Market Cycles and the Current Opportunity
The last 18months has proved a testing time for lithium yet I’ve personally seen it as anamazing opportunity. Whenever I’ve been quizzed on why I always go back to market cycles and my views on where we sit.
Oil has hadits ups and downs but we’ve never seen it drop to zero (while its been theglobes main fuel source for the auto industry that is) so why would batterymetals do the same?
As SimonMoores put it "These supplychains are the oil pipelines of tomorrow. The lithium ion battery is to the21st century is what the oil barrel was to the 20th century.”
When EV’s started toget traction on a macro level it made sense to buy into the unstoppable wavethat’s on our doorstep. Although one thing most investors failed to recogniseis the time the ‘actual demand’ would kick into gear. Even though ALL the automajors were spending hundreds of billions on the EV revolution they werespending it on infrastructure and processes to create the cars – the cars stillhad a while till they actually needed batteries and started to roll off theproduction line.
As with most cycles thehype helped overshoot the mark and caused a major over pricing dilemma forlithium stocks. There were a number of other reasons for the correction such asthe impending trade war, oversupply issues (brought about by certain companieswanting in themselves) and don’t discount the manipulation by the largeautomakers and/or big oil giants to jockey for positions in the upcomingbattery arms race also.
So the handbrake gotpulled and most lithium stocks did a full 180-degree turn, much to horror ofits investors.
This 180-degree turnmay have been horror for some but other investors saw this as nothing but anincredible opportunity…
Coincidentally I was havinga quiet Sunday coffee and reading Howard Marks book ‘Mastering the MarketCycle’ and there were a few things that jumped off the page at me that reallyhammered home the current state of affairs.
Howard discusses marketcycles (obviously, lol) and how the market will follow a secular trend. Thesecular trend relates to the long-term direction and it’s the oscillation ofthings around the midpoint that ‘often present profit opportunities for thosewho understand, recognise and take advantage of this cyclical phenomena.’
‘The movement from either a high or a low extreme back toward themidpoint is often described as - regression toward the mean.’
‘The rational midpoint generally exerts a kind ofmagnetic pull, bringing the thing that’s cycling back from an extreme in thedirection of normal.’
‘In particular, that means the swing back from ahigh or low almost never halts at the midpoint… Regardless of how “right” or“appropriate” the midpoint may be. The continuation of the movement past themidpoint and toward the opposite extreme is highly dependable.’
Howard says that heusually draws his clients a simple picture to help them understand where wecurrently sit. It was that simple diagram that made me think “I know what thatlooks like” and I have to say, I was excited before but this one simple diagrammade me a whole lot more excited.
This is Howard Marks' diagram of market cycles following asecular trend line
Note: I added the arrow and text 'We are here'. That’s my opinionand you are welcome to form your own.
To help you form an opinion of where lithium issitting in the cycle I’ve included the chart for the Global Lit ETF below. I’vetaken the liberty of adding my own secular trend line to the chart…
Look familiar???
The trend line on the abovechart is my own interpretation, although it’s interesting tonote that the four areas that have clearly overshot the trend line (above andbelow) have done so at almost identical levels. The current drift away from themean looks to have just hit its peak to the downside. So a return to the upsideis looking very, very likely considering the fundamentals and catalysts in thenear future for the lithium market.
To quoteHoward again ‘to have a fullunderstanding of cycles, that’s not enough. The events in the life of a cycleshouldn’t be viewed merely as each being followed by the next, but – much moreimportantly – as each causing the next. For example
· Asthe phenomenon swings toward an extreme, this movement gives it energy, whichit stores. Eventually its increased weight makes it harder for the swing tocontinue further from the mid-point, and it reaches a maximum beyond which itcan no longer proceed.
· Eventuallyit stops moving in that direction. And once it does, gravity then pulls it backin the direction of the central tendency or midpoint, with the energy it hasamassed powering the swing back.
· Andas the phenomenon in question moves from the extreme back toward the midpoint,the swing imparts momentum to it that causes it to overshoot the midpoint andkeep moving toward the opposite extreme.’
As you cansee, the markets are like a pendulum. Once they go out toward their extremewidths they almost always have a tendency to swing back the other way.
The Litmarkets have a secular trend that is heading upwards. It currently looks wayoversold and the fundamentals for the pendulum to swing back the other waycould not be any stronger.
As BenchmarkMinerals just put out a new research note stating
‘The timingof the surge in lithium ion battery production continues to play a role
in limitingthe development of new lithium resources.
Money needsto start flowing into the lithium market quickly, or the road to
electrificationwill be stunted by lithium supply, in even the most conservative of
forecasts.’
You can readthe full article here https://gallery.mailchimp.com/4bff972445c3d36015be2ef8e/files/73c910d6-4670-46a2-8b3d-5d03e1fcd928/Lithium_s_Price_Paradox.pdf
So where is the best place to position yourself forthe impending swing to the upside?
