big 3” (SQM, ALB and Livent - formerly FMC) all saw prices increasing as the year went on. SQM most clearly reports pricing and anyone with a two function calculator (don’t try to buy one) could tell the global average price was rising. Several companies wanting to challenge Benchmark Mineral Intelligence’s hegemony in price reporting came out week after week with “the sky (aka price) is falling sensationalist headlines” based on a small subset of the market they call the “China spot price”. Many denizens of Twitter accuse me of simply trying to “pump a rosy lithium narrative”. The reality is I have called the “new normal” in lithium carbonate pricing as $12- $14/kg. SQM’s price is currently well above this so I am actually saying prices will moderate but they WILL NOT crash.
Where is the “Tsunami of Supply” more than one “Big Bank" analyst called for? When the numbers are tallied for 2018 supply from Chile and Argentina will be essentially flat with 2017. Yes, hard rock from Oz got cranked up in the second half of the year but much of it is either “orphaned” in the short to mid term by the lack of matching conversion capacity in China or is being sold into a functioning spodumene oligopoly which includes three of the top four lithium players who are not anxious to usher in a lithium chemicals price crash. Ultimately there will be a home for all of the spodumene Oz can produce in the next five to seven years but a short term oversupply of concentrate would not equal an oversupply of lithium chemicals.
By now most of you are probably aware that after the RMB equivalent of almost USD 2 billion of investment over nearly two decades, Qinghai Province China has increased the production of mostly lower quality lithium carbonate that like much of Orocobre’s material needs to be “cleaned-up”. Between 10K and 15K MT of LCE sold at low prices and was enough noise to create the China spot price crash story. No argument from me – short term contracts for this material did sell a low prices sometimes lower prices than reported. My point to you is – it doesn’t really matter in the grand scheme of things.
The “best deal of the year” was also the “worst deal of the year” depending on which side of the transaction you were on. ALB paying 1.15 billion USD for 50% of Wodgina was just one of many bone-headed plays coming out of the Charlotte, NC HQ of Albemarle. Mineral Resources wins either way so they got the "best deal of the year" leaving formerly “Cool Hand Luke” holding the bag - a “certainly not Greenbushes” garden variety hard rock asset. Score one for Chris Ellison.
But before we leave the discussion of ALB – let’s talk about how they have become the “bad boys of the Atacama” replacing SQM. Now under siege by regulators and the Chilean tax man; Luke can run but he can’t hide. The “strategic” move to Wodgina is “kicking the can of expectations” down the road. ALB’s poor operational track record in Chile isn’t likely to improve in the Pilbara.
Demand growth is just getting started. Tesla seems to have righted the ship with the Model 3 exiting “production hell”. In addition, car makers around the globe have announced ambitious EV platform plans. I won’t go into detail here and I am sure many of the plans will never happen. However, I am more certain that we have hit the tipping point in electromobility. It will take two or three years for the vertical move in the “S” curve but it will happen. Unfortunately, the reality is the lithium industry can’t support 8% EV penetration with an average 50 KWH battery in the next six years. Instead of opining about oversupply, the big banks should smell the coffee and understand lack of investment and short supply of quality material is a much larger potential issue.
While we wait for more significant EV growth in two or three years, the market will still grow >50K MT LCE in 2019 plus some restocking. A contributing factor, ESS growth, is happening faster than most forecasters believed just a year or two ago.
My previous employer and the former FMC Lithium is now Livent. They have a world class asset in Argentina and are the only producing pure play lithium chemicals company listed on a US exchange. They are now the low cost carbonate and chloride producer; yet they have a hydroxide focused strategy that made sense in 2011 but no longer. Paul/Tom – the IPO is over as is your leadership and quality advantage in hydroxide. Reposition yourself to leverage your cost position in carbonate and prepare for the future move to solid state with your chloride cost advantage. You also might want to quit “jacking around” in Catamarca and actually expand. Your mouths say “yes, yes, yes but your actions say “no, no, no”. Moving a little dirt is nice, actually getting fully permitted with adequate water rights and doubling capacity would be much better.
Here is to hoping my buddy Rodolfo Micone, the Catamarca Secretary of Mining, gets good news in 2019 with Galaxy moving ahead at Sal de Vida, Livent acting rather than talking and maybe a bit of additional progress at 3Qs.
We interrupt this post to announce a major change in the “Lithium Star Alliance”. SQM is out and the “period of enlightenment” in Santiago has seemingly ended. Their announced “four country” strategy looks more like one and a half (we will see how they do in Oz). No, I haven’t gone totally dark on my former brine favorite but their recent “expansion blip” is more likely a harbinger of a period of under-performance to targets in 2019 before ultimately righting the ship. Despite my current bit of negativity, this is not an ALB like fall from grace but SQM will be suffering through "growing pains" as they try to fully leverage the world’s best brine asset and slowly climb the hard rock learning curve. The final lingering SQM question – how does their relationship with Tianqi unfold?
SQM’s move out of Argentina is Ganfeng and LAC’s gain. Contrary to popular belief, SQM’s exit is going to speed up the development of Cauchari. Ganfeng is anxious to have access to material from a world class brine asset in addition to their broad based hard rock supply portfolio. Ganfeng’s ownership in both LAC and the Minera Exar JV bodes well for more rapid execution in Jujuy.
I started the year with a trip to Oz and was impressed with what I saw. Start-ups are never easy but it is great to see Pilbara, Altura and Tawana enter the ranks of spodumene concentrate producers.
Newsflash to Livent and all the Aussie writers covering lithium: hydroxide is not necessarily “better” or “more special” than carbonate – the most suitable raw material depends on the application. Yes, hydroxide is required for certain high nickel cathodes based on specific chemical characteristics but to say it is a “better product” simply shows ignorance. Each product has advantages and disadvantages vs the other depending on the process requirements. Both are needed and both will grow. If you look further out in the future, chloride/metal is likely to be the next big thing.
Many of the emerging lithium "experts" simply aren't very knowledgeable. Be careful who you listen to. My list of trusted sources is quite small. Experience matters as does having significant industry contacts to draw on. Names like: Vijay, Gerrit, Simon, Chris B, Daniela come to mind. Jingwen Sun in China and my friends at Nomura. Of course, I am not ignoring Mac Whale, the best name in lithium. That is not to say there are not other smart people writing about lithium but it is important understand whether the person is more of an general analyst now writing about lithium or someone that has the ability to separate the wheat from the chaff. I don't read anything on Hot Copper unless sent to me or Seeking Alpha. I realize there are some good nuggets on those platforms from time to time but mostly they are vapid time wasters.
My 45 min are about up so I will close with a big “thank you” to the listeners of the Global Lithium Podcast. Last year in my year end post I mentioned we “planned” six episodes with one from each major lithium province. That actually seemed ambitious at the time but the reality is we will end the year 28 episodes in calendar 2018. I learned quite a bit spending time with a great line-up of guests but the biggest surprise came just a couple weeks ago in Santiago when Eduardo Bitran and I buried the proverbial hatchet recording an hour and forty-minute episode after having dinner the night before. The episode with Dr Bitran shattered our expectation of what the audience for the podcast could be. As of this morning the “Man on a Mission” episode has been downloaded over 17,000 times. I felt the podcast would be worth doing if we had 1,000 consistent listeners. I certainly underestimated the potential audience. A special thanks to Emily Hersh for offering to make the podcast a reality and co-hosting and to Elena Piech for her production work.
Final thought – lack of investment is the most critical issuing facing the industry. Don’t write me because I didn’t mention Nemaska getting financed – their real work is just beginning or any of your other favorites that didn’t make the 45 minute cut…….
