Spodumene processing at Altura Mining in Western Australia
Part 2 of Lithium’s Second Coming.
If you missed part 1 it can be found at the following link https://mastermines.global/articles/lithiums-second-coming/
As researchers for lithium and battery metals, we feel we’ve been fairly accurate in comparison to others. Our message on disruption has always targeted 2023 as the year that all hell breaks loose. The more that time goes by, the more that looks to be likely.
However, we find the more you research the more you spot changes earlier. This has often meant we were correct, but too early in our assumptions. It’s brought us to an added focus on timing, rather than a simple “what will happen next” scenario.
Our last article was back in February, during the height of doom and gloom for Lithium investors. We called it “Lithium’s Second Coming”, where we predicted a sudden increase in hype towards the end of Q3 and leading into Q4, 2019. Our reasons were many and it’s impossible to cover them all here.
The recent news of Wesfarmers bid for Kidman was therefore a real “yes” moment. Researching is not always factual because the market never is. We describe it like fine tuning an old carburetor, and often more of an overall feeling for the market. Beneath that feeling obviously lies a layer of facts that bring you to a conclusion. From the well reported supply and demand metrics, through to anticipating future CCP policy in the world’s biggest EV market. You add all the pieces, no matter how small that finally bring you to a conclusion.
We do have a big problem with the large reporting houses. They tend to be purely fact based, and facts alone are a poor way to read high growth markets. While they can work quite well in isolation for a market like iron ore, they can be hopelessly inadequate for Lithium. So, let’s discuss “some” of those issues that bring us to a conclusion. In this article we outline what we see as the major parts to investment cycles in a high growth market like lithium. Understanding Cycles
Perhaps one of the most difficult areas for investors. Why do prices surge and suddenly crash in a growing market. It makes no sense, right? Wrong !
Within each cycle are a number of minor cycles. These minor cycles can help you understand when a cycle will break and when a new one will form. Within minor cycles are a number of sub cycles that we won’t discuss here. 1. Prices for a mineral or metal steadily increase over a long period.
This is best described as the real demand growth, and marks the beginning of the first cycle. This period encourages investors, which then encourages miners to fast-track projects. It’s also a period where the basic supply and demand outcomes are most relevant. 2. Prices begin to surge in an out of control manner over a few months.
This is not real demand but perceived as such by investors and miners.
It usually follows a hype trigger point such as Elon Musks famous presentation a few years ago. Investors pile into the next big thing, hoping to get rick quickly. The old “ten bagger” term is everywhere, a term I particularly dislike, as it infers making money is just so easy.
In fact it’s usually also the result of stockpiling and never more so than with China. Traders play this market and as long as prices are increasing they will hold and only release when they actually need funds. It’s always very difficult, or impossible, to get real stockpiling figures. The price and shortages are what we look for. Unless factual demand figures show otherwise, it’s the trigger point for us to take some off the table. How much and when, is controlled by the finer points such as the inevitable entry of new projects. 3. A trigger point creates fear in a fake demand market.
We saw this happen when some of the big reporting houses came out with some rather interesting headlines. We noted and reported early in 2018, that oversupply would happen. Many investors scorned our call even though we were clear that we also did not agree with the tsunami headline. However, there was an obvious oversupply about to hit and it was undeniable to anyone that understood the market.
What it really was is the trigger point for a change in sentiment when the market was totally exposed. It was certainly the beginning of the down cycle and it probably had to happen. 4. New supply has been encouraged by the up-cycle.
Miners have little choice these days than to move fast in an up-cycle.
Just as the height of the cycle is reached they are usually committed to production. They will often hit production some time during the down cycle adding fuel to negative oversupply sentiment. This is where real figures of supply and demand need to watched carefully. The difference in the Lithium market is that unlike iron ore the growth is massive. We follow this added production with interest but not in isolation. At the same time we watch the demand side more carefully, because we’re looking at where those metrics may lead. Demand will always be our major driver. which will be explained in detail in a future article. 5. Stockpiling and Negativity
During the same period of the down cycle the traders begin to panic as prices drop. This adds fuel to the negative flame, resulting in the dumping of more material on an already stressed market. It also creates the impression of out of control supply. Suddenly the partner processors have the upper hand. Finance dries up as processors and end users feel less pressure to secure supply chains, (supply chains also needs a full article). The final result is that we enter a period for investors of negativity and hopelessness. 6. New projects stall as negativity increases
During this period of negativity, we see the construction of new mines stall.
You can almost set your watch to it. Who wants to finance in a market of negativity. Investors and financiers have a short attention span, and at this point what they actually do is help create the next cycle.
New mines take an average of 2-4 years to produce, (China can and do react much quicker). This becomes almost like our insurance policy for the next up spike because when it happens they will take longer to react. 7. Opportunity and Positioning
For us this is a real opportunity period. We spend the time as usual on research looking for the appearance of green shoots and we analyse changes to government policy and sentiment. More importantly, we use this period as a time of reflection. A time to reorganize our portfolio ready for the next cycle.
Due to our confidence in reading the market this reorganization becomes our major focus. While others are wallowing in what was lost, what could have been, where the share price was at it’s high’s, and how they once felt wealthy, we’ve moved into buying mode. Don’t think for moment we don’t worry about our decisions because we do. We ponder them over and over again. We don’t feel like buying because that’s not a natural human emotion around all that negativity. I would say instead we force ourselves to buy based on fundamentals. What we never do is to wallow in the past.
This is exactly where we were in early 2019 until recently. We increased and decreased positions across all stocks. It was not a case of selling because we don’t like a stock, as we only ever hold what we like. It was more a case of looking at the percentage mix that would maximize the next cycle. Percentage mix becomes “how much you like a stock” rather than if you like a stock. 8. A trigger point creates a turning point in the market.
For a new cycle to begin there is usually a trigger point. For the first lithium cycle it was Elon Musk and Tesla. Long time investors will remember well that famous presentation that started the ball rolling.
This trigger point brings us to last weeks announcement by Wesfarmers. It’s why it was such a yes moment for us. We knew something was going to come and this was exactly what we were looking for. Maybe it won’t play out that way but if it doesn’t, we’ll be waiting for the one that does. For me we have entered the early stages of the next cycle. We feel well prepared and our confidence level is well above average. I don’t care what the big reporting houses say. I’m looking for hype above all else because I know what an amazing catalyst that can be. They on the other hand, have their own motives for what they write. In a market growing as exponentially as electric vehicles the demand will take care of supply…. because the mining cycle will make that happen. It’s also worth pointing out that the beginning of a cycle does not mean that negativity will evaporate. It’s merely a process where hype will eventually overtake negativity. 9. Sentiment Turns and danger arrives
So we’re at level 8 now. Level 9 will create a whole new investor sentiment. Greed will take over from fear and most investors will repeat the same mistakes of the previous cycle. Human emotion is controlled by fear and greed, and it’s well known and said by many. The issue is whether you can overcome emotions that come naturally and become pragmatic. When valuations sky rocket, will you always ask for more or take some off the table? How much you remain exposed, and at what price you sell some or all, beccome future struggles. 10. In conclusion
This article is about investment cycles but targeted specifically at Lithium. A market with the fundamentals and capacity for growth such as lithium will have different rules to other minerals or metals. Even within the battery metals space the rules will vary. in addition there will be winners and losers in every market segment. Don’t assume you will win just because you got the cycle right.
It’s our take on how we handle things and we don’t expect everyone to agree. We’re not looking for approval or adoption of our principals rather we simply hope that investors consider a multitude of opinions.