If you’re risk adverse and/or unsure of which Litcompanies will fair the best but still want in on the sector then you canalways just invest in the Lit ETF. If the pendulum swings the same as has donein the last few years then you could potentially double your investment in thenext two years. This is no guarantee but as Mark Twain was reported to havesaid “History doesn’t repeat itself, butit does rhyme.”
Or you could put in the work and try to find the bestcompany positioned to capitalise on the lithium opportunity. I have done my ownresearch and IMHO I think the company with the most potential on the ASX is ArgosyMinerals. I see AGY’s current sp and market cap as almost a leveragedinstrument to invest in the lithium sector as it’s potential near-term andlong-term upside are looking like multiple bags in the offing.
– Obviously this is my opinion only so don’t take thatas investment advice.
Although if you did want another educated opinion thenyou should check the great post from @BytheHorns on Friday about competitiveadvantage.
https://hotcopper.com.au/threads/fundamentals-new.4113475/page-885?post_id=39713752
AGY have ticked off some major milestones in recenthistory by commencing production in its pilot plant.
do not advertise external links.au/companies/news/223380/argosy-minerals-begins-lithium-carbonate-production-operations-at-rincon-223380.html
The company has managed to get one of the industrygreats, Pablo Alurralde, on board who is now responsible for bringing the firstbattery grade brine to production in years!
The company chose Pablo Alurralde due to his extensiveLithium expertise and experience (PA is a Chemical Engineer with 15 years assenior management producing LCE and 30 years’ experience designing chemicalprocesses for multiple Lithium processing companies). Pablo Alurralde hasworked on multiple projects including FMCs brine projects as director of Mineradel Altiplano S.A. and has his name on two FMC Patents for lithium processingtechnology. Pablo Alurralde has vast knowledge within the Lithium triangleSalars with Rincon having special meaning to him as he completed his thesis onthat Salar from his University days as well as his previous LCE productionthere. Importantly, Pablo Alurralde has vast experience in the optimisation ofindustrial plants, international commerce and logistics, and an in-depthknowledge of international lithium markets. He chose the Rincon Salarspecifically due to the homogenous brines and high evaporation rates, locationand proximity to the Chilean border and Antofagasta port, and the highpotential for the delineation and production of lithium products.
Thanks @Onspeed for the brief bio off one of your veryearly posts.
AGY near term catalysts
- 2tpa Mining permit is due to be approved any day now.
(By the looks of recent satellite pics this ispotentially as good as done. IMO I'd say the marked area very much looks to be earthworks for modular plant slab....)
https://hotcopper.com.au/threads/plant-progress-discussion.4872544/
- Production update also due any day from now.
Did I mention that AGY have recently fully staffedtheir pilot plant and commenced operations for continuous production to meet theircommercial agreement with Mitsubishi?
Interesting to note that last month Mitsubishiattended a conference in Chile with AGY on ‘Lithium Supply & Markets’ (readinto that what you will)
What’s even more interesting is that both AM and JZattended meetings with Mitsubishi in Japan for 3 days last week and from reports extended that trip by an extra day – I don’t think Mitsubishi would want themto hang around for extra time unless there were some pretty serious discussionsat hand.
- This points to the 2tpa OT getting incredibly close.
- Plans for 10tpa are still very much on the agendaalso (I would think a formality once commercial scale is proven with the 2tpa)
All of this going into a week when the Fed is lookingto cut rates and US and China are meeting face to face to progress with tradetalks… This week alone is shaping up as a beauty.
With a longer term view if you consider the potentialfor a resource upgrade this blows my mind on the potential upside AGY has. Asit stands the current resource is openat depth, only drilling to 100m so far, meaning we haven’t even scratchedthe surface on how big the resource actually is! Add a resource upgrade onto a couple of decent OT's and Lit sentiment back in the penthouse and AGY will be absolutely flying...
When you couple that with almost all other lithiumplayers having an issue with bringing production up to nameplate and havingmassive issues with converting to high quality battery ready lit, it pays to beinvested in a company that has the ability to not only produce battery gradecarbonate but also hydroxide if customers so require that!
Watching the sp action over the past couple of weeksit has been clear the MM has not been willing to give up too many shares asthey’ve been hell-bent on accumulating with every opportunity. Selling down hasbeen done on incredibly light volume and buying that has followed hasn’t leftmuch opportunity to buy for the rest of us with weak sell sides and minimaltime leaving sells up for grabs. This has resulted in some decent spappreciation.
This doesn’t surprise me as I expect we will get aproduction update this week with quarterly and I’d speculate there’s some newsto come from the Japan trip soon also judging by sp action.
All in all I’m quite happy to have seen the sp declinethis year as an opportunity and have managed to accumulate more than sevenfigures to my holdings in that time. Whether this was a good decision or notonly time will tell but when I look at the weight of information supporting adecent move to the upside I am comfortable with my own choices. I’ll let youmake your own.
DYOR
GLTAH
(20min delay)
